Shadow Inventory? Bring it on…

October 27, 2009

Anyone who is shopping for a home right now in San Carlos (or for that matter anywhere on the mid-Peninsula) knows that there's just not much to choose from right now. Consider these sobering facts about the San Carlos market:

  • Current Inventory of Single Family Residences for Sale:  47 homes.
  • Average Days on the Market (DOM) for these 47:  121 days.
  • Average Days on Market of the past 25 homes to go into contract in San Carlos:  34 days.
  • % of these 47 homes that have been on the market for less than 34 days:  23%

What does this tell you?  First, there are two distinct markets in San Carlos — homes that sell, and homes that don't.   That in itself is nothing earth shattering — every community has its dividing line.  But the disparity between the two in San Carlos is alarming.   Roughly 23% of the inventory is actually selling, whereas 77% of the homes for sale right now are those you can safely assume every potential buyer has already seen and has voted with their feet.   That's an amazingly big chunk of stale inventory, especially or a vibrant market like San Carlos.

What's causing this?  It certainly isn't a lack of interested and qualified buyers.    Look at recent home sales stats on this site for the past month — I can safely tell you that most of the homes that have sold in San Carlos in the past month saw multiple offers.  There are pre-approved buyers looking all over the Peninsula to purchase a home right now.  No, it's the lack of decent inventory in the hot sub-$1M market segment that's causing insane buying behavior that's reminiscent of 2005.  But more important, this dearth of inventory both here in San Carlos and in other Peninsula communities, threatens to squash whatever rally this market is trying to muster up.

That's where the “shadow inventory” comes into play..

What is Shadow Inventory?

“Shadow inventory” is the moniker that's given to the ever-increasing stockpile of homes that the bank has reclaimed through foreclosure, but has not yet put back on the market for sale.  I have spoken with several agents who have contracts with the bank to list the bank's foreclosed properties, and even they don't know how big this inventory is ….but they all agree that it's a “significant” number.   This stands to reason — there have been far more foreclosures than there have been REO listings.  That means the banks are hoarding an inventory of foreclosed homes that must be sold at some point — but nobody seems to know how many will be sold and when.

In my opinion, now would be a great time.

Normally, you'd want to shy away from hitting any market with a sudden surge of inventory.  But there are so many more buyers in the sub-$1M range than there are choices, that this market could easily absorb such a surge.

What's the impact on San Carlos?   Since the number of foreclosures in San Carlos is low relative to other communities, the impact on this market will be more indirect.  Not every buyer who is looking in San Carlos is doing so exclusively, so by giving that group of buyers some options in nearby cities it may help provide much needed balance in this market.

I'm sure the banks have a time-line as to when they will release the next wave of REO properties for sale.  I just hope it's sooner rather than later….


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  1. Jason on October 27, 2009 at 4:05 am

    Chuck you should read Mr. Mortgage ( and Dr. Housing Bubble for a clear picture about Shadow Inventory. Your area is loaded with Option ARMs that will be recasting to significantly higher payments. My in-laws bought in San Carlos near the peak in Oct 2006 and they are screwed (and I don’t think they know it — head in the sand). The Gov’t has been doing a lot of propping up; it ain’t going to be pretty when that stops.

  2. Chuck on October 27, 2009 at 1:03 pm


    You brought up a very good point. In this article, I primarily focused on the inventory that the banks already own and could theoretically put out on the market fairly quickly. But as you pointed out, there’s another set of issues that will undoubtedly cause some pain to homeowners in the coming months. Not only the readjustment of Option ARM’s (as you mentioned) but unfortunately unemployment in Silicon Valley is still sitting around 12%, with office vacancies topping 20%. It’s hard to pay for a mortgage when there are no jobs.

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