As we've all seen in the past 4 years, the housing market has declined, to say the least, and hit a sensitive economic nerve that hadn't been strained in years. In mid-2008, there were less than 1.4 million houses in foreclosure and the economy was already feeling the powerful, preliminary effects of the imminent "Great Recession". In January of 2011 alone, 100,000 home-owners were expected to face this gruesome process; bringing the total number of homes subject to foreclosure to over 5 million. 4.6% of total U.S. households are at risk or currently undergoing the process, which translates into nearly 1 in every 20 homes. That is a sobering figure and putting it into a micro perspective (1 in 20 homes) may cause you to wonder which of your neighbors are struggling with their own finances. Bloomberg.com quotes industry professionals predicting over 6 million homes getting seized by the banks by 2013. Right in the heart of the credit bubble preceding the recession, home values increased at roughly twice the rate of median household income. For future generations: this little indicator is an easy way to predict that a storm is brewing and should have been the obvious handwriting on the wall.
Whether deserved as a consequence of their own actions or brought on by misleading sales tactics of an over-ambitious agent, the number of individuals who possess properties that are classified as "under water" (aka the property value is less than the current value of the mortgage) or, perhaps, subject to the premium spike of the adjustable-rate mortgage, are increasing as the months progress. But are we not emerging from economic instability? Has your 401k not returned a well-missed 30% in the past 4 quarters? And though jobs are slow growing, the massive wave of lay-offs have generally subsided, correct? Yes, all of those things are completely true. But please don't think that housing has stabilized. Thankfully but perhaps arguably, President Obama instituted federal policy (i.e. first time home buyers credit, temporarily freezing foreclosures, etc.) that gave a crutch to an injured sector of the economy, while giving hope to those failing to see the bottom. In reality, we have yet to see the true bottom of the housing market. These government programs are expiring and the layer of obscurity consequently produced by them will no longer taint accurate market valuation . The only thing that can heal the wounds inflicted on American property values (via Mortgage Backed Securities/CDOs) is time, and time alone. For better or worse, we enacted policies that allowed the market to cease free-fall and, thus, stabilize. The time has now come to accept the impending thorn of a transactional technique known, euphemistically as, the "short sale". This is the most feared word in the vocabulary of a Wall Street banker or investor in MBSs/CDOs, as it is the short sale that will negate profits at earnings calls through 2011 and the coming few years and devalues the asset. The short sale process leverages loan liabilities against each other to receive a grant of "forced forgiveness" on a percentage of that (or those) loan(s). As of quarter 3 in 2010, almost a third of all residential transactions were short sales. Some sources predict this trend to accelerate to 60-70% over the next 12 to 18 months, based on the fact that . This means that the majority of real estate deals done, in a residential capacity, will be short sales.
The road to recovery is not a road without struggle. The folks who refinanced every 3 years there for a while, in order to access their "home's liquidity" have learned this tough lesson the most. Whether we like to admit it or not, America put itself in this financial predicament and that effect has resonated throughout the networked global economy. The time is now, from an investment standpoint, to utilize the short sale to your advantage. Soon, the business arrangement with such a negative connotation, will receive a fresh coat of paint as the new "normal". Real estate no longer has to be overlooked, as if it's day as a formidable investment, has come and gone. A true market correction is not only an accurate glimpse of real value, it is a time that allows one to acquire property at a discount. With opportunity under so many rocks, a savvy investor need not leave any unturned. Pursuing a short sale could spawn your next deal and give you experience that you will use for several years to come. Banks beware! Offers you refuse today WILL be accepted sooner than later and will require everyone down the line to flex. And though a temporary sting to ROI on the annual balance sheet exists for these financial institutions, they can be at peace knowing that they are rid of a bad asset. And a short sale will assist the defaulting home owner, who otherwise, may face bankruptcy by relieving them of a bad asset. Unfortunately this all takes time, and time is the only way to revert to what we once thought was a flourishing housing market. Above all, a house is more than an asset backing a security. It is a real person's home and that is their life. Regardless of how we got here and thinking past how to pass the blame for our predicament, denial of value purchases,such as short sales, by the big banks are going to decline in direct correspondence with the rise in foreclosures. Thanks for listening...
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