A Potential Source of Inventory?
One question that seems to keep popping up lately from home buyers who are frustrated at the lack of inventory in San Carlos is the following: “What about the ‘shadow inventory’ we keep hearing about?” For those of you not familiar with the term “shadow inventory”, it refers to the inventory of foreclosed homes that banks have accumulated since the housing crisis hit, and will someday put back on the market as Real Estate Owned (or, REO) listings. The “shadow” metaphor almost harkens to a horde of homes that are lurking in the shadows, just waiting to be unleashed on the market.
But regardless of what it’s called, shadow inventory has taken on almost a mythical status throughout the bay area. Why? Because of all of the agents and mortgage brokers I have spoken with, nobody seems to be able to confirm nor deny the existence of a shadow inventory. And these are people who should know. It’s almost like a Bigfoot sighting — many think it’s there, but nobody has really ever seen it.
Why a Shadow Inventory Would Exist.
Before we dive into whether a shadow inventory exists or not, it’s important to understand why such an inventory would exist in the first place. When an owner defaults on their mortgage, their home eventually ends up in foreclosure. If the owner doesn’t sell the home ahead of the foreclosure date, and the home then doesn’t sell at auction on the courthouse steps, then the bank inherits an asset that they’d rather not have. So why don’t they just turn around and sell it? The answer to THAT question is the very reason behind the theory of a shadow inventory.
In areas where there is a high rate of foreclosures, the real estate market is still unstable, and very likely still falling. And because the banks want to recover as much of their loss as possible on this newly acquired asset, they may be hesitant to sell this asset in a depressed market. Furthermore, if they own MANY homes in a particular area (think bankrupt subdivisions), they don’t want to flood an area with REO listings. Such a move could be devastating to the home values in an entire neighborhood. So the theory behind the “shadow inventory” is that the banks have a huge bag of goodies, but they’re waiting for the right time to bring them out. (Or, maybe they don’t have them after all?)
Why There’s Likely Not One in San Carlos.
Carrying this line of reasoning over to the City of Good Living (and stable home prices), would a bank benefit by sitting on a foreclosed San Carlos home? No, and here’s why:
- There aren’t that many foreclosed homes. According to the tax records I checked this morning, there are approximately 22 single-family residences in some state of pre-foreclosure in San Carlos. Sounds like a significant number, but most of these 22 will NOT make it all the way to foreclosure. Why? First, a percentage of these 22 homes are already part of the 40 homes that are for sale right now in San Carlos, so one can assume they’ll sell before they are foreclosed. Second, the database of those 22 isn’t that accurate — some of these homes have already been removed from the list via a sale or a recission of the default notice. And finally, some distressed owners will find a way to catch up with their past due mortgage before it hits the market. So the end result is that a very small percentage of these 22 homes will end up in the bank’s lap.
- Market Stability. San Carlos isn’t like Modesto. Values have remained relatively stable here throughout the housing crisis, and well-priced homes still sell quickly, regardless of whether it’s an REO or a straight-up home sale. So there’s little risk in putting a foreclosed home right back on the market. Case in point: 405 Pearl Avenue. According to the tax records, this home went to foreclosure in mid-October of 2010. By late-November, the bank already had it on the market as an REO listing, where it sold only 17 days later.
So there’s really no motivation for the banks to keep a back pocket of inventory in a market like what we have grown accustomed to in San Carlos.
There will indeed be more inventory coming available in the coming months in San Carlos – – but I don’t believe it will come from any kind of “shadow inventory”. The market dynamics don’t justify the existence of such a beast, and nobody I have spoken with has seen such an inventory. So, much like the Loch Ness Monster, Sasquatch, and the Easter Bunny… I won’t believe it until I see it.
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