San Carlos Real Estate Agent, San Carlos Realtor Is There a Shadow Inventory in San Carlos? | The White Oaks Blog
San Carlos Real Estate February 3, 2011

Is There a Shadow Inventory in San Carlos?

by Chuck Gillooley

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:

  1. 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.
  2. 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.

Summary.

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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Comments 3
  • Chuck, I beg to differ about your following statement:

    “San Carlos isn’t like Modesto. Values have remained relatively stable here throughout the housing crisis.”

    My relatives bought near the peak of the market in San Carlos…paid about $950,000. Using multiple sources to track comps in the same neighborhood, all indications point toward their home being “worth” about $750,000 – $780,000. That’s 21% lower, and a lot of money they couldn’t afford to lose. Now they are stuck in their house with over three quarters of a million dollars of debt (their mortgage)…I believe you are rather biased by your desire for San Carlos to look stronger than it is, due to your job.

    As someone who is trained in quantitative analytics and who watches that market very closely (using quantitative data, not opinions, etc.), along with not having a financial interest in trying to dress up an otherwise pull back in prices, I can clearly see that San Carlos has not been immune to the housing crash.

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    • Jason,

      Thank you for your comment. I respect your perspective on this post, but I stand behind my statement that San Carlos is not like Modesto.

      But first let me address your allegation; “I believe you are rather biased by your desire for San Carlos to look stronger than it is, due to your job.” If that is the case, why would I have spent an entire day of my time to research and write the following article that I posted just a few weeks ago: “Special Report: Is the Real Estate Market Softening in San Carlos?” Had you taken the time to actually read this report, you would have seen that I did use “quantitative data” (not opinions) in the form of charts and graphs to show that there has indeed been a significant drop in the San Carlos housing market, even since the middle of 2010 — not just in sales prices, but the percentage that homes were selling for versus list price, and the number of homes sold. Wouldn’t that be a rather self-destructive piece to write for someone who is trying to “dress up” the market for their own financial gain?

      In addition, I write a weekly post titled The San Carlos Real Estate Week in Review which lists all of the FACTUAL statistics from the prior week — good or bad. It lists what homes went pending, new listings, and most importantly, how much homes sold for (with a factual comparison to the list price.) This is a very unbiased representation of DATA, from which I allow the readers to draw their own conclusion about what’s happening in the market.

      So pardon me if I take serious umbrage at your allegation that I misrepresent the real estate market in San Carlos for my own personal gain. You truly have missed the point of this site.

      Regarding San Carlos versus Modesto. I have never stated anywhere on this site that the San Carlos market has not been affected by the housing crisis. If I have, please show it to me. In the statement “Values have remained relatively stable here throughout the housing crisis”, the key word is “relatively”. Yes, house prices have dropped in San Carlos since the peak of 2005-06, just like they have everywhere else in the country. I have never claimed otherwise. But in places like Modesto, and Tracy, and Fresno homes have lost 60-75% of their value, and entire blocks of brand new homes sit foreclosed and empty. The point I was trying to make was that banks will handle foreclosures differently in these two regions because of the different market dynamics.

      I’m sorry that your relatives are upside down on their mortgage. Unfortunately, the same thing has happened to many homeowners who purchased homes during that peak. I don’t think anyone could foresee the recession and housing crash that we’ve endured over the past few years.

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  • Jason,
    Chuck is correct, “relative” to Modesto, San Carlos home prices have been stable. I think those who bought in Modesto and now own homes worth 50% (or more) less than they paid might agree.

    Had your relatives bought in Modesto, they would most likely be underwater instead of just owing what their home is worth. Plus, whatever deficit they have suffered in San Carlos, they will see much faster improvement in the current value.

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