Rebound In Housing Hampered By Slowdown in 'Short Sales'
When Vasco and Mrjama Lukic's American housing dream turned into a nightmare, they managed to escape through a long and complicated process known as a "short sale."
The Yugoslavian-born couple and their sons built a home in West Orange, N.J., where they hoped to settle and enjoy the fruits of many hard hours of labor.
But when their son Goren was hurt in an automobile crash two years ago, he could no longer help his parents with the mortgage payments on the house. The couple quickly got behind on their mortgage—more than a year at one point.
With no other options, they turned to a short sale—in which the lender agrees to take less than the value of the mortgage to avoid the more onerous foreclosure process. For the Lukics, it was a long and emotional road that finally ended on Thursday, when they sold their home for less than half the original asking price.
"I couldn't work anymore. They had to do everything on their own and they were struggling," Goren Lukic said as he drove his parents to the closing on their home. "We called up the bank and said, 'We can't afford the house anymore, can you guys take it?' They were like, 'Why not?'"
Short sales, which have taken off in the past year, have become a way out for some Americans in trouble with their mortgage. But just as the concept is gaining favor, it is already running into problems—another reason why the housing recovery is taking longer than many had hoped.
Real estate industry experts say banks are becoming more reluctant to agree to short sales, in part because the change in mark-to-market accounting rules gives them less incentive to take less than the mortgage is worth. As a result, they say, banks are holding out for what Realtors say are unrealistic offers.
"Every Realtor I talk to tells the same sort of horror story making a buy offer," says Rick Shargo, vice president of marketing at RealtyTrac, which follows housing trends. "Interminable delays of six weeks to three months are not uncommon, or banks rejecting a 20 percent discount at short-sale only to ultimately take the property back and market it at 40 or 50 percent lower."
For their part, bankers say prospective buyers are trying to take advantage of the situation by offering prices that are too far below market value.
There are no exact figures for what portion short sales comprise of total real estate transactions. The best estimates are that about 1 in 10 transactions is a short sale.
They fall into the broader category of "distressed" sales—when a homeowner sells because they can't afford to keep the house—which has been on a sharp uptick in the past year.
Distressed sales in May actually fell to about 33 percent of all transactions from about 45 percent the previous month. But some real estate experts say the pace isn't moving fast enough
Clearing inventory out of the market is essential to stopping the steep fall in housing prices,and selling the houses either in foreclosure, short sale or a third category, often referred to as "deed in lieu of" where owners return their home to the bank before the foreclosure process begins, account for a large portion of the real estate contagion.
"We started hearing about distressed sales a year ago. Ever since that trend began short sales have taken far too long," said Walter Molony, spokesman for the National Association of Realtors. "The faster you clear off this excess inventory the faster you can stabilize home prices."
Bankers, though, say they're being demonized when in fact they're simply trying to protect their balance sheets.
"The complaint I think is largely on the part of Realtors who feel as though they have a client who is prepared to do a short sale. But it's the holder of the mortgage who's going to take the loss," says Jay Brinkmann, chief economist for the Mortgage Bankers Association. "What they have to do is say, 'Is this the best deal we can get?' They're not going to be anxious to jump out of their chairs and take a big loss."
Indeed, not all of the accounts regarding short sales are horror stories.
Some, like the Lukics, were just happy to be able to be able to dump the property and get on with their lives. After putting the house on the market initially at a price that would help them recoup their investment, the family finally realized they needed to change their thinking.
"They weren't able to sell it because they wanted too much money for it," said Joel Zeichner, an agent with Jordan Baris Realtors in West Orange, which represented the family. "We convinced them they needed to come up with a more aggressive price."
Indeed, sellers are finding that pricing is just as big a factor in the distressed housing market as it is in the conventional category.
"It's not a three-week process," said Zeichner's boss, Ken Baris. "I can tell you definitively that short sales are getting negotiated. It does take time and banks are making absolute certain that they are giving up as little as they can."
Banks have another advantage in the situation: Relatively recent accounting rule changes allow banks to mark distressed assets to what they would be according to valuation models, rather than their actual market prices.
RealtyTrac's Shargo says banks are also doing what they can to push losses forward on their balance sheets, in hopes that rising property values down the line will allow for lower losses on the distressed properties.
For Goren Lukic, though, all that matters now is that the process worked for him. The family is on its way to Scottsdale, Ariz., where it can start over again after its short-sale nightmare in New Jersey.
"I'm with a smile on my face," he said. "I'm moving somewhere I don't know anybody and nobody knows me, but I'm starting a new life. My parents are happy, too."