Short Sales Higher, Prices Lower


By Diana Olick, CNBC Real Estate Reporter

NEW YORK ( CNBC) -- Buyer traffic is strong, supply of homes for sale is low, and yet home prices continue to defy the usual formula, falling again in March. Prices usually rise as supply shrinks, but demand is still too low to make those historical "norms" compute, not to mention that the type of supply available is largely distressed.

Foreclosures and short sales (when the home is sold for less than the value of the mortgage) accounted for 47.7% of sales, in a three month running average measured by Campbell/Inside Mortgage Finance. That's the 25th month in a row that distressed sales have topped 40% of the market.

"With nearly half of the market being distressed, we're a long way from a return to a normal market," said Thomas Popik, research director at Campbell Surveys. "Agents responding to our survey say that homeowners with well-maintained properties in good locations are very reluctant to list at today's prices. That's why inventory is low--and also why forced REO and short sales are such a big proportion of the remaining market."

Home prices for non-distressed properties fell 5.7% in March year-over-year, according to the survey. Prices for "damaged" REO (bank-owned properties) fell 5.7% and for move-in ready REO fell 2.5% during the same period. The real sticker shock is in short sales. Prices of those homes fell 14.3% from March of 2011.

More from CNBC
Phoenix's Hard-Hit Housing Starts to Rise From Ashes
China's Love Affair With SUVs
BP Oil Disaster: Two Years Later

Short sales have been ramping up of late, as banks attempt to comply with the so-called "robo-signing" mortgage settlement. Those are part of the losses the banks are required to take in the $25 billion deal. Over the past six months, short sales have moved from 17.8% of all sales to 19.9%, according to the Campbell/IMF survey. They now represent the number one segment for distressed properties.

That share is likely to grow, as the conservator of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA), last week announced it was directing the two mortgage giants to "develop enhanced and aligned strategies for facilitating short sales, deeds-in-lieu and deeds-for-lease in order to help more homeowners avoid foreclosure." It includes a requirement that mortgage servicers review and respond to short sale requests within thirty days.

Lengthy timelines have long been the biggest complaint in the short sale sector. Fannie Mae and Freddie Mac hold hundreds of thousands of distressed loans, and accelerating the process will surely move the numbers up quickly, although the rules don't go into effect until June 1. The FHFA is requiring the two make final decisions on these sales within 60 days. Previously, short sales could take up to a year and even beyond, with buyers often dropping out in frustration.

"This could put short-term downward pressure on home prices, as short sales by their nature occur more quickly than foreclosures," writes Jaret Seiberg, analyst at Guggenheim Partners. "That could raise questions about the status of the housing recovery, which could be negative for those with housing exposure. That would include homebuilders, mortgage lenders and mortgage insurers."

On the plus side, short sales tend to sell at higher prices than foreclosures. It appears, however, that regardless of the FHFA edict, banks are already ramping up the short sales. Some began doing so in the aftermath of the robo-signing scandal, as foreclosures stalled. Even now, foreclosures falling as short sales rise. The good news is that sales of distressed properties are rising, but the headlines will likely focus more on the falling prices, than the much-needed clearing of these homes.

--Written by Diana Olick at CNBC

CNBC is a world leader in business news, providing real-time financial market coverage and business information.

More from Stocks

3 Simple Reasons to Buy Bank Stocks With Juicy Dividends

3 Simple Reasons to Buy Bank Stocks With Juicy Dividends

Dow Turns Higher, S&P 500 and Nasdaq Rise Ahead of Alphabet Earnings

Dow Turns Higher, S&P 500 and Nasdaq Rise Ahead of Alphabet Earnings

PayPal's New Activist Investor Is Right for Thinking Stock Is 50% Undervalued

PayPal's New Activist Investor Is Right for Thinking Stock Is 50% Undervalued

Sergio Marchionne in His Own Words: Why Ferrari's IPO Has Been So Successful

Sergio Marchionne in His Own Words: Why Ferrari's IPO Has Been So Successful

Video: Jim Cramer on Financials, Industrials, Fiat Chrysler and Hasbro

Video: Jim Cramer on Financials, Industrials, Fiat Chrysler and Hasbro