With housing inventory already at uncomfortably high rates, it would appear that the subprime mortgage debacle will serve to add a further 500,000 homes to supply.

March 9 (Bloomberg) -- Rising mortgage defaults by subprime borrowers may add more than 500,000 homes to a residential real estate market already beset by slumping prices, according to CreditSights Inc.

In January, 4.09 million new and existing homes were offered for sale, down from 4.43 million in July 2006, the National Association of Realtors and the U.S. Commerce Department said. New homes accounted for 536,000 of the January total, down from a record 573,000 in July.

A five-year housing boom that ended a year ago was fueled in part by the growth of mortgage products marketed to borrowers with poor credit histories. Now, as defaults on subprime loans surge to a seven-year high, more than 20 lenders have closed or sought buyers since the start of 2006. The survivors are raising their lending standards.

"We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default -- an unwelcome phenomenon given the existing supply surplus,'' Sarah Rowin and Frank Lee of bond research firm CreditSights wrote in a March 1 report.

The glut of homes on the market has led potential buyers to hold off purchases on expectations that prices will fall. Tighter lending standards may also hurt the housing recovery as people who could previously qualify for a mortgage can't get one now.

About 10 percent of subprime loans were more than 60 days delinquent or in foreclosure as of Dec. 31, up from 5.4 percent in May 2005, according to data compiled by Friedman Billings Ramsey Group Inc. of Arlington, Virginia. The rate was the highest in seven years, according to the report.