The sad reality is that negative equity, short sales, and foreclosures, will likely be around for quite a while. “Negative equity”, which is the excess by which total debt encumbering the home exceeds its present fair market value, is almost becoming a fact of life. We know from theRMLS™ Market Action report that average and median prices this summer have continued to fall over the same time last year. The main reason is due to the volume of “shadow inventory”. This term refers to the amorphous number of homes – some of which we can count, such as listings and pendings–and much of which we can only estimate, such as families on the cusp of default, but current for the moment. Add to this “shadow” number, homes already 60 – 90 days delinquent, those already in some stage of foreclosure, and those post-foreclosure properties held as bank REOs, but not yet on the market, and it starts to look like a pretty big number. By some estimates, it may take nearly four years to burn through all of the shadow inventory. Digging deeper into the unknowable, we cannot forget the mobility factor, i.e. people needing or wanting to sell due to potential job relocation, changes in lifestyle, family size or retirement – many of these people, with and without equity, are still on the sidelines and difficult to estimate.
As long as we have shadow inventory, prices will remain depressed. Why? Because many of the homes coming onto the market will be ones that have either been short sold due to negative equity, or those that have been recently foreclosed. In both cases, when these homes close they become a new “comp”, i.e. the reference point for pricing the next home that goes up for sale. [A good example of this was the first batch of South Waterfront condos that went to auction in 2009. The day after the auction, those sale prices became the new comps, not only for the unsold units in the building holding the auction, but also for many of the neighboring buildings. – PCQ]
All of these factors combine to destroy market equilibrium. That is, short sellers’ motivation is distorted. Homeowners with negative equity have little or no bargaining power. Pricing is driven by the “need” to sell, coupled with the lender’s decision to “bite the bullet” and let it sell. Similarly, for REO property, pricing is motivated by the banks’ need to deplete inventory to make room for more foreclosures. A primary factor limiting sales of bank REO property is the desire not to flood the market and further depress pricing. Only when market equilibrium is restored, i.e. a balance is achieved where both sellers and buyers have roughly comparable bargaining power, will we see prices start to rise. Today, that is not the case – even for sellers with equity in their homes. While equity sales are faster than short sales, pricing is dictated by buyers’ perception of value, and value is based upon the most recent short sale or REO sale.
So, the vicious circle persists. In today’s world of residential real estate, it is a fact of life. The silver lining, however, is that most Realtors® are becoming much more adept – and less intimidated – by the process. They understand these new market dynamics and are learning to deal with the nuances of short sales and REOs. This is a very good thing, since it does, indeed, appear as if this will be the “new normal” for quite a while.
Short sales shot up 19 percent between the first and second quarters, with 102,407 transactions completed during the April-to-June period, according to RealtyTrac. Over the same timeframe, a total of 162,680 bank-owned REO homes sold to third parties, virtually unchanged from the first quarter.
RealtyTrac’s study also found that the average time to complete a short sale is down, while the time it takes to sell an REO has increased.
Pre-foreclosure short sales took an average of 245 days to sell after receiving the initial foreclosure notice during the second quarter, RealtyTrac says. That’s down from an average of 256 days in the first quarter and follows three straight quarters in which the sales cycle has increased.
REOs that sold in the second quarter took an average of 178 days to sell after the foreclosure process was completed, which itself has been lengthening across the country. The REO sales cycle in Q2 increased slightly from 176 days in the first quarter, and is up from 164 days in the second quarter of 2010.
Discounts on both short sales and REOs increased last quarter, according to RealtyTrac’s study, but homes sold pre-foreclosure carried less of a markdown when compared to non-distressed homes.
Sales of homes in default or scheduled for auction prior to the completion of foreclosure had an average sales price nationwide of $192,129, a discount of 21 percent below the average sales price of non-foreclosure homes. The short sale price-cut is up from a 17 percent discount in the previous quarter and a 14 percent discount in the second quarter of 2010.
Nationally, REOs had an average sales price of $145,211, a discount of nearly 40 percent below the average sales price of non-distressed homes. The REO discount was 36 percent in the previous quarter and 34 percent in the second quarter of 2010.
Commenting on the latest short sale stats in particular, James Saccacio, RealtyTrac’s CEO, said, “The jump in pre-foreclosure sales volume coupled with bigger discounts…and a shorter average time to sell…all point to a housing market that is starting to focus on more efficiently clearing distressed inventory through more streamlined short sales.”
Saccacio says short sales “give lenders the opportunity to more pre-emptively purge non-performing loans from their portfolios and avoid the long, costly and increasingly messy process of foreclosure and the subsequent sale of an REO.”
Together, REOs and short sales accounted for 31 percent of all U.S. residential sales in the second quarter, RealtyTrac reports. That’s down from nearly 36 percent of all sales in the first quarter but up from 24 percent of all sales in the second quarter of 2010.
States with the highest percentage of foreclosure-related sales – REOs and short sales – in the second quarter include Nevada (65%), Arizona (57%), California (51%), Michigan (41%), and Georgia (38%).
States where foreclosure-related sales increased more than 30 percent between the first and second quarters include Delaware (33%), Wyoming (32%), and Iowa (30%).
As of August, there were 2.1 million units, representing eights month of supply, of shadow inventory, up from 1.9 million units, or five months of a supply, a year ago.
“With visible inventory remaining flat at 4.2 million units, the change in shadow inventory increased the total supply of unsold inventory by 3 percent,” the company said in a release.
CoreLogic estimates its shadow inventory, sometimes referred to as pending supply, by adding up properties that are seriously delinquent (90 days or more behind in mortgage payments), inforeclosure, or owned by mortgage lenders but not currently listed on multiple listing services (MLSs).
These properties typically don’t show up in official numbers released by the Census Bureau and other outlets, meaning housing supply is worse than it looks.
And the visible months’ supply increased to 15 months in August, up from 11 months a year earlier due to the decline in sales volume during the past few months (expiration of homebuyer tax credit).
Now the total visible and shadow inventory stands at 6.3 million units, up from 6.1 million a year ago.
As a result, the total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago.
Typically, a reading of six to seven months supply is considered normal, meaning current inventory is roughly three times the norm.
Translation: Continued downward pressure on home prices.