Short sale trend might be short-lived

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As lenders review their backlog of more than 5 million delinquent mortgages, short sales are becoming an ever more popular escape route, it was reported by CNBC. But that trend may have a short life.

A short sale is when the bank allows a home to be sold for less than the value of the mortgage. The bank takes the loss, but that loss is generally less than a more costly foreclosure.

“The government has been pushing more short sales at Fannie Mae and Freddie Mac through financial incentives, and banks are streamlining the process,” the CNBC report stated. “Short sales have been gaining so much steam, they actually surpassed sales of foreclosed properties last spring.

“A short sale is debt forgiveness. Debt forgiveness is taxable. In order to help the huge volume of troubled borrowers and promote more short sales, Congress in 2007 passed the Mortgage Forgiveness Debt Relief Act and Debt Cancellation. The debt forgiveness from a short sale or a mortgage principal reduction would no longer be taxable.”

That act is part of many tax cuts that expire at the end of this year. Without an extension, short sales would grind to a halt, as might mortgage modifications that involve principal reduction, the report noted.

“Realtors believe if the legislation is not extended, households who are already struggling to pay their mortgages will be further burdened with tens of thousands of dollars in additional taxes that they probably can’t afford to pay because the IRS would count the cancelled debt as income,” said Jamie Gregory, a spokesman for the National Association of Realtors.

Q: Is the production of new homes rising?

A: Yes, substantially. Nationwide production and permitting of new homes rose sharply in September to their highest levels in more than four years, according to newly released figures from HUD and the U.S. Census Bureau, it was announced Oct. 17 by the National Association of Home Builders.

A 15 percent gain brought the pace of new housing construction to a seasonally adjusted annual rate of 872,000 units, while an 11.6 percent gain brought the pace of permit issuance to 894,000 units. These were the strongest numbers seen in both categories since July of 2008.

“Builders are responding to the rising demand for new homes as consumers begin to feel more confident about their local markets and put back into motion purchasing plans that were on hold during the recession,” said Barry Rutenberg, chairman of the NAHB.

“Yet, while September’s surge in activity is certainly encouraging, we need to remember that we still have a long way to go back to a fully functioning market and, in order to get there, significant challenges must still be addressed in terms of credit availability and appraisal issues, as well as the increasing cost of building homes due to rising materials prices and a declining inventory of buildable lots.”

Q: Are home prices holding steady?

A: Home prices are rising. Prices in September were up 5 percent year over year, while home sales posted a 4 percent annual increase, even as housing metrics began their typical seasonal declines, according to Redfin’s analysis of activity across 19 major U.S. markets.

Between August and September, these 19 markets saw prices decline just 0.8 percent, which Redfin says is a smaller decline than is customary at this time of year. At the same time, the number of homes for sale in the target markets was down 29.3 percent from September 2011.

Q: What’s the current rate of homeownership?

A: Real estate consultant John Burns has a unique way of calculating the homeownership rate:

“The real homeownership rate, which we define to be the percentage of households who own a home and are not 90 days or more delinquent on their mortgage, has fallen to 62.1 percent, which is the lowest level in almost 50 years,” Burns said.

“The 65.5 percent homeownership rate published by the U.S. Census Bureau greatly overstates the real level of homeownership in the country, as the Census Bureau counts all 3.8 million homeowners who are 90-plus days delinquent on their mortgage as homeowners. Most of these people are really just renters in waiting.”

WOODARD has been writing about real estate news and trends since 1971 and is the resident storyteller at the Ronald Reagan Presidential Library in Simi Valley, Calif.