Friday, Sept. 26, 2008 | When economist Ryan Ratcliff started house-hunting in San Diego this summer, he assumed a buyer’s mindset prevalent in this market. Surely, he thought, a list price was a starting point to be negotiated downward. Sellers would be fighting for the chance to sell him their homes. His would be the only offer a seller had seen in months.
“I thought I was just going to walk in there saying, ‘How about I give you 15 percent lower than you’re asking and you’ll be happy to take it,’” Ratcliff said. “But I soon realized, ‘This isn’t working the way I thought.’”
Ratcliff isn’t your average homebuyer. He moved south from his former post at the University of California, Los Angeles Anderson Forecast to teach economics at the University of San Diego. He wrote about his “hard-learned lessons” about the San Diego real estate market, considered to be a buyer’s market, in a section of the newest Anderson Forecast report, released this week.
When the guy whose job it is to forecast the housing market buys a house, those lessons are likely to draw some attention. In the course of his house hunt, Ratcliff looked at 80 homes, was outbid four times and rescinded an offer before entering escrow last month on a place in Rancho Peñasquitos.
The main reason for those headaches? Short sales. Those are homes listed for less than the seller owes on the mortgage that require approval from the lender. Sellers who can’t make their mortgage payments, or some who can, but who want to cut their losses, pursue the short sale to get out of their mortgage.
Because the mark left on a borrower’s credit is slightly less than a traditional foreclosure, the option to sell at a loss is becoming popular in this market, where many homebuyers who purchased or refinanced since 2002 find themselves owing more than the price the current market will support.
More than one-third of the houses listed on the market in San Diego County this year have been short sales, but they count for a much smaller percent of the homes that actually sell. In the first eight months of 2008, short sales counted for 36 percent of the listings on the Multiple Listing Service, the database used by real estate agents, Ratcliff found. They only counted for 12 percent of the homes that actually sold in that same time.
Because banks aren’t processing short sales very quickly, they’re casting a shadow over the whole market, Ratcliff said. And, he argues, they must play a major role in any forecast of the future of the housing market.
“The general discouragement you get from the banks leaves a lot of sellers just letting the properties go into foreclosure,” said real estate agent Dan Cassidy, who focuses on urban listings in North Park, Hillcrest and downtown. “That leaves people to see foreclosure and nonpayment as the best possible option.”
As the housing market struggles to regain its footing after two years of slump, the vehicles looked to for help aren’t simple or easy. Prices have fallen to a point where first-time buyers are itching to come on the homeownership scene, but those using some federal buyer assistance programs to get a deal on a foreclosure are encountering a tougher situation than they expected: banks turning down offer after offer. And though the prices on many short sales appear alluringly low, the waiting game deters buyer after buyer.
“A desperate would-be short seller could list a house for 30 percent below the comparable properties,” Ratcliff wrote, “but the combination of red tape, overwhelmed and understaffed loss mitigation departments at the lenders, and misconceptions about what’s needed to get the sale approved means the house doesn’t sell any faster.”
While lower prices mean boosted sales among repossessed houses, the short sale slice of the market pie is not so predictable, much to Ratcliff’s vexation.
And the short sales take longer, too. Short sales took a median 106 days to sell in that eight-month period, versus the 67 days non-short sales (including bank-owned foreclosures) spent on the market, Ratcliff found.
“I’m telling my clients, ‘If you want to buy a short sale, plan on four to five months,’” said real estate agent John Kline, who focuses on short sales in North County.
That time gap and the reasons for it have made short sales a quick turn-off for many of the region’s real estate agents, buyers and sellers. There are hoops to jump through for home sellers (and their agents) just to get permission to try to sell at a loss. Then they have to find an offer from a buyer willing to wait around to see if the offer is accepted by the lenders of one or two mortgages on the property.
The lenders have to sign off on the deal because they’re agreeing to take a loss on the mortgage.
In some cases, banks are asking sellers to prove their financial hardship with tax returns and to promise to pay back the difference even after they’ve left the house. And there’s always the chance that while a real estate agent is negotiating a short sale with the bank, another branch of the bank is working to repossess it, sending it to auction and selling it out from under that agent.
From the street, a short sale looks like any other house for sale with a sign in front advertising an asking price and a phone number for a real estate agent. But on the other side of the front door, a number of issues might slow down the transaction: the seller’s financial situation, the number of mortgages on the property (and the number of lenders with which to negotiate) and how many payments the owner has missed.
It all makes for a long process. By the end, sellers might have seen several offers come and go as buyers grow impatient with the slow pace. Sellers’ agents are given a variety of hats to wear, from screener of offers to negotiator with lenders, which requires maneuvering the complicated phone hierarchies at the bank. And often, the process takes so long that the house ends up going to foreclosure anyway.
Real estate attorney Mike Spilger counsels real estate agents, buyers and sellers that the short sale route is not simple, and may be worse than just letting the house go to foreclosure. There’s some circular logic inherent to becoming approved for a short sale, he said, especially because a seller must already be behind on mortgage payments for the request to receive a response.
“They don’t believe you’re having trouble until you’re two or three months behind, but once you’re two to three months behind, your credit’s already shot,” he said.
To realistically forecast the bottom of the housing market, Ratcliff argues, you have to acknowledge that “short sales have temporarily hijacked the market mechanism.” What’s coming next in the region’s housing market will depend more on how short sales and bank-owned houses are dealt with by lenders than on the region’s median price reaching any sort of “magic” level that would convince buyers to snap up all of the homes on the market.
In the end, Ratcliff chose a bank-owned house in San Diego County, after renting in Los Angeles for a few years. The house he’s buying has fallen 25 percent in value from the peak. He said he doesn’t believe he timed exactly the bottom of the market — he thinks that’s “at least a year off” due to more foreclosures. But since he’s planning to stay there for at least five years, he doesn’t regret deciding to buy now.
“On the one hand that’s an argument for waiting,” he said. “But at the same time, I moved and I need to live somewhere. Do I really want to move twice in a year and a half?”