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Brad comments on the decline of the short sale.

At the start of this year, 2013, I predicted that short sales would be on the decline. The reasons I stated were: home values on the rise; lower unemployment; most mortgage resets already passed; and a decrease in the number of “available” properties that have not already been through a short sale or foreclosure. Today, I would like to update on this prediction.

As we look at the most recent statistics, short sales have, in fact, been on the decline. While once approaching 50% of resale activity in the Las Vegas area, short sale transactions now account for approximately 30%, and falling.

Home values have been rising at an alarming (albeit unsustainable) rate. Yes, again. This time, after pushing the reset button from 2007 through 2010, we are starting from much lower numbers. But some prices have risen 30% or more in the last year, and that includes condos and townhouses. A few neighborhoods have even risen 40% year-over-year. Mathematically, as values rise, fewer properties are underwater, or have mortgages that exceed fair market value.

Unemployment, an absolutely fundamental driver of real estate market conditions, has been slowly and steadily dropping, and for all intents and purposes, has now been mitigated. Folks have accustomed themselves to the new economy: many have a household member either unemployed or underemployed. But most employers who needed to cut staff have already done so. Therefore, the impact of unemployment on the real estate market has now been greatly minimized, and will not be much of a factor going forward.

Prior to 2007, many new mortgages were written with adjustable rates (ARMs), teaser rates (artificially low introductory rates), pick-a-payment plans (allowing homeowners the option of paying what they wished), interest only, and even negative amortization (NegAm). And in addition to these wishful-thinking creations, qualification requirements were nominal. Consequently, within a short time, homeowners got into financial trouble with these mortgage products, and this contributed substantially to the wave of short sales.

Since 2007, short sales have dominated our local real estate market, peaking, by my calculation, in 2011. Tens and tens of thousands of debtors opted with varying degrees of hesitancy to wade into short sale waters, and emerged with varying degrees of success. Tens and tens of thousands of others watched as their lenders took ownership of their homes, voluntarily or by force. Properties that have experienced either a short sale or a foreclosure are highly unlikely to go through one again, at least for the ensuing few years.

Others continued to make payments on their debts, maybe for ethical reasons, or maybe because they simply loved their homes and wished to keep them. And still others had no mortgage debt at all, and have been affected by the precipitous drop in prices only on paper. With a finite number of residential properties in the Las Vegas area, fewer and fewer homeowners remain inclined to go through the short sale process in the near future.

A few lucky homeowners (and I mean a few!) were helped by loan modifications, and were able to adjust their payments down to a level they could afford. Even though a majority of debtors who successfully complete permanent loan modifications eventually go into default again later, some do not. And those homes are most likely not headed for a short sale any time soon.

Recently, we have seen another group of homeowners: those who might be qualified or well-situated for a short sale, but choose to add some cash to the mix in order to complete a traditional sale. This strategy avoids the pitfalls, stress and credit hit associated with doing a short sale. As prices have risen, the difference between the mortgage and the resale value has decreased, which makes it easier for homeowners with some available funds to bridge that gap with their own money.

There is another reason, a psychological and intangible reason, that short sales have declined this year. In a rising market, there is the expectation that prices will continue to rise. And many homeowners are hanging on and continuing to make mortgage payments, waiting for market value to catch up to their debt. So they keep paying their lenders, which makes their debt go down as values go up. When the two numbers are in the same ballpark, they may then decide to put their homes on the market for sale. This is not only a reason why short sales are decreasing, but also a reason why inventory is so very tight right now.

In my opinion, we may see at the end of this year that short sales only accounted for roughly 25% of resale transactions. And the vast majority of those will be “strategic defaults”, meaning that homeowners are able to make the payments but choose not to. As we head into 2014, unless there is a significant drop in prices (there will not be) or a new law that greatly impacts the real estate market, short sales will continue to decline.

Date posted: September 3, 2013