"So, the US as a whole has not yet reached the "bottom." However, what about the Bay Area?"
When it comes to making a decision on the sale of a single property looking at the Bay Area would not provide a useful answer. The geographic definition of the "Bay Area" will vary from person to person. For example, why would you want to look at Berkeley if the property is in Morgan Hill/Gilroy?
"The location of interest is the Morgan Hill/Gilroy area...and how much home prices have fallen in the past few years is quite obvious... but if they fall even more, wouldn't this mean that even more homes will go through foreclosure?"
Morgan Hill and Gilroy are not exactly the same as far as town feel and local amenities. Any Realtor would want to know the exact property info. Yes, all other things being equal (i.e. unemployment rate does not improve); I do believe further price declines will lead to more distressed property supply.
"Also, do you think there is a large REO shadow inventory left in this specific area?â€
The RealtorÂ® your sister â€œhiresâ€ should answer this question based on the representative geographic area chosen to research.
â€œFor example, homes that were previously over $1M at Eagle Ridge are now going for under $700K. Could these homes fall even further?"
â€œShe wants to sell her house so that she can move to a larger home that were not affordable during the housing bubble... do you still advise that it's smarter to wait?â€
The only advice I am providing is to fully research the economic/housing trend(s) for the representative geographic area your sisterâ€™s home is in coupled with professional tax/financial planning input to make an informed decision regarding this question.
Researching the area trend(s) is a â€œno brainerâ€; however, you really do want to also include tax/financial planning! Case in point: will your sister be 55 when she sells? If so, She may be able to take advantage of Props 60, 90, or 110 allowing her to transfer her tax base (if advantageous) on a new home that is purchased or built! You can read more details here: http://docs.Steven-Anthony.com/Prop60-90-110.pdf
If you, and your sister, would like to talk in more detail or need a referral for a tax/financial planner contact me via email.