A Response to Comments on an Earlier Post

On October 27, 2008, I did a post regarding Bellingham real estate short sales, distressed properties & foreclosures.  In it, I defined these terms and others related to the process, and I also discussed the impacts on the Bellingham and Whatcom County real estate market.

Recently we received a comment on that post, raising some questions and making me realize we needed an update.  The discussion below consists of the comments and a response.

Comment: “ I am not sure this article answered the sentence preceding the link…’Bellingham and Whatcom County Real Estate is being increasingly affected by short sales and foreclosures…’  In what way is it being affected?”

Response:  The short answer is price.  Particularly when the market first started to see a number of short sales, they were often priced substantially below list prices for “normal” sales.  Some of these prices were “real” – that is, the home actually sold close to the listed price – but many were designed to create bidding and sold for considerably more than the list price. This is not seen as often now due to changes in MLS rules attempting to bring more credibility to pricing.  Whether the prices were real or not, they created a very strong impression that prices had dropped substantially.  Even if the list prices were

realistic, short sales and bank owned properties typically sold for less money than “normal” properties.  As more distressed properties entered the market, “normal” sellers realized they needed to compete, and all prices have drifted lower.  

            As of November 30, 2011, 13% of the homes for sale in Bellingham were distressed, 55.6% of the pending sales were distressed, and 25.4% of the sales in November 2011 were distressed.  It’s pretty obvious that buyers are looking for a good deal, and the “normal” sales have to compete.

Comment: “Real Estate prices are still too high in Whatcom.  More specifically, too high for this economy.  The cost of buying a home is out of balance with incomes, so either incomes need to rise or housing needs to fall.  I own a home and … what my home is “worth” greatly exceeds what I paid for it only a few years ago even after the bubble burst…”

Response:  Let’s begin by defining “worth or value”.  Unless a home has recently been sold, no one knows what it is “worth”, because that is determined by the price to which a ready, willing and able buyer and a ready, willing and able seller will agree.  A variety of methods are used to estimate value, but they do not establish it.  A current example from our practice:  a home was appraised at $235,000 in August.  The list price has gradually been reduced until it is now listed at $185,000.  The seller just accepted an offer of $175,000, and that could go down after the inspection is completed.  I can virtually guarantee that any home sold in 2005 or thereafter is worth less than the sale price at that time, unless very significant upgrades have been made.

            Affordability is a mixed bag.  According to the Washington Center for Real Estate Research at Washington State University, during the 2^nd quarter of 2011 (the most recent stats available), the Homeowner Affordability Index in Whatcom County was 128 (5^th lowest in the State of Washington).  The first-time buyer Homeowner Affordability Index was 63.7 (also the 5^th lowest in the State of Washington).  The higher the index number, the more affordable housing is relative to income.

Comment:  “Bank or mortgage companies are part of the problem.  They make statements that they can’t sell a house for less than XXX or refuse to sell a home at a loss…  Until banks “let go” and clear the market of these properties (by selling at reasonable prices even if at a loss to the bank to eager first time buyers) this market will continue to struggle.”

Response:  Lenders have been part of the problem, although not necessarily because they aren’t willing to take the losses.  Some of them, particularly the surviving very large lenders, still don’t have efficient systems in place to process these

properties…particularly the short sales…which leads to incredibly long waiting times for approval, properties being sold at foreclosure while they are in negotiation for a short sale, loan modifications being denied that could work for both parties, homeowners remaining in homes after skipping payments for months without notice of default, etc. 

            The flip side, however, is that in areas with massive numbers of properties in default, the delays have helped to feed homes into the market gradually rather than in one big batch.  This may have been a godsend to “normal” sellers by helping to keep prices somewhat more stable. 

            In the State of Washington, a new law took effect last July with requirements that may help distressed sellers negotiate more effectively and in a more timely manner with their lender.

An Observation:  It is worth repeating the numbers regarding distressed and “normal” sales from above: As of November 30, 2011, 13% of the homes for sale in Bellingham were distressed, 55.6% of the pending sales were distressed, and 25.4% of the sales in November 2011 were distressed.  Note the disparity between the percentage of active listings which are distressed, (the lowest percentage of the 3), the percentage pending sales which are distressed (the highest percentage of the 3) and the percentage of homes sold in November which were distressed.  A “normal” sale typically closes in about 30 days.  Most bank-owned properties close in 30 to 45 days.  A short sale may never close, and the default period of time to hear back from the lender according to our contract forms is 60 days…and it typically takes an additional 30 days to close.  Buyers and agents are learning about the frustrations, delays and risks of a short sale, which means the price for one has to be really good to tempt a buyer to go through the process.  This may actually lessen their impact on prices as fewer buyers want to mess with them.

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