Short sales now outnumber foreclosures, tides are turning

At the beginning of the recession, banks did not have massive levels of inventory of foreclosure homes, so an inherent stubbornness around agreeing to short sales remained long after the housing crash, but banks are finally showing signs of letting up.

The state of short sales in America

According to new data from Lender Processing Services, Inc. (LPS), the number of short sales exceeded the number of foreclosures for the first time, pointing to evidence that banks have become more apt to sell homes for a small loss through a short sale than having foreclosed homes on their books indefinitely.

LPS reports that short sales accounted for 23.9 percent of all home purchases in January, which is the most recent month they are reporting for, so it is conceivable that the volume of sales that are short purchases could rise in coming data reports. Meanwhile, foreclosures account for 19.7 percent of home sales in the same period.

This marks a slow, yet significant rise as in January 2011, LPS reported that short sales accounted for 16.3 percent of transactions while 24.9 percent of sales were foreclosures – we are seeing a reversal of roles.

Many real estate practitioners would argue that it makes sense for all involved to pursue a short sale over a foreclosure, especially the banks, given the volume of foreclosures in the current economy. Now that banks are giving incentives on short sales in a push to close a deal, we will likely see more of a shift toward short sales rather than the stubborn old foreclosure playbook.

Inventory holding back a housing recovery

The secondary benefit of short sales being more common than foreclosures is that both depress surrounding home prices, and the faster distressed sale inventory can be depleted, the faster a recovery can begin.

In January, LPS reports that foreclosed homes sold on average 29 percent less than a comparable non-distressed listing, while short sales sold for an average of 23 percent less. Both are still destructive to the overall housing market, but a 6 percent margin is notable.

According to the National Association of Realtors (NAR), short sales accounted for 13 percent of transactions in January, while foreclosures accounted for 22 percent, but in February, short sales accounted for 14 percent of sales while foreclosures fell to 20 percent.

Foreclosure filings are still high, but slowing, and banks have expedited the short sale approval process and now incentivize the process, meanwhile requiring less strenuous paperwork. Banks overall are considering short sales as the better move for them in the long run, and homeowners and buyers benefit as well as the market finds its bottom faster than holding out for foreclosures.

Written by Tara Steele