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2010 Real Estate Forecast

December 1st, 2009 7:15 AM

Region: Maricopa County
The Age of the Short Sale
By Mike Orr

The impact of lender-owned homes reached a peak in the winter season 2008-2009. While these were available in large quantities and at falling prices, buyer interest was focused almost entirely on them. Supply was sufficient to keep REO prices declining until early April 2009. After the second quarter of 2009, REOs became much harder to find, and as competition for them grew fierce, short sales have become more important. Given the large number of homes still in distress and the banks’ desire to avoid foreclosure if possible, we expect short sales to become the most important segment in the market over the next few years.

In October 2009, short sales and pre-foreclosures constituted about 39% of the active listings on the Arizona Multiple Listing Service (ARMLS), with normal sales at 48% and lender-owned properties at 13%. Short sales and pre-foreclosures constituted about 50% of the listings under contract on ARMLS, with normal sales at 20% and lender-owned properties at 30%. Lender-owned properties are declining in market share, and normal sales are stable while short sales and pre-foreclosures are increasing.

The demand for short sale properties is now strong, particularly for the more affordable homes. However, a large proportion of the listings are still failing to close in a timely fashion. For example, the monthly sales rate for September was only 1,458 - less than 16% of the listings under contract. However patience is eventually paying off for a lot of buyers since the listing success rate has improved dramatically over last year. The success rate for short sales improved from about 15% in January to over 50% in October, just below that for normal sales, though far less than for lender-owned properties.

The growth in short sales has been most dramatic in the price ranges up to $200,000. The most important range in dollar volume terms is that between $100,000 and $200,000, with a trebling of monthly volume between January and September and a monthly dollar value now over $90,000,000. The price range below $100,000 has also shown dramatic growth although this is of much less significance in total dollars spent. Although the more expensive sectors have relatively low unit sales, when measured in dollar volume, they also show very significant growth in short sales.

When we analyze the 48,000 residential properties in Maricopa County that have received a Notice of Trustee Sale, we find that fewer than 1 in 5 are listed on ARMLS. Given that we are now seeing considerable success among the short sales, it is a little surprising that so few owners attempt a short sale. We anticipate that this percentage will increase over the coming year, as more homeowners understand the benefits compared with foreclosure. We believe that many lenders will postpone a trustee sale if there is any sign of a short sale taking place, so homeowners should not be deterred by the belief that they don’t have enough time within the 90-day notice period.

In Maricopa County, 47% of the short sales and pre-foreclosures listed on ARMLS have not yet received a Notice of Trustee Sale. So a large number of homeowners are clearly attempting a short sale long before they receive a notice, which seems like a sensible strategy. As lenders appear to be getting more flexible in their consideration of what constitutes hardship, it seems likely that more of these short sale listings will achieve success as long as the pricing is not too low to be acceptable to the lender.

Greater Phoenix suffered a very significant price decline between May 2006 and April 2009, so many homeowners who wish to sell their home and have a deed of trust on their property are going to find themselves in a short sale situation for the foreseeable future. Fortunately, lenders are now devoting more effort and resources to short sales, and many REALTORS® are learning the tools and techniques to bring them to a successful conclusion.

As properties get purchased by new buyers at the new lower prices and prices stabilize and then increase, we will eventually see a peak in short sales and a long slow decline in their importance. However, that peak is still ahead of us, and the next several years are likely to be remembered as the “Age of the Short Sale.”

Posted by Brad Phillips on December 1st, 2009 7:15 AMPost a Comment (0)