Lately, there has been much made of the current “housing recovery,” with many thinking that the market turn around has begun and that the end is near for short sales. I could not disagree more, and here’s why:
1. Has the Market Recovered? – According to Steve Berkowitz, CEO of Move, Inc., which operates realtor.com, “Where we have seen significant volatility in many markets — including double-digit declines in inventories as well as increases in median price for both yearly and monthly views — we are now looking at a housing market that is less heated and moving closer to normalcy. Future home price increases may be driven more by market demand than inventory shortages.”
As for pricing, CoreLogic has released estimates of near 12 percent in price growth in 2013, but also shows a distinct cooling trend for 2014, with lower priced property leading the slowdown at just 2 percent price growth. This can be attributed to rising interest rates, a slowdown on investor participation, changing short sale rules and expanding inventory. It is that last market segment, inventory, that I believe holds the key to determining how 2014 will play out.
2. The Inventory Scam – Anyone active in real estate sales can tell you that inventory can be tight in some segments, and this has led to increased prices. Increased prices set the tone that the market is rebounding, and that “good will” feeling about the market can go a long way to changing people’s perceptions about the market and encouraging many who are waiting on the sidelines to jump back in. While the price increases are encouraging, they have a long way to go to erase the equity losses of the last decade. Clearly, any housing market restart is tied to inventory, and this is why I think that the current market rebirth is an illusion.
The “shadow inventory” that has been much speculated about is real, and when it is revealed, it will erase one of two segments of the market that is propping up growth, the other being artificially low rates. My definition of “shadow inventory” is simply inventory not reflected on the market, most notably the MLS. There are many reasons for shadow inventory, including those in some sort of foreclosure work out program, such as: a loan modification; those who are actively litigating foreclosure; and those who have simply given up trying to short sale due to agent short sale incompetence or lack of success with their lender (which many times gets the blame when short sales are mishandled by the agent).
The biggest reason for shadow inventory though, and one that is most troubling, is the property that has already been foreclosed and taken back by the lenders. In many cases, it could be months, or even years before these properties hit the market. The reason for this is that the servicers who foreclose will end up conveying those properties back to the investor, and in the last year, many of those investors have been dumping property back to Government-Sponsored Entities, or GSEs, such as Fannie Mae, Freddie Mac and HUD. That process takes time, but there is another, more sinister undercurrent: the consolidation of the distressed property market to the GSEs, and their influence.
3. The GSE Influence – While our collective focus has been turned towards the economic recovery as a whole, the GSEs (Fannie Mae in particular) have been quietly squirreling away foreclosed homes, many of which are not on the market years after being foreclosed. This pile up of off-market inventory, along with new Fannie guidelines, which no longer consider short sales and foreclosures distressed property (and thus, are no longer discounted), is very interesting.
On top of this, both Fannie and Freddie are routinely refusing to value short sales at appraised value. Short sale negotiators around the country are reporting Fannie/Freddie counter offers that exceed appraised values by as much as 10 percent. Tim McCallum, the director of short sales for Fannie Mae, has stated that due to recent market gains, Fannie has a new policy of countering short sale offers above market value, because they assume that if they take the property back in foreclosure, that by the time they get around to selling it, the value will have gone up past the current appraised value.
This is a dangerous assumption, one many lenders relied on and got burned by when property values were strong. To me, this is an obvious play by the GSE’s to manipulate market pricing. By withholding inventory, then assuming higher values, values will indeed rise in the short term. However, when more and more inventory is released, and new tougher lending guidelines narrow the buyers market, I think we will see these short term gains halt or reverse.
In Part II, we will examine how the new lending guidelines will affect both the buyers and sellers market, and how artificially playing with property values can lead to a market correction.
Joseph C. Alfe worked as a mortgage lending executive with a leading mortgage lender before starting his short sale negotiation company, Short Sale Processors, in 2005. Since then, he has stayed at the forefront of this constantly changing industry as one of the only truly independent, third-party negotiation firms, and has consistently innovated and developed cutting edge negotiation techniques and best practices.
Joseph and his associates have closed nearly 1,000 short sales, and he continues to be active as a short sale coach, consultant, and speaker. SSP is based in Chicago, and negotiates short sales throughout the country. Joseph resides in the northwest suburbs of Chicago with his wife and 5 children.