Over the past few years, the US Real Estate Market has been defined mostly according to the inventory of short sales and bank-owned properties (aka REOs) available for sale and the unlisted inventory of properties virtually bank-owned (i.e. not yet processed by lenders as foreclosures), often referred to as the Shadow Inventory.
2012 saw a significant turnaround in both inventories: The inventory of short sales and REOs dried up in many real estate markets and as of October 2012, the Shadow Inventory had dropped by 12.3% vs. 2011 to 2.3M housing units.
As we are turning the page of 2012, here are a few facts and keys to understand how this inventory will continue to impact the US Real Estate Market and how this trend will impact potential home buyers and sellers in 2013.
Key #1: Impact of Short Sales and Foreclosures on the Real Estate Market
To apprehend the state of the US Real Estate Market, one needs to understand the trends in the inventory of Short Sales, Foreclosures
and REOs properties for sale at any given time in any market.
In other words, these types of properties are no longer an exception to the US real estate market, they are now an intrinsic part of the housing inventory, whether we like it or not.
The big question on everyone's mind is: Why did we have less short sales and REOs for sale in 2012?
In retrospect, it looks like the current shortage of foreclosed properties took place in three phases:
- Phase 1: Since Day 1, The Obama Administration has done everything in its power to keep American families in their homes.
- Phase 2: The $25 billion agreement between 49 state attorneys general and the nation's five largest mortgage servicers to address foreclosure abuses earlier this year sent a crystal clear message to financial institutions: Stop foreclosing people houses and allow them to short sell their homes.
- Phase 3: The new Foreclosure Guidelines enforced during the second half of 2012 sent an even stronger message to lenders, i.e. to help distressed homeowners to refinance their loan instead of short selling their homes. This trend was strengthened in California by the passing of the Bill of Rights effective January 1st, 2013.
Key #2: The Great Challenge of Renting vs. Buying for Home Buyers
If the number of short sales and REOs that hit the market remains low in 2013, home buyers will still face multiple offers situations when bidding for a home.
On the other hand, individual home buyers should not be worried about potential competition from investors when buying a property. As far as I know, Real Estate Investors are mostly looking for true fixer-upper homes that they can fix and resell at a profit. In most cases, a private person would not be able to take on the renovation of such homes by him/herself without the help of professional contractors.
Potential home buyers who presently rent their home should spend time doing the math before getting back to the real estate market. Rents are going up, interest rates are still low, but the question home buyers should ask themselves is the following: What can I get for the price of my rent?
Key #3: Sellers Will Remain Kings of the Real Estate Market in 2013
Home sellers are mostly the winners of the rebound of the Real Estate Market in 2012.
It is clear that sellers who bought their home a long time ago in a good neighborhood received a pretty good return on their investment.
As long as interest rates remain low and if you are among the home sellers lucky enough to have made an equity gain on the sale of your home, move up sellers should be able to buy their dream home under good financial terms.
If you are among sellers looking to downsize in your current state or in another, you are without a shadow of the doubt the biggest winners of the Real Estate Market in 2012.
Sellers who bought at the peak of the market are most likely still under water and should carefully look at the market trends and comps in their neighborhood before making a move. With negative equity on your home, you might be better off staying where you are or rent your property to move up.
The lower the inventory of short sales and REOs available on the market, the better for potential homes sellers who will be able to command high prices for their homes in a housing market with extremely low inventory.
To paraphrase Benjamin Franklin, as far as the US Real Estate Market is concerned in 2013, nothing will be certain but Interest Rates (expected to remain low), Tax Incentives (specifically mortgage interest deductions and non taxable forgiven debt for short sales homeowners) and Foreclosures (which will dictate the overall direction of the real estate market).
© Sophia Delacotte CDPE, SFR, CHS
San Jose Realtor
Cell: (408) 717-2575