If you’re a prospective home buyer or investor looking to capitalize on the lower prices of homes in Southern California, you’ve probably shopped the market and found a number of foreclosures and short sales that have attractive prices.

But if you’ve ever made an offer on one of these homes, especially if you’re checking out real estate in California, you know that these listings are oftentimes very difficult to get.  In addition to the red tape that goes along with lenders approving short sales and offers exceeding listing prices, (sometimes by as much as $100,000), these homes also usually carry other disadvantages with them as well, such as maintenance needs. They may even just be in neighborhoods that aren’t attractive to investors.

If you’re an investor, a quick internet news search for “California real estate” will yield a slew of negative predictions, especially in the last couple months.  Though home sales were up pretty significantly in May over 2009, a lot of real estate experts are predicting a market “hangover” based on recent government incentives that expired in late April.

One of the words you might hear thrown around is “shadow inventory,” a name with ghastly connotation that almost seems to describe haunted houses or cobwebbed shacks hidden somewhere deep in the woods.  Really, the term shadow inventory isn’t necessarily a totally bad word.  Though it can affect the overall market, it has a very broad definition and might even be semi-positive for those looking to close on a home at a price much lower that southern California real estate has sold for in previous years.

In a nutshell, shadow inventory refers to houses that are on standby to be sold in some sort of distressed sale. Generally, they are those that have been foreclosed upon or repossessed by banks and are waiting to be put on the market.  Lots of real estate experts will include a vast amount of other properties in their definition of shadow inventory as well.  Some include homes where owners have stopped paying their mortgage, and others even count homes owned by buyers that wish to sell but are holding back because of the down market.

So shadow inventory is really just a “list” of homes ready to be placed on the market at lower market value.  If this number is high, experts worry because if tons of homes flooded the market under value, the real estate market as a whole would suffer.  We say the market would “suffer” because average market value might decline, but also discounted homes might prevent fair-value homes from selling in the same neighborhoods.

While prices are lower for buyers looking for a home, short sales and foreclosures usually are sold at a loss to lenders, so the long term effects could include rising mortgage rates and fewer lenders in general.  This also hurts the return of investment on those looking to sell their homes, because buyers are more likely to make offers on the discounted properties.

In essence, shadow inventory is the amount of poor inventory projected to be available in the housing market.  They are usually distressed homes in need of some kind of distressed sale.

While some less-optimistic real estate experts believe that a glut of shadow inventory will negatively affect the market, typically these homes aren’t all placed on the market in amounts great enough to saturate the industry and drive down market prices.

While a high amount of shadow inventory is not desirable for market value or investors, it’s not necessarily a great indicator for severe market disaster either—especially since the definitions can be so broad.  High shadow inventory could actually mean it’s a great time to buy, just be sure to check the numbers in your prospective neighborhoods to be sure you’re making a wise investment decision.