Short sales, sales of homes for less than what is owed on the mortgage, are creating a backlog of pending sales that take FOREVER to close. 2010 is going to be the year of the short sale. With an enormous glut of foreclosures in 2008, the Federal government stepped in and in 2009 virtually strong armed big lenders to modify loans. The problem is that not everybody qualifies for a loan modification and many successful loan modifications default again on their loans down the road. Yet, there are still a tremendous number of homeowners in trouble. Both the government and banks are in agreement, that they don’t want to foreclose unless there is virtually no other alternative. And, there is a better alternative, short sales. There are many advantages to short sales for the homeowner; including, the ability to purchase again sooner. For the lender, they get to take advantage of pride in homeownership, the homes are not dilapidated and, unlike foreclosures, do not require thousands of dollars to fix nor do they have significant holding costs. So, at the end of November 2009, the US Treasury put together a short sale directive that outlines a new process that begins on April 5, 2010, for all Fannie Mae and Freddie Mac loans. In the interim, lenders have been scrambling to address the new program and modify their current processes that have been ineffective thus far. Currently, the short sale process is NOT working and has resulted in a deluge of pending sales that take forever to close. There are currently 6,706 outstanding pending sales in all of Orange County. Of those, 4,154, or 62%, are short sales. The problem is that almost 70% have been pending for over one month. Many have been pending for months. The reason these do not close within a short period of time is because they require lender approval. And, if there is a second loan, the process is even longer. Throw in the fact that many short sale homeowners have stopped paying their homeowner association dues, and they too have to sign off on the deal if they are obtaining less than what is owed. Often, the buyer of a pending short sale grows so frustrated that they cancel and look elsewhere. The short sale is then placed back on the market and is often placed right back into pending status in a short period of time, and the wait for lender approval continues. With short sales, the buyer, seller and offer must all qualify. The buyer must qualify for the new loan. The seller must qualify to obtain the short sale; there must truly be a hardship. Finally, the offer to purchase must be at or near fair market value. With demand so hot, lenders are taking a closer look at value and not willing to sell at a major discount. The current process for short sales is an absolute crapshoot. Real estate agents, buyers and sellers enter into a pending sale with no definitive timeline. Some lenders are better than others. Some second lenders are better than others. Some Realtors® are better than others. 2010 promises to be the year of the short sale. It is the year where a lot of the distressed backlog, often referred to as the “shadow inventory,” will finally be properly diminished in the form of short sales. Yes, there will still be foreclosures. Some short sales simply will not go together. Some homeowners will just walk away from their obligations. But, banks and the government have their sights set on going the short sale route. It is in everybody’s best interest. Buyers, sellers and agents have had their sights set on short sales for about a year and half now. If you are skeptical, just take a look at the following chart, the number of short sales versus foreclosures in Orange County:
As 2010 rolls along, the process is going to get better and better. It will not be perfect, but it will be better than it is right now. Short sales will finally result in more successful closed sales.
So, how do the rest of the numbers look? The active inventory increased over the past two weeks by 278 homes, or 4%, to 8,135. The active inventory last year was at 11,541, 3,406 additional homes compared to today. Two years ago it was at 15,392, 7,257 additional homes. Demand, the number of new pending sales over the prior 30-days, decreased by 4 to 3,244. There are 425 additional pending sales compared to last year and 1,424 compared to two years ago. Demand typically rises at a quicker pace in the middle of February, so we will have to see if this trend continues. Part of the problem is that there simply is not a lot of new inventory coming on the market. The biggest complaint from agents down in the trenches is that they need fresh inventory for the many buyers that they are working. The expected market time for all price ranges in Orange County increased slightly from 2.42 months two weeks ago to 2.51 months today. At the current pace, the overall market is a seller’s market without much appreciation at all. The number of distressed homes within the Orange County housing market is keeping a lid on appreciation. On the other hand, the higher end price ranges are experiencing a deep buyer’s market, the higher the price range, the deeper the buyer’s market. The hottest price range is homes priced between $250,000 and $500,000, with an expected market time of 1.75 months. Contrast that with homes priced above $4 million with an expected market time of 33.89 months. The active distressed home market, all short sales and foreclosures combined, increased by 54 homes to 2,705. The number of foreclosures within the active listing inventory increased in the past two weeks from 377 to 380, a gain of only three. The expected market time for foreclosures is a sizzling 0.95 months, a deep seller’s market. Foreclosures are HOT. The number of short sales within the active listing inventory increased by 54 and now totals 2,705. The expected market time for short sales is 1.68 months, also a deep seller’s market. There are a lot more short sales than foreclosures. In 2010, short sales will be KING.
