Prediction 1: Rise of the Short Sale

Welcome 2010! We are coming into a new year. With the economy stable and troubled, real estate stable and troubled and the job market still in flux, we will see continued efforts from the federal government to make an impact on the economy starting with more corrections to improve the housing market.


Housing is a big driver in the economy, new home sales create secondary demand for "durable goods" like home appliances and fixtures. Unlike a year ago, loans are now available but new home sales are still low and housing starts have not yet shown any signs of improvement. Real estate recover is going to be driven by resales. Through 2009, year foreclosures have continued at historicly high rates and defaults are continuing in record numbers.


Me and others have commented on the existence of Phantom Inventory. I recently posted about the number of foreclosures at auction and the number of homes released for sale not being equal. In addition to all this market insanity, the banks have been slow to release a number of homes in this area. Moderating the number of listings, while lending conditions have improved has created an artifical shortage and has inflated prices.


The reason this is nuts is that all the while the above is happening, foreclosures are continuing at a rate higher than the listed foreclosure inventory is sold. (If anyone at the too big to fail bank are listening, could you kindly release all your bay area real estate under 500k, we need more of those homes on the market.)


To add to the insanity, investors are snapping up foreclosures at auction, cleaning them up and reselling them at a profit. On one hand this is good for the economy, good for the banks but on the other hand it is bad for homeowners in distress and first time home buyers. It is adding unnecessary expense for the people who are actually buying homes to live in. What a crazy idea that is...


To my point, more changes are on the way for consumers in morgage trouble. As we speak the federal government is creating legislation to make it easier for short sales to occur by limiting damands by second lenders and creating new rules and incentives for banks to operate with to try to stop the impending flood of foreclosures. We should see these rules in place and I would guess by the third quarter of this year those homes will reach the market.


From an agents perspective this whole short sale process is madness. Lost papers, delays, buyers backing out (I have had to get 2 offers at different times on each of mine), the process has to restart once a buyer backs out, there are no guarentees that the bank is going to approve the sale or they demand a top dollar and unreasonable price. It's nuts. The consequences of this madness is that short sales have to offered at a discount to foreclosures.


Think about that. The administrative costs are higher on short sales, the offer price is lower to incentivise buyers to stick the process out. The banks provide awful service on Short Sales and they demand top dollar. (Sounds a lot like the Microsoft business model). I wish everyone could a business that way. It would solve the job's problem in an instant.

The last thing I learned in business business school is that good corporate citizenship is the key to free enterprise. When you start to generate profits at the expense of your consumers, expect the government to get involved to solve the problem in ways businesses won't like. The good news for homeonwers in distress is that help may actually be on the way. It only took 3 years. The question is, is it too little too late.