Distressed Property Expert: Nationwide Short Sale Surge to Continue

I have earned my Certified Distressed Property Expert (CDPE) designation and felt it was time to share a few tidbits on the state of the market.

RealtyTrac has unveiled a new report outlining expected short sale trends in 2012, showing a 33 percent year-over-year increase in pre-foreclosure sales (typically short sales) in January 2012, with annual increases in 32 states, including California (52 percent increase) and Arizona (44 percent increase).

Short sales outnumbered real estate-owned (REO) sales in 12 states, including Utah, California, Arizona, Florida, Indiana, Colorado, New York and New Jersey.

“Short sales have long held great promise as a market-based solution to the nation’s foreclosure problem, but short sales transactions over the past three years have actually declined after peaking in the first quarter of 2009,” said Daren Blomquist, vice president at RealtyTrac and author of the report. “January foreclosure sales numbers, along with first quarter foreclosure activity, strongly indicate that downward trend is ending, and we believe 2012 could be a record year for short sales.”

Foreclosure starts, defined as either default notices or scheduled foreclosure auctions, in Q1 of 2012 also point to more potential short sales for the remainder of the year. More than 100,000 properties nationwide started the foreclosure process in March, an increase of seven percent from the previous month and the first time foreclosure starts had exceeded 100,000 since November 2011.

March foreclosure starts were still down 11 percent from a year ago, but March was the third straight month where foreclosure starts increased from the previous month. And the trend is not just in a few states; 31 states posted monthly increases in foreclosure starts in March.

Another surge in foreclosure starts occurred from August to November of 2011, during which time national foreclosure starts averaged 109,000 per month after averaging 96,000 per month in the prior four-month period. Given that the average time to complete the foreclosure process nationwide is 370 days, most of the properties that started the foreclosure process during August to November 2011 are still in foreclosure and therefore represent potential foreclosure sales.

Behind the recent surges in foreclosure starts are two much larger pools of potential short sales. The first is delinquent loans not yet in the foreclosure process, representing approximately 3.5 million properties according to the Q4 2011 National Delinquency Survey (NDS) by the Mortgage Bankers Association (MBA). The second, even larger, pool of potential future short sales is underwater homeowners. A RealtyTrac analysis of 45 million outstanding mortgages nationwide shows that 12.5 million of those mortgages, or 28 percent, are seriously delinquent—meaning that loan amount is at least 25 percent higher than the estimated value of the property securing the loan.

Gary Trieschman is the president of Pacific Realty Property Sales &
Management.