“The Year of the Short Sale” Lives up to its Billing

by 06 Dec 2012

Early this year, experts and journalists widely proclaimed 2012 to be the “Year of the Short Sale” because a number of factors were making short sales more popular and feasible than ever.  Now the proof is in.  For the first time in history, sales of properties in some stage of pre-foreclosure (largely short sales) outnumbered sales of bank-owned properties (REO).  Taken together, short sales that entered the foreclosure process and those that did not accounted for lion’s share of distress sales in the third quarter.

Pre-foreclosure sales increased 22 percent from the second quarter and were also up 22 percent from the third quarter of 2011, while the average sales price decreased 3 percent from the previous quarter and was down 5 percent from a year ago, according to RealtyTrac.  A total of 98,125 pre-foreclosure sales occurred during the quarter compared to a total of 94,934 REO sales.

By contrast, REO sales increased 19 percent from the previous quarter but were still down 20 percent from the third quarter of 2011. A total of 193,059 U.S. properties in some stage of foreclosure or bank-owned (REO) were sold during the third quarter, an increase of 21 percent from the previous quarter, but still down 3 percent from the third quarter of 2011.  Foreclosure-related sales accounted for 19 percent of all U.S. residential sales during the third quarter — down from 20 percent in the previous quarter but the same level as in the third quarter of 2011. 

Foreclosure sales were down because significantly fewer foreclosures are being completed.  CoreLogic reported earlier this week that there were 58,000 completed foreclosures in October 2012, down from 70,000 in October 2011, representing a year-over-year decrease of 17 percent. On a month-over-month basis, completed foreclosures fell from 77,000 in September 2012 to 58,000 in October, representing a decrease of 25 percent. By comparison, prior to the decline in the housing market in 2007, completed foreclosures averaged 21,000 per month between 2000 and 2006.. Since the financial crisis began in September 2008, there have been approximately 3.9 million completed foreclosures across the country.

Short sales of properties not in the foreclosure process increased 15 percent from the previous quarter and were up 17 percent from the third quarter of 2011. These non-foreclosure short sales accounted for an estimated 22 percent of all residential sales, bringing the total distressed sale share to an estimated 41 percent for the quarter.  Non-foreclosure short sales prices in the third quarter fell short of the total amount of loans outstanding by an average of $82,312 per short sale. For all short sales, including non-foreclosure and in-foreclosure properties, the sales price was short of combined loan amounts by average of $94,896 per short sale.

Pre-foreclosure properties sold for an average price of $191,025 in the third quarter, down 3 percent from the second quarter and down 5 percent from the third quarter of 2011. The average sales price of a pre-foreclosure residential property in the third quarter was 27 percent below the average sales price of a non-foreclosure residential property, up from a 25 percent discount in the previous quarter and a 19 percent discount in the third quarter of 2011.

The average REO sales price decreased 7 percent from the previous quarter but was still up 7 percent from the third quarter of 2011. REOs sold for an average price of $161,954 in the third quarter, down 7 percent from the second quarter but up 7 percent from the third quarter of 2011. The average sales price of a bank-owned home in the third quarter was 38 percent below the average price of a non-foreclosure home, up from a 33 percent discount in the second quarter but down from a 39 percent discount in the third quarter of 2011.

Homes in foreclosure or bank owned sold at an average price that was 32 percent below the average price of a home not in foreclosure, up from a 29 percent discount in the second quarter and a 31 percent discount in the third quarter of 2011.

Short sales gained market share at the expense of REO and sales of completed foreclosures at auction.  The slowdown in foreclosure processing over the past two years, new programs implemented by major lenders, software platforms that facilitate short sale transactions and new policies by Fannie Mae and Freddie Mac that took effect November 1 have made short sales, once a rare occurrence, more popular than foreclosures for homeowners and lenders alike.

“The shift toward earlier disposition of distressed properties continued in the third quarter as both lenders and at-risk homeowners are realizing that short sales are often a better alternative than foreclosure,” said Daren Blomquist, vice president of RealtyTrac.

The near term short sale outlook is not as bright.  The boom faces a serious hurdle created by Congress that has yet to be solved. If it isn’t, borrowers will have to count mortgage relief from lenders as income on their federal tax returns. Thus a borrower would have to pay taxes on a $100,000 reduction in principal owed on a loan, or a $20,000 write-off in the amount owed after a short sale.  Extending the Mortgage Forgiveness Debt Relief Act of 2007 would solve the problem, but time is running out to meet the January 1 deadline.

“The scheduled expiration of the Mortgage Forgiveness Debt Relief Act at the end of this year could stifle this trend toward short sales. If that law expires as scheduled, homeowners who agree to a short sale could see their income tax jump significantly because the portion of the unpaid loan balance not covered by the short sale proceeds will be considered taxable income in many cases,” said Blomquist.

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