Sunday, February 21, 2010

What strikes fear into the hearts of sellers? Only "the shadow" knows...

"The shadow" being unsold, banked-owned inventory called "shadow inventory". You'll often hear people in the foreclosure side of real estate talk about this like it's a scary monster ready to come crashing into the market to drop prices.

In the hardest hit areas of the country including Southern California and the North SF Bay Area, there are plenty of bank owned properties not on the MLS and simply not for sale. In some areas there are thousands of homes but in most areas there are only a handful. So, why the fear?

In areas with a lot of shadow inventory the fear is that the banks will dump the properties to get them off their books. The flood of inventory would thus force sales prices down leading to more short sales and foreclosures. Fear mongers argue that there are years of inventory built up and that local markets will take that long to recover.

Here's why "the shadow" is NOTHING to fear; banks don't want to lose money and dumping inventory to sell fast would increase their losses. It's that simple. All the shadow inventory comes from foreclosures and in California there's no recourse to the original owner (with some exceptions). So, the banks have no incentive to dump these homes. They're better off waiting and selling based on demand - which is exactly what they're doing.

Moreover, do a search on articles about "shadow inventory" in markets with a lot of "shadow inventory" and you'll find that investors are buying a lot of these homes as fast as they come on the market. Most homes held by banks are low-cost, making them perfect for rentals or flips. Several research groups have done studies on this side of the business including a recent one posted on the C.A.R. website. That study and others have found that "shadow inventory" is not as large or as scary as once thought because of investor demand and first-time home buyers.

By shining some light on "the shadow" and moving past the fear, we see the market for what it is, balanced and improving. Inventory levels in the Los Altos area and Santa Clara County in general are normal for this time of year. Sales prices are increasing but just slightly which helps motivate new sellers to list properties, including the banks. Sales volume continues to be strong, especially in the low-end. I had over 100 people through my open house yesterday for a very nice but modest $1.4 million home in Los Altos. I'd say that's a good indicator that there are plenty of buyers out there.

What do you think about shadow inventory or the prospect of a flood of bank owned properties?

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