A supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the U.S. housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, researchers said. A variety of measures to keep discounted bank-owned properties off the market -- including moratoriums on foreclosures by major lenders and federal initiatives aimed at keeping people in their homes with mortgage payments they can afford -- has helped to increase a backlog of so-called 'shadow inventory' by 55 percent in the year ended Sept. 30, according to a report Thursday from First American CoreLogic, a Santa Ana, Calif.-based real estate research firm. These shadow inventory properties are homes that have not been tallied into official inventory numbers tracked by Realtors and other real estate professionals. They include homes taken back by lenders through foreclosures and similar actions, as well as those homes where borrowers are at least 90 days delinquent on their mortgage notes. A year earlier, the pending supply of homes not yet up for sale totaled 1.1 million. A debate among real estate professionals and market watchers has emerged as to how big an impact such shadow properties will have on housing prices and sales if they emerge as part of the total mix of homes for sale next year. Some argue that lenders, concerned over potential losses, will spread out the pace of repossessions to avoid depressing the market. Others say efforts by the government won't be able to keep up with the sheer number of defaults brought on by unemployment and depressed home values. 'One of the key questions is the timing, and a lot of the timing issues are really related to the administration's HAMP program,' or Home Affordable Modification Program, said Sam Khater, a senior economist for First American. 'If many of the loans that are delinquent are able to be successfully modified, and those loans perform, then that should alleviate this issue of the pending supply and shadow inventory.' Such success is proving elusive. Data released last week by the federal government showed banks are doing poorly turning the growing number of temporary mortgage modifications into permanent ones. Only 31,382 of more than 700,000 mortgage modifications under the federal program had been made permanent by the end of November. This month, the administration unveiled new measures, including the threat of fines, to push mortgage servicers to improve. 'Our forecast is that (home) prices will drop,' Khater said. 'We are basically expecting that the program will continue to proceed as it has in the recent past; there might be a slight improvement, but it is a drop in the bucket relative to the size of the pipeline of default that is coming up.' In California, home prices and sales have shown steady improvement in part because foreclosure properties have made up a smaller slice of the for-sale housing mix in recent months. A separate report released Thursday by the research firm MDA DataQuick of San Diego showed the state's median home price in November increasing 1.6 percent over the prior month to $261,000. Of the previously owned homes sold statewide last month, 40.6 percent were foreclosures, the lowest since May 2008, when it was 39.8 percent, and considerably down from its February peak of 58.8 percent, DataQuick said 'One of the big reasons that we have had stability in prices is that there is very little supply these days,' said G.U. Krueger, principal economist at HousingEcon.com. 'The foreclosure supply really has shrunk, and it will be interesting to see what happens when that comes back on the market sometime next year. ... It looks like the banks, under the urging of the Obama administration, are going to do the smart thing and mete it out in a more fashionable way, a more careful way.' FirstAmerican estimated that the amount of potential inventory not yet added to the market constituted 3.3 months worth of supply at the end of the third quarter. The official inventory of homes listed for sale at the end of the third quarter was 3.8 million, a 7.8 months supply at the current sales pace, First American said. That's a 19 percent decline from 4.7 million homes, or 10.1 months supply, a year earlier. Stuart Gabriel, director of UCLA's Ziman Center for Real Estate, laid out a troubling scenario if shadow properties did hit the market early next year: a contagion effect where waves of foreclosures beget more, taking down the values of entire neighborhoods. Concern over such a potential outcome could cause sellers and lenders to act more cautiously, slowing the pace at which they take back troubled properties, he said. 'Some are strategically holding property off the market and are only putting it back on in dribs and drabs,' he said. 'They're playing this interesting game where, on one hand, they need to liquidate these properties, but they can't create a downward implosion in prices that will come back and bite them even harder.' Some lenders have declared limited foreclosure moratoriums this year to give troubled borrowers time to catch up on their payments or work out other solutions. On Thursday, those announcements continued as mortgage titans Fannie Mae and Freddie Mac, as well as Citigroup, said they would suspend foreclosures and evictions during the holidays. 