Volume of Short Sales Could Lead to Lower Home Prices

A survey conducted by Movoto.com indicates that another drop in home prices could loom on the horizon if changes are not made to the short sale process.

Out of Movoto’s 2,000 national real estate agents, 49.2% reported that the majority of homes listed in their market are short sales. Due to the volume of short sales and an increase in foreclosures, the San Mateo, Calif.-based real estate company is speculating that fewer offers will be made on existing short sales listings because they are so difficult to close.

Approximately 20% to 25% of the agents said their short sales are not closing because the banks and buyers cannot come to terms before the home goes into foreclosure.  The combination of higher short sales and greater foreclosures would lead to another fall in home prices.

“We are now at a point were there are really good deals out there,” said Mark Brandemuehl, vice president of marketing at Movoto. “I tell people that if you buy the right property today, you will be really happy about that decision five or 10 years down the road. It is hard to imagine interest rates and prices are going to remain like this in the future.”

Brandemuehl said short sales vary for every region throughout the country. He said Phoenix has a large inventory of short sales, but those properties are being bought at a steady pace. However, states like Georgia and Florida are not experiencing similar success pertaining to its short sales inventory.

Brandemuehl believes the market has hit “rock bottom” and it will take a couple of years for the industry to recover because of the amount of short sale inventory throughout the country that is not getting purchased. These properties will eventually convert into foreclosures and come through the market at a steady pace.

He added that markets like Florida and Las Vegas could take even longer before its home prices return to similar values from five or six years ago.

“Right now, it is taking a year and a half for foreclosures on average to go from notice of default to a bank-owned property,” Brandemuehl said. “If foreclosures entering the process are getting back to historically normal levels today, then foreclosures exiting the process should get back to normal levels probably in a year and a half to two years.”

Despite economic speculation that there could be a 10% to 12% drop in home prices this year, Movoto is optimistic this will not occur due to the stability of the market. Brandemuehl said a 2% to 4% growth in prices in five to six years would be an encouraging sign for the industry, even though the same economists say a 8% to 10% jump can possibly take place during the same time period.

A recovery will all depend upon how quickly the banks move homes through the short sale process and into REO status, “so there is a lot of incentive for them to overload the market with inventory,” Brandemeuhl said.

He added that lower priced homes (below $150,000) have high demand in the major metropolitan statistical areas for both investors and first-time homebuyers, while higher-end properties are getting taken off the market at the same rate that they come on.

Brandemuehl said the only way to decrease the amount of short sales taking place nationwide is for borrowers to think about a loan modification.

“Even if the banks modify the loans, some people still can’t pay them and think it’s just better to get out of the situation,” Brandemuehl said. “If you are underwater in a house that is now worth $150,000 with a $300,000 or $350,000 loan balance and the bank will take $50,000 off or extend your payments for another 10 years, a lot of people will say it is not worth it and still decide to short sale.”