Dallas Real Estate and Short Sale Blog

Are Short Sales Good for the Housing Market?

I'm often asked if short sales are good for the housing market.   Of course "good" is a relative term.  The best market environment would include no distressed sales of any kind-no foreclosures, no short sales, and no deeds in lieu-just regular sales with mortgages paid in full.  Conversely, a housing market riddled with distressed sales is a nightmare on Main Street. 

While distressed sales were not a large part of the landscape in previous years, we're seeing more and more of them these days.  Some blame this on sub-prime or other risky mortgages.  While each geographic region is different, most of my distressed sale listings are a result of the downturn in the economy, not from risky loans.  I've talked to many homeowners who have exhausted their savings trying to keep their homes after job loss.  Others are not so "fortunate" to have large cash reserves.  They list their homes in hopes of selling, but find that decreasing values make it impossible to sell and have the funds needed to close. They eventually wind up in default and lose their home to foreclosure.    It's a vicious cycle.

The cycle does have some roots in sub-prime and other risky loans.  These loans foreclose at a higher rate and when the homes sell at foreclosure prices, they impact values in the area.  The mortgage industry reacted to this by requiring appraisers to use a smaller window of comparable sales and to give greater weight to distressed sales. 

Adding to the issue was the creation of the Home Valuation Code of Conduct (HVCC).  HVCC was intended to take loan originators out of the appraisal loop by having the appraiser assigned from a random pool.  Sound idea, poor execution.  Appraisal Management Companies (AMCs) were set up to manage the appraiser pools.  The AMCs charge the consumer a fee for the appraisal and then seek appraisers to perform the work.  In an effort to drive up their own profitability, the AMCs often assign the work to the low-bidding appraiser.  Many of the more experienced and qualified appraisers refuse to work for the reduced fees offered by the AMCs.  As a result, the appraisal quality suffers.  Many desperate sellers often reduce their home prices just to complete the sale.  These sales are then used as comparables for the next appraisal in the area. 

So back to the original question-are short sales good for the housing market?  Short sales are clearly better than foreclosures for all parties.  Sellers take less of a hit to their credit scores and are generally relieved of debt liability.  Buyers purchase homes at discounted prices.  While not priced as low as foreclosures, the houses are usually in better condition and have not sat vacant.  Lenders get to clear the mortgage and asset off the books and take less of a loss than they would if they had to foreclose.  Finally, home values in the area are not as severely impacted by short sales as they would be by foreclosures.  Research done by Jack Harris (Bubbles, Buying, and Bank-Owned Sales, Jack C. Harris, Published in Tierra Grande, October 2009), a former research economist with the Real Estate Center at Texas A&M University, supports these conclusions.



Tom Branch and Gina Branch, The Branch Team with RE/MAX Dallas Suburbs, service the greater North Dallas suburbs including Dallas, Plano, Allen, McKinney, Frisco, Lewisville, and Carrollton.  While Gina concentrates on traditional listings and buyer/tenant representation, Tom specializes in assisting distressed homeowners to avoid foreclosure.  Tom and Gina have published two books (Achieving Rock Star Status and The Field Guide to Short Sales) and are available for speaking engagements in the greater Dallas - Fort Worth Metroplex. Subscribe to The Branch Team Blog.

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Comment balloon 2 commentsTom Branch • December 29 2009 01:48PM
Are Short Sales Good for the Housing Market?
I'm often asked if short sales are good for the housing market. Of course "good" is a relative term. The best market environment would include no distressed sales of any kind-no foreclosures, no short sales, and no deeds in lieu-just… more