Monday, January 14, 2008
Short Sale Considerations
An article in Sunday’s New York Times brings up some common issues with short sales from the Realtor’s perspective. The article cited some responses from a survey of real estate agents sponsored by Inside Mortgage Finance Publications. Among the problems agents identified in their experience with short sales were the following:
- Loan servicers were unresponsive to offers presented by agents
- Slow responses from the bank to offers presented - sometimes months
- Tangled web of communications with the bank before being referred to speak with someone at the loss mitigation department.
- The lender is frequently unresponsive to phone calls
Most of us with any involvement in the short sale process can readily agree to the complaints above. A short sale requires much more patience from buyer and seller (and agents) if it is to be successfully completed.
The blog Calculated Risk provided a response to the Times article, citing some considerations that agents and parties involved with distressed sales should keep in mind to avoid a fraudulent transaction.
- Anyone at any time can sell short - that is to agree to a purchase price less than the amount of the full payoff owed to the lender, while asking that lender to release the lien on the property so that the buyer can have clear title. The idea is that the lender’s loss will be mitigated if they agree to the short sale instead of having to go through the foreclosure process - that is they will lose less than if they foreclose and allow the property to be sold at auction. Whether the lender should or will agree is another matter.
- Traditionally, a short sale comes up as an alternative after the borrowers are already delinquent. In these cases they have already been referred to the lender’s loss mitigation department.
- The confusion arises when the sellers put their property on the market and only receive an offer for less than the loan payoff. When the realtor or borrower then tries to inquire about a short sale, the stonewall begins - the lender has at that point no evidence that any loss will occur. They do not have a delinquent mortgage or notice of the buyer’s inability to make payments. The lender will expect payment in full unless they receive proper documentation of a problem.
- The seller must already have notified the lender of inability to make payments and that default is impending. Sellers must expect that the lender will request all financial information from the seller to back up their claim, and that the lender will order the property to be inspected. Failure of the seller to cooperate will almost certainly result in foreclosure instead of the short sale.
- The seller will probably have to pay something for the sale to be approved. The lender will also want to ensure that the transaction is arms length - buyer and seller are unrelated and unaffiliated - or if related or affiliated, that proof is given that the transaction is being conducted as if they were not. They will want to ensure that the property has been exposed to the market for sufficient time or otherwise be assured that they are getting a reasonable value for the property.
- The lender will want to verify the validity of the buyer’s financing and identity to assure themselves of the buyer’s legitimacy. Lenders must guard against the fraudulent transaction. Needless to say, sellers or agents who try to pressure the bank to move more quickly are not providing the reassurance that the lender needs.
Ultimately the question is whether an arms length short sale really will mitigate the lender’s loss more than a foreclosure sale at auction. For any foreclosure or short sale we represent, we will look carefully not only at these questions, but at the conditions under which title is conveyed. While foreclosure and short sales are becoming a more common occurence in our market, they also bring with them new risks and responsibilities for real estate agents.
Tuesday, January 08, 2008
Kitsap Real Estate Market Report - December 2007
Presidential Primary Election results have eclipsed real estate and mortgage lending problems in the current news cycle, though there has been no shortage of worrisome real estate news. National unemployment just rose to 5%. Inflation is up as commodity prices are on the rise. The Fed would prefer not to cut interest rates much further, as has been advocated to fend off the huge losses from mortgage defaults and subprime losses. Single family home starts are at their lowest levels since 1991. Overall mortgage delinquencies are at the highest rate since 1986. Builder confidence in the market for single family homes is at the lowest reading since 1985.
Not being a perfectly competitive market, housing prices tend to be strongly persistent - sellers are reluctant to lower their prices. If you’ve been gaging the market by how prices have changed, things may not look too bad - but you should not be misled. If we focus on inventory levels, we can predict that prices must decline. Currently Kitsap County has an inventory turnover rate of about 10 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that there is a very substantial possibility that prices will fall to allow the inventory to be reduced. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007. Note that the year end inventory normally falls about 15% as sellers take their homes off the market for the holidays. We expect much of this inventory to come back on the market in the coming months.
There are a couple metrics we might try out on the Kitsap market. If the relationship between median family income and median prices is 2.8 in a normal market, in our mid December Outlook we calculated that it is about 4.3 in Kitsap County. Prices tend to fall slowly, so it might take a couple years to get back within the normal range of income to median home price.
Another metric says that annual gross equivalent rent less the cost of utilities should be about 5% of a home’s value. This came from a study by Morris Davis , an economist at the University of Wisconsin-Madison and formerly at the Fed. The study tracked the percentage of annual gross rent less utilities divided by average price and interpolated year over year using the CPI equivalent rent component. The data show that nationally this ratio has fallen to about 3.5%, meaning that home prices have risen much more quickly than the equivalent rent that the homeowner might receive. We could not duplicate the data for Kitsap County but have been able to verify that the trend since 2000 appears to be correct (see graph below).
Residential Highlights
Kitsap County residential inventory in December (1920 listings) was down 12.5% from November. Inventory was 19% higher than a year ago. The number of year to date pending sales was down 14% compared to a year ago - compared to minus 13% last month. Pending sales for the month of December were down 20% compared to December 2006. Countering the downward trend, Poulsbo YTD pending sales are up 31% compared to a year ago. Of 45 current pending sales in Poulsbo, 40 are new construction, and most of these are presales that never appeared as active listings. Bainbridge Island year to date pending sales are down 4% from a year ago (a reversal over the past several months after being up for most of the year). The number of YTD closed sales Countywide (see graph below) is minus 18% compared to a year ago - down from minus 17% last month. Poulsbo YTD closed sales are up 13% from a year ago, up from 11% last month. Bainbridge Island closed sales were down 5% from a year ago.
Prices are falling…
Prices have gone down. The YTD median sales price of $290,343 in December was down just over a percent from November (see graph below). This is up 6% from a year ago. The median for closed sales in December was $265,500 - about the same as last month and down about 1% from closed sales in December 2006. It’s vitally important for sellers to be the most competitively priced among their competition if they want to generate an offer.
Seller expectations…
The median list price for the year remained steady at $350,000. This is the same as last month and is less than 1% higher than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 9.9 months, down from 10.1 months in November. This number has been steadily going up for the past several months. A year ago this number was 6 months, and that was already reflecting a market slowdown from its 2005 levels. Today a seller has a 10% chance of selling his/her home in a given month. Competitive pricing is essential, and almost every offer we see presented is negotiating on price.
The statistics for pending sales (compared to year-to-date sales last year) varied for different parts of the County. Most areas have slipped some in the past month. Here is a snapshot (see graph below for comparison):
Bainbridge Island -4% (-3% last month)
Poulsbo +31% (+32% last month) - 40 of 45 pending are new construction
Bremerton -23% (-24% last month)
Kingston -11% (-10% last month)
Silverdale +2% (+2% last month)
Port Orchard -8% (-6% last month)
Olalla -25% (-25% last month)
Download the January Prowse and Company Newsletter
Download the Newsletter. This month we show you some graphs, talk about the current real estate market, tell you about Habitat for Humanity of Kitsap County’s New Hope Project, and Brenda shares one of her favorite poems!
Statistics not compiled or published by NWMLS
