UCLA says short sales 'hijack' housing's future

Orange County RegisterSeptember 24, 2008

UCLA says short sales 'hijack' housing's futureposted by Jon Lansner/ocregister.com

From UCLA's latest California forecast, a discussion of "short sales"that require the lender to accept less than full repayment when a homeis sold ...

The illiquidity of short sales has a very key implication for those of us trying to look ahead and find the end of this dismal housing market. One of the many methods for forecasting the end of the housing slumpinvolves calculating how much further home prices must fall to returninventory levels to their historical norms, using the price/sales relationships from previous bear markets. But when 30% - 40% of thatinventory is tied up in short sale red tape, no amount of price declinewill get it to move, making this inventory-based method of forecasting highly suspect.

A realistic forecast of the bottom of the housing market needs to explicitly acknowledge that short sales have temporarily hijacked the market mechanism: the near-term course of the housing market will be determined more by the procedural timelines of foreclosures and shortsale approvals than any notions of a magic price that will clear existing inventory. After our housing mega-bender, we will be suffering inventory indigestion for some time to come.

As we've argued before, data from the Fed suggests that under writingstandards tightened significantly in early 2007, and Dataquick's estimates suggest that the average mortgage default in California occurs roughly two years after origination. Taken together, these facts suggest that foreclosures will be the dominant factor in the California housing market until 2009Q1 at the earliest.
(To read UCLA's job forecast CLICK HERE http://jan.freedomblogging.com/2008/09/24/california-jobs-tough-times-ahead