Short Sale Amenisty Program Could Cure The Real Housing Market Problem
If you have ever used an old fashioned hand water pump, then you remember how much work it can take to get the water flowing. Sometimes you might crank up and down on that old cast iron arm for several minutes and not even get the first drop of water. When one of these pumps had not been recently used, you would "prime the pump" by filling it with water to get it going.
The hand water pump has been around for a long time and is very reliable once the water is flowing. Much more effort is required to get it started than keep it going, and I think it makes for a great comparison to how we should view the real housing market problem.
Most people understand that the real estate market has lost its prime, and many speculate on what it is going to take to get the housing market restarted. The real estate equivalent to pouring water down the spout of the hand water pump is a topic that is often discussed in real estate circles, seeking a solution to the real housing market problem.
The Real Housing Market Problem
Like most problems that you deal with in life, there is no one single cause for the housing market collapse, nor will there be one singular action that restores it to historical norms. But 2011 has unveiled the primary problem in the housing market, and I do not see it being addressed in many real estate forums, and certainly not from NAR or our "leaders" in Washington.
Historically, more than one-half of all homebuyers already own a home, and that means as a prerequisite to buying a home, they first have to sell a home. So, assuming this number is only 50%, we can say that 1/2 of the buyer pool has to sell a home before they buy, and 1/2 is either a first time homebuyer, an investor, or somebody who has sold a home already.
Thus, the real housing market problem is that 50% of the people who would be buying homes right now have a problem, and they do not know how to solve it. They are what is broken in the real estate pump, and they are the ones that need to be "primed."
Let's take a look at the reality being faced by 1/2 of the buyer pool.
- The typical home ownership period is 5 to 7 years
- The housing market peaked 6 years ago
- The majority of those "ready to move" purchased or refinanced in the past 5-10 years.
- Home values have declined over 30% since 2006
- The majority of the "ready to move" market have zero or negative equity in their homes to bring to the next purchase
- Negative equity owners are trapped because all of their options lead to "no new home purchase"
- If they bring money to closing, they have no equity to put in the next home
- If they do a short sale (and stay current on their mortgage), they get dinged on credit and have to wait 2 years to buy
- If they do a short sale (and do not stay current on their mortgage), they get destroyed on credit and won't be buying for quite some time
- These would-be buyers don't have viable options, so they are doing nothing ... they need to be "primed"
Therefore, the real housing market problem has nothing to do with "tightened lending standards," or "low appraisals" as has been sung by the National Association Of Realtors. The real problem we must fix is the mass of pent-up buyers who cannot first sell their homes.
As these homebuyers languish awaiting buyers for their homes at prices that will not be found in this market, home values continue to decline, thus adding more people to this group of frustrated homeowners.
A Solution To The Real Housing Market Problem
One potential solution to the real housing market problem is a Short Sale Amnesty Program. I would propose a simple solution, one that removes the 2-year wait for purchasing a home for people doing a short sale, combined with a public awareness program of how current short sale actions can be implemented. I would drop the credit ding (currently about 50 pts) for those who have maintained their payments on time, but I would continue the severe response for those that fall behind on their payments.
The solution does not need to reward people who made mistakes in the past, rather it needs to free those who have only been harmed by falling prices. Lenders (or more importantly, the shareholders of these large banks) need to push the leadership of their organizations to work feverishly to approve short sales. The values have already been lost, I suspect some banks are responding slowly in order to retain the decision makers who do not want to book the losses (even though they have already occurred).
While I know that a singular solution is not the answer, and I would certainly spend more time than an hour in the morning to write the solution, a short sale amnesty program would invigorate the market much faster than all the "stimulus" mistakes that have already occurred.
Simply put, there are people who cannot sell their homes because the people who want to buy them cannot sell their homes because the people who want to buy them cannot sell their homes ... ad infinitum. This is a continuous loop that needs to be severed. The pump needs to be primed!
There are millions of people who would like to move, they just do not know how to get out of their current homes without losing their right to home ownership. A short sale amnesty program would put these millions back into the buyer pool and help solve the real housing market problem.