Why You’re Seeing More Short Sales

A short sale is an agreement between the lender and a homeowner to sell a property for less than what is owed on the loan. With the current economic conditions today, you may be seeing more short sales in the future. Here’s why:

With the booming housing market in recent years, average housing prices were rising faster than inflation and wage increases. The average first time homebuyer was faced with higher income standards to meet in an attempt to be approved by lenders. Many of these homeowners opted for nonconventional type loans, such as Adjustable Rate Mortgages (ARMs). Adjustable Rate Mortgages are loans that adjust the interest rates periodically as a result of changes in market conditions. The borrower receives a lower interest rate usually for a predetermined time period, which will change depending on market conditions and federal rates. As a trade-off of having lower interest rates, the borrower shares a portion of the risk that their payments will increase as a result of national economic interest rate increases.

The problem for those who opted for ARM loans came when interest rates rose and as a result, their mortgage payments increased substantially. Many homeowners were no longer able to make their monthly payments. As a result of this, people began to default on their loans and houses were on the verge of foreclosure.  This set the stage for homeowners looking for alternatives to foreclosure. However, there is more to the situation of rising short sales than unconventional type loans.

Since 2005, home prices are no longer on the rise as they were in the recent past.  In fact, in many areas, home prices have actually fallen substantially, to a point where a homebuyer no longer has equity in their home. A lot of homeowners trying to sell their homes today are now finding out that their homes are appraising at lower values than they currently owe, and there are some situations where home prices have fallen as much as 50% from their previous value – unheard of during the housing boom that we saw such a short time ago. Houses were always considered the ultimate ‘safe’ investment.  However, with lowered market values and increasing foreclosures, many neighborhoods have average home values declining due to a ripple effect, where houses being sold for less and less are contributing to overall lowered market value of the neighboring homes.

Add all of this to the increasing unemployment rate, job losses in manufacturing in the Midwestern states, and slowed economic conditions in the Sun Belt states, and you have a
recipe for increased short sales.

A typical short sale situation may go like this: A person loses his/her jobs and is desperate
to find income. More often than not, this means relocating. Relocating usually entails selling the home. When the home is worth less than he/she bought it for, this can result in a loss of a few thousand dollars. Another alternative is (if the loss is more substantial and
the seller cannot make up the difference or continue with current mortgage payments) a
possible negotiation with the bank for a short sale.

Inevitably, as with all market conditions, short sales and foreclosures are cyclical in
nature, but with the current outlook, short sales are expect to remain on the rise. As the
economy rebounds , short sales may become less frequent, but for now, they are here to stay.