In the last post, we discussed some of the factors that are in play in this white-hot real estate market that have given us all the impression that we’re suffering through a critical shortage of inventory. In reality, the fact that homes are selling so quickly is as much of a factor as the below-average number of new listings in contributing to the uncharacteristically low inventory of homes for sale in San Carlos.
But there’s another element of the market whose sheer existence serves to keep the number of new listings below what we would see in a more typical year. This is a quietly suffering group that we refer to as the “landlocked“, and their numbers are growing as the market continues to stay hot.
Landlocked sellers are those home owners in San Carlos who are looking to upsize (or even downsize) to a different home either in San Carlos or to another equally competitive market on the Peninsula, but can’t do so because of the extra challenges they face in buying that next home. Thanks to the current market conditions, they’re essentially stuck (or landlocked) in their home — unless they want to move completely out of the area.
If they were able to move, it would free up a whole bunch of additional inventory, which would obviously greatly benefit the market.
Sell First, Buy Second.
Unless a homeowner has a boatload of cash or equity in their current home (or both), they will need to sell and close escrow on their current home before they can buy another home. There are ways to get around this problem, but it requires very creative financing and really only applies to a few select buyers.
As such, these homeowners have only a couple of options to consider, and neither are very good in this market. The first is to try to purchase the next home conditional on them selling their current home. Now in a perfect world, this is a very feasible scenario. The landlocked owner’s home should sell in a nanosecond in this market, so the risk to seller #2 in taking a conditional offer should be almost non-existent.
But the reality is that imposing this kind of condition on an offer is a deal-killer in this market. When you stack a conditional offer next to conventionally funded offer, or (heaven forbid) an all-cash offer, the conditional offer will lose 99 times out of 100. Sellers simply don’t need to inherit a shred of risk when buyer are willing to write non-contingent offers all day long.
The other option is to completely decouple the two transactions — literally, sell their house first and then take the proceeds of that sale and purchase another home. Again, in an ideal situation, this would probably be OK. They could even negotiate a rent-back period which would allow them to stay in their current home while they quickly searched for the new one.
But the reality of this option is that the landlocked owners must have a long-term contingency plan in place to ensure they have a roof over their head after they sell their house. With the current inventory levels and the ultra-competitive buying environment, it could be many months before the landlocked seller finds a suitable replacement. That means finding a short term rental (expensive), or moving back with the in-laws (expletive). Neither are terribly good options.
A Shadow Inventory of Sorts.
I know of at least 3-4 homeowners who are in this exact situation. And if you talk to any other Realtor who does significant business in San Carlos, they all have clients in the same boat. So what does this mean? There’s a whole block of landlocked inventory that could be released – almost like that mythical “shadow inventory” of foreclosed homes that the banks supposedly own — if only there was a way to get these owners out of their homes and into the next one. Think of what that could do for this market.
The numbers are significant. And until the market regains its balance, they’re going to stay there…in quiet suffering.
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