Welcome to San Diego Blog | November 23, 2011

Shadow Inventory

With the unprecedented number of Short Sales and Foreclosures in Downtown San Diego Condos in the years since the subprime mortgage meltdown, it has been a constant source of opportunities for buyers. 
In fact, as realtors, we became reliant on these “bank affected” properties not only as a major component in our property portfolio, but also to build our comps for valuing properties.  The supply of Short Sales and Foreclosures appeared endless.
Leading up to the housing bubble burst in 2007/2008, the Downtown real estate market had gone through an unprecedented decade long period of appreciation and expansion.  National and international development groups including Anka Development and Bosa Development added thousands of housing units to Downtown inventory.
Now, more than three years later, this seemingly infinite supply is exhausted.

Defining Shadow Inventory

Many lenders have been intentionally slow to put their inventory up for sale for fear of flooding the market and further driving down prices.  Since continued falling prices lower their ROI, it seemed a sensible approach. 

This holdback of homes and condos were identified as “Shadow Inventory.”  Realtors, buyers and sellers have been hearing this term for years now–and I suppose that it implies “shady” activity.

It is hard to determine if  banks have manipulated markets through this strategy or merely protected an insecure real estate market.  But there is little doubt that such a strategy has been employed in the 3 years since the “housing bubble burst.”

Where is the Shadow Inventory now?

There seems to be an expectation among clients that Shadow Inventory is an event or opportunity that continues to transpire and will be available for them to exploit in the future.  Recent inventory and sales in Downtown San Diego show no sign of this however.  See Market Absorption rates for the Q3 2011.

An analysis of recent year’s sales of Foreclosures and Short Sales in Downtown San Diego show a sharp decline in sales from these sources:                       

Year Foreclosures Short Sales Total  
2008-09 175 147 322  
2009-10 202 216 418  
2010-2011 122 121 243  

Source: Sold Condos in MLS Sandicor, sales restirctions for REOs and Short Sales        

The key indicator of  upcoming foreclosure and short sale activity is the issuance of “Notices of Default.”  Lenders must notify delinquent borrowers of future foreclosure activity by sending an “NOD.”  Notice of Default is public record and is tracked in every geographic location.

Default Research Inc. reports that San Diego County Notices of Defaults have declined 52% in the past 12 months.  The Downtown San Diego numbers show a decline of over 60% in NODs.  A visit to the Courthouse Steps for home auctions at “trustee sale” show fewer sales and a decreased number of buyers. 

The economy has created a horrendous struggle over the past three years as homeowners have fought to hang on–or have lost their homes.  Statistics indicate that most of this is behind us. 

There is talk among economists of a possible “second bubble.”  Short of this occuring, we’re simply not seeing “Shadow Inventory.”

Fewer Short Sales and Foreclosures

The conclusion of this blog should say, “with fewer short sales and foreclosures in the market, we have recently seen a notable increase in prices.”  Or at least something to that effect.

This surprisingly has not been the case.  There are fewer pricing anomolies in the market now.  Inventory in general is tighter, and the “smoking deals” are few and far between.  Nonetheless, condos of excellent value remain at similar prices and cost per square foot as they did in early 2011.

Homes under $500,000 are rare and selling quickly.  Particularly under $300,000, where there continue to be a limited number of short sales and foreclosures, we’re seeing multiple offers and a “sellers market.”  At the higher price levels the activity level and sales are at a much lower pace.

Call or e-mail to have a conversation about San Diego Real Estate.  I can be reached at david.manes@welcometosandiego.com or 858.432.3203.







Written by: Dannecker & Associates

Categories: Absorption Rates, Buyers, Columbia District, Cortez Hill, Downtown San Diego, East Village, Gaslamp, Little Italy, Marina District, Real Estate Investment, Sellers

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