What “Short Sale Decline” Really Means

05/07/2014 03:41 PM (CST)

short saleAccording to CoreLogic, a real estate information service, new data shows a sharp slowdown in short sales for the first two months of the year.

Short sales comprised at least 9 percent of total sales in October 2012, however, short sales had declined to 5.2 percent by last December and in January they made up only 4.6 percent of sales, a faster pace of decline. And preliminary data for February shows an even steeper drop to 2.2 percent.

At the same time, real estate titan Realogy, which owns and operates the U.S.’s largest brokerage and a handful of the world’s largest franchisors, just released its 1st quarter earnings. According to the release, Realogy grew its first-quarter revenue by 5 percent from a year ago to $1 billion thanks to rising home sale prices.

However, the company represented fewer homebuyers and sellers than it did a year ago.

“As we have moved into our spring selling season, thus far the level of open activity we expected has not materialized, particularly as it relates to home sale transaction sides,” said Anthony Hull, Realogy’s chief financial officer, in a statement.

Realogy expects transaction volume to increase dramatically in the second quarter. Even at the high end of its estimation, however, the total would be 5.3 percent lower than in second-quarter 2013.

First of all, the dramatic increase is unlikely. Even if it does happen, it will be more than canceled off by even steeper decline towards the end of the year. This is what a real estate marketer and former loss mitigator Lee Honish has told us back in January:

It’s very likely that May, June and July of 2014 are going to be the hottest months in real estate. During the summer months Realtors have the best chances of getting all kinds of listings, including traditional equity sales.
Towards the end of the year, the government will probably stop the quantitative easing process and then we will have a flat final quarter once again.

We bet this is going to be the case.

Now if we look at the “short sale decline” again, the news is usually followed by the statement that “the expiration of a federal tax exemption for forgiven mortgage debt appears to be scaring borrowers away from pursuing short sales”, as it was recently stated in The New York Times.

The above is most definitely true. Combined with general hype around rising home prices, we have true reasons why short sales are on decline.

1) Homeowners are still waiting for the Mortgage Forgiveness Act to be extended.

2) Homeowners are waiting for home prices to rise even higher, so they are no longer underwater.

The mortgage debt exemption may very well be extended. This would definitely prompt some homeowners to go ahead with a short sale.

Waiting for home prices to go up even higher may not work out so well.

First of all, home price increases are going to be very modest. Secondly, if your home is underwater and your own financial situation is not great, a modest price increase is not going to magically make your home affordable. Hence, some homeowners are going to feel that urgency to go through with a short sale again, most likely towards the second half of the year.

In addition, real estate is always local. National trends, such as national numbers on short sale activity, are just that—averages of what’s going on nationally. Certain states, such as Nevada, Illinois, Florida, especially parts of these states, are so underwater and unemployment is so bad, that no amount of price increases will bring back home prices to their pre-2008 levels.

So, what’s the conclusion here?

Short sales have slowed down not because everyone is out of the woods in terms of economy and their mortgage affordability, but because people are trying to wait and see what happens next. Once they realize that nothing has changed, they will proceed with a short sale.

Meanwhile, if you get a feeling that no one is doing short sales, it may be a perfect time to seek out short sale clients… Buy stocks when everyone’s selling; do short sales when no one else is doing them…