Focus On Short Sales

It's been a few months since I wrote about short sales, so I figure it's about time to check in on that segment of the market to see how things are changing.

Short sales are, in my opinion, here for the long haul. I expect to see some level of short sale activity in our market for 6-8 years. We had a lot of houses sold and refinanced during the boom years, so we have an incredible number of people who owe more on their house than it's worth. I've seen several different national numbers on how many homeowners are upside down, ranging from the 30% range up to around 60%. I suspect that a lot of those numbers are what I like to call "PFA" numbers - "Plucked From Air", or in less polite circles, "Pulled From... well, you know". I'd love to get my arms around what our local number is. I can come up with the number of homes sold in Lompoc from 2004 through 2006, and subtract the number of REO's. But I don't have a good source for refinances, and that's a big part of the picture. If I can come up with a good local number at some point, I'll report on it, and it could give us a clearer picture of how long we can expect this to go on. Bottom line, it's not going to end until we see some significant appreciation.

Anyway, since this is a large and likely long term segment of our market, it warrants watching. If you've been reading my Monday Morning Numbers posts, you'll know that the number of contingent listings has exploded in recent months. And no surprise, this is largely a result of short sale activity. Currently, 46% of our combined active & contingent listings are short sales. This is in about the same range that we've seen all year. What's changed is the mix. Short sales make up a whopping 70% of our current contingent listings, and only 26% of our active listings.

The percentage of pending listings is down from when I last reported on these back in May. Right now, short sales account for about 15% of our pending listings, down from 23%. I think that may be at least partially due to agents leaving them in a contingent status for longer. I can't track it, but it seems to me that I'm seeing shorter times between these listings changing from pending to sold.

We've seen a slight decrease in the percentage of short sales as sold units. Year to date, they account for 14% of our sales, but only 11% of the sales so far this quarter. That number was 17% in the the second quarter, and 15% in the first quarter. But the quarter isn't quite over yet, and it wouldn't take a huge swing late to move that number back in line, and I'd be surprised not to see it back in the 17-20% range in the fourth quarter, given the number of contingent short sales out there today.

One number that continues to change for the better is the success rate of short sales. When I first reported on these, I noted that back in early 2008, I calculated that about 9% of the short sales listed eventually sold, and that had improved greatly over about a year to around 25%. Right now it looks like we have a success rate at around 33% for short sales, compared to 70% for the market as a whole. I think that everybody is getting better at the process. Banks are making some slow progress in getting their acts together, and agents are getting better educated about the process and are doing a better job of managing these transactions.

There is a monkey wrench in the works these days, and I hope this isn't a permanent trend. Increasingly, lien holders are agreeing to release the lien on the property to get it sold, but they aren't releasing the borrower from the debt. If this continues, I think we'll start to see a decline in the numbers of these types of sales, and we'll have a prolonged REO cycle instead. When borrowers see this clause in their short sale approval letter, there are two typical reactions: They hit the wall and decide not to agree to the sale - why bother with it if I'm still going to owe $400,000? The other school of thought (maybe misguided) is to say "Go for it - you can't get blood from a stone". Either way, I hope this practice dies an early and quiet death.

Bottom line, like I said earlier, if you're looking for a home in Lompoc right now, you limit your already limited options by excluding short sale listings. There are legitimate reasons to avoid them, depending on what you are trying to accomplish. But even with the pitfalls, more buyers are going that route. It's not quite the hopeless mess that it was a couple of years ago.