Why Short Sales Will Be Around for a While
If in fact the reports are correct, and I believe they’re pretty close, then nearly 50% of the home owners in Phoenix and surrounding areas are upside down in their homes, owing more than their homes are worth.
That’s not to say that everyone is grossly under water, but underwater is underwater. The degree to which you’re under water will vastly impact your decisions regarding your future, and affect the outcome of a possible need…the sale of your home.
Life continues to happen, and that means that for who are able to make their monthly payments, a shift in circumstances may mean the need to sell their home and reconfigure their lives. If their house is upside down and they need to sell, they’ll have no choice but to sell the house short of what they owe their lender. If they have to sell, they’ll either need to cover the difference out of pocket, or ask their lender to take a loss.
The answer to the question, “how long will short sales be around” depends on the rate of growth in the real estate market and the rate of appreciation in resale values.
Let’s take a look at an example of one person’s situation in a highly desirable area of Scottsdale. Originally purchased at $115,000, this Scottsdale town-home appraised at $240,000 one year prior to the height of the market. A neighboring property with an identical footprint sold for $319,000. When the market tanked, the values dropped to their current range of $100-120K.
Why was the home appraised when it was? For the purpose of taking out a Home Equity Line of Credit (HELOC) which ultimately raised the amount owed on the property from $115,000 to $200,000.
With a town home valued at $100,000 and a mortgage balance of $200,000, there’s a HUGE gap to bridge before the home has any equity. So let’s look at an example of what happened to this particular condominium. We’ll look at it first from the “What If” angle.
What if the housing bubble had never happened?
The figure above assumes a 4% annual appreciation. The town home, purchased in 2002 for $115,000 gradually increases in value to an approximate value of $169,000 by 2012. Not bad, considering by then the amount owed on the home would be about $88,000.00. The green line represents the balance owed on the property, which should gradually decrease over time. In this illustration, there’s no evidence of a bubble, but the bubble was the only reason a line of credit was available, so the green line should continue to decrease.
But that’s not what happened. In reality, the following illustration shows a more accurate picture of what’s going on. The current value of the property is $100,000, not $169,000. So, by shifting the blue line to the right, we get a more accurate picture of how long it will take to break even on the property.
As in the previous figure, this assumes a 4% annual appreciation, but this time we’ve added the bubble, and shown that the value of the property TODAY is $100,000. Based on this, we can assume that it will be another 7 years before this house is worth what is owed…if 4% is the rate of appreciation and the home owner continues to make payments to the principal balance. Obviously longer if it’s lower, and shorter if it’s higher. Either way, this house is under water for a while. Another factor to consider is the number of interest only loans that cause that green line to remain flat. I haven’t illustrated that, but if you flat line the loan balance, you can imagine how long it will take for the blue line to reach the green line. In fact, the property may cap out at a certain value and never be worth what is owed.
What This Means
This means that if there is ANY reason that this home owner would need to sell the home (and life happens) then the sale will be a short sale. The conclusion drawn from this is that Short Sales will be around for a while.