Let’s start with a quiz … when does a sale take place in the Phoenix real estate market?
Simple answer … when a ready, willing and able buyer and ready, willing and able seller agree upon a sales price, terms and conditions and successfully complete the escrow process and the deed to the property changes electronic hands.
Without a ready, willing and able buyer and without a ready, willing and able seller, there can be no sale.
As of yesterday, there were 26,000-odd single-family detached homes listed for sale in the Phoenix real estate market. Of those, nearly one third are being offered for sale by sellers who may be ready, who may be willing but aren’t able to sell. Aren’t able to sell, that is, without approval from the lender(s) who had financed the purchase of the property.
These 8,000 or so properties are short sales – the owner owes the lender more than the house is worth but still is trying to sell with the hope that the lender will be willing to write off the difference between the mortgage amount and current market value.
Few of these short sales ever are completed, most often because of delays on the lender’s side of the equation. In the 30 days to six months it takes for a lender to evaluate all the seller’s paperwork, review the value of the property and evaluate the offer, most buyers simply get tired of waiting and walk away.
“The lenders need to do better,” we yell, and it’s true that three years into this real estate fiasco lenders still haven’t managed to put consistent processes in place to handle short sales. Bank of America claimed to have done so by automating everything through Equator, but use of Equator unfortunately never led to BofA understand what market values really are. And the reality that lenders lose less on a short sale than a foreclosure has yet to make an ounce of difference.
Which is why the time is long past for lenders to clear the decks and end the illusion of assistance. How?
LENDERS NEED TO STOP CONSIDERING SHORT SALES
Oh, there will be pain associated with this.
Politicians who promote initial-chocked programs won’t like this idea because it removes their ability to posture and pretend they’re helping distressed homeowners.
Real estate agents who sell short sales as the salve for all financial wounds, even when foreclosure or bankruptcy might be a better option, won’t like this idea because it prevents them from collecting a commission check should the odd short sale be approved.
Distressed homeowners won’t like this idea, at least until they are honestly and forthrightly presented with the reality of short sales and they realize there’s false hope than true promise to the process.
Imagine a Short Sale Free Market
But let’s take a look at the larger picture …
Over the past 30 days, more than 5,000 single family detached homes have sold in Maricopa County. In short, buyers do exist.
What would happen if these serious buyers, the ones who have yet to close escrow, were no longer distracted by the false list prices and illusionary discounts of short sales? They wouldn’t disappear. They would turn their attention to the homes where there was a seller who was ready, willing and, most importantly, able to sell their property.
And those buyers would be looking at an inventory of homes closer to the 18,000 mark than 26,000 … rather than there being six months of inventory thanks to the nearly phony short sale listings, there would be closer to 3 1/2 months of inventory.
Mathematical semantics, possibly, but still valid given human psychology. When inventory is lower, a sense of urgency is injected into buyers’ thinking. That sense of urgency combined with outside factors – say a Canadian dollar at this second worth more than the American dollar – causes buyers to purchase. With the purchases, inventory is absorbed and theoretically, one day, prices will find a secure bottom and recover.
You might ask, “Yes, but wouldn’t those short sale listings just become foreclosure listings in the future, flooding the market?”
And I would say that’s already happening.
If 1 in 6 or 1 in 7 short sales close escrow, those other five or six homes are becoming foreclosure listings. Adding that extra home – we’ll round things off and say we’re increasing inventory by 15 percent if we don’t close the rare short sales – is a worthy trade off to lose a third of the perceived inventory by eliminating sellers who aren’t able to sell.
This is an idea whose time has come, whose time actually came long ago.
We need to stop selling false hope. We need to stop expecting lenders to do what they’re not equipped to do. We need to stop giving our political leaders the opportunity to sell platitudes instead of legitimate answers.
It would take courage to do so, but short sales need to be eliminated. Today.