Orange County Housing Report
Feburary 18, 2010

Short sales, the sale of homes for less than what is owed on their mortgage, are creating a backlog of pending sales that take FOREVER to close. 2010 is going to be the year of the short sale. Because of the enormous number of foreclosures in 2008, in 2009 the Federal government stepped in and attempted to strong arm big lenders to modify loans. For the most part this was not very successful. The problem is that not everybody qualifies for a loan modification and many successful loan modifications end up in default again. As well, the ongoing recession and high unemployment are placing increasing numbers of homeowners in trouble. Both the government and banks are in agreement that they don't want to foreclose unless there is virtually no other alternative. Often times, there is an alternative: a short sale. There are advantages to short selling a home for the homeowner; including, the ability to purchase another home sooner than would be possible after a foreclosure. For the lender, there are benefits too. They get to take advantage of your pride in homeownership. Most of the time, a short sale, unlike a foreclosure, doesn't require thousands of dollars in repairs nor do they require significant holding costs. At the end of November 2009, the US Treasury put together a short sale directive that outlines a new process that begins on April 5, 2010, for all Fannie Mae and Freddie Mac loans. Lenders are scrambling to bring their own ineffective short sale possesses in line with the new Fannie Mae and Freddie Mac process.

Subscribe to the Orange County Housing Report as part of REALTOR® Tony Dove's newsletter. For more real estate news and commentary, visit: Inman News Tony Dove's Local Realty Digest

The current short sale process is NOT working and has resulted in a huge backlog of pending sales. There are currently 6,706 outstanding pending sales in Orange County. Of those, 4,154, or 62%, are short sales. The problem is that almost 70% have been pending for over one month. Many have been pending for months. The reason these do not close within a short period of time is because in addition to the buyer having to obtain loan approval to purchase the property, the seller must obtain approval from their lender to sell the property. And, if there is a second loan on the property, the process, if it can be completed at all, takes even longer. The fact that many short sale homeowners have stopped paying their homeowner association dues, adds to the complexity, because the association may have to agree to take less than is owed to them as well. Often, the buyer of a pending short sale grows so frustrated that they cancel and look elsewhere. The short sale is then placed back on the market and is often placed right back into pending status with a new offer, and the lender approval process begins all over again. In a short sale situation, the buyer, the seller and the offer must all qualify. The buyer must qualify for the new loan. The seller must qualify to obtain the short sale; there must truly be a hardship situation. And, the offer to purchase must be at or near fair market value. With demand so hot, lenders are taking a closer look at value and are not as willing to sell at a major discount. Never-the-less, much of the distressed inventory backlog, often referred to as the "shadow inventory," will be disposed of this year in the form of short sales. Yes, there will still be foreclosures. Some short sales simply will not work out. Sometimes the outcome of a short sale is not in everyone's best interest. Some homeowners will just walk away from their obligations. But, banks and the government have realized the best way to properly reduce the distressed inventory, is by short sale, something that buyers, sellers and real estate professionals have realized for about a year and half. If you are skeptical, just take a look at the following chart, the number of short sales versus foreclosures in Orange County:

The active inventory increased over the past two weeks by 278 homes, or 4%, to 8,135. The active inventory last year was at 11,541, 3,406 additional homes for sale compared to today. Two years ago it was at 15,392, 7,257 additional homes for sale. Demand, the number of new pending sales that have occurred over the prior 30-days, has decreased by 4 pending sales to 3,244. There are 425 additional pending sales compared to last year and 1,424 compared to two years ago. Demand typically begins to rise at a quicker pace in the middle of February, so we will have to see if this trend continues. It may be a reflection of not having enough fresh homes for sale, especially in the lower price ranges. The expected market time for all price ranges in Orange County increased slightly from 2.42 months two weeks ago to 2.51 months today. At the current pace, the overall market is a seller's market, but without much appreciation. The number of distressed homes within the Orange County housing market is keeping a lid on appreciation. The higher price ranges are out of step with the overall market, and are experiencing a deep buyer's market, the higher the price range, the deeper the buyer's market. The hottest price range is homes priced between $250,000 and $500,000, with an expected market time of 1.75 months. Contrast that with homes priced above $4 million with an expected market time of 33.89 months. The active distressed home market, all short sales and foreclosed homes combined, increased by 54 homes to 2,705. The number of foreclosed homes within the active listing inventory increased in the past two weeks from 377 to 380, a gain of only three. The expected market time for foreclosed homes is a sizzling 0.95 months, a deep seller's market. The number of short sales within the active listing inventory increased by 54 and now totals 2,705. The expected market time for short sales is 1.68 months, also a deep seller's market.

Source: Steven Thomas, President, Altera Real Estate