Fast Facts 12/22

Fast Facts
Calif. median home price: November 2010: $296,820 (Source: C.A.R.)

Calif. highest median home price by C.A.R. region November 2010: Santa Barbara So. Coast $874,500 (Source: C.A.R.)

Calif. lowest median home price by C.A.R. region November 2010: High Desert $124,580(Source: C.A.R.)

Calif. First-time Buyer Affordability Index - Third quarter 2010: 64 percent (Source: C.A.R.)

Mortgage rates: Week ending 12/16/2010 30-yr. fixed: 4.83 Fees/points: 0.7% 15-yr. fixed: 4.17% Fees/points: 0.7% 1-yr. adjustable: 3.35% Fees/points: 0.7% (Source: Freddie Mac)

Latest Market Summary for Nov. 2010

The news remains cautious at best and while we're seeing a bit of activity, much of it is still on the lower end (with many cash or near-cash buyers)...

Fast Facts

Calif. median home price: October 2010: $304,220 (Source: C.A.R.)

Calif. highest median home price by C.A.R. region October 2010: Santa Barbara So. Coast $864,000 (Source: C.A.R.)

Calif. lowest median home price by C.A.R. region October 2010: High Desert $125,060 (Source: C.A.R.)

Calif. First-time Buyer Affordability Index - Third quarter 2010: 64 percent (Source: C.A.R.)

Mortgage rates: Week ending 12/2/2010 30-yr. fixed: 4.46 Fees/points: 0.8% 15-yr. fixed: 3.81% Fees/points: 0.7% 1-yr. adjustable: 3.25% Fees/points: 0.6% (Source: Freddie Mac)

Mortgage Trends since 1971

Our local mortgage expert Greg Erigero provided this interesting history of 30-year fixed rate mortgages since 1971. Let's hope we never see rates like those in the early 80's again...

Latest Market Summary for the Coast

We have a new format for the local market summary and I hope you find it useful. There's a lot of information packed into one page so if you have any questions or want to discuss any of the data, just give me a call or email me at steve@coastalagent.com.

Fund Set Up for Injured Bodega Firefighter

FROM SONOMA COUNTY FIRE CHIEF MARK ASTON. ALSO VISIT BODEGA FIRE DEPARTMENT'S WEBSITE.


Sonoma County Fire and Emergency Services, CAL FIRE and all local Sonoma County fire districts are closely monitoring the medical condition of Bodega Fire Volunteer firefighter, Ben Hakala. While actively working on the “Bodega Fire” on September 25, 2010, near the town of Bodega, Ben sustained substantial electrical shock when he came into contact with an energized downed power line.

Chief Mark Aston, Sonoma County Fire, Chief Ron Albini, Bodega Fire, CAL FIRE Battalion Chief Robert Sherman and Retired CAL FIRE – Fire Captain Hank Epling visited with firefighter Hakala yesterday to follow up on his treatment and to provide comfort and support to Ben’s wife and family members.

Ben underwent surgery yesterday morning and is listed in critical but stable condition. Doctors expect him to remain in the hospital for approximately two weeks for further treatment and recovery. It is not known at this time if further surgery will be necessary.

Ben has been a volunteer firefighter with the Bodega Volunteer Fire Company for 12 years. He has been employed with CAL FIRE, Sonoma-Lake-Napa Unit for 11 years as a seasonal employee at the Santa Rosa Station.

Sonoma County Fire has created a trust fund on behalf of the Hakala family. Donations can be sent to the Ben Hakala Trust Fund in care of Bodega Volunteer Fire Company at PO Box 28, Bodega, CA 94922.

New Cell Tower

Big news for Bodega Bay - at least the north end of it. Construction began this week on a new Verizon cell tower in Sereno del Mar at the north end of town. Rumor has it that the project will last for about 5-6 weeks and that the signal could reach as far north as Jenner and south to most of Bodega Bay. If only AT&T could reestablish their towers, we'd have decent coverage throughout town...

Bodega Bay Market Summary for August 2010

One of our slowest months in a long, long time in Bodega Bay. Two sales and one put into escrow is about all the activity we had - but it seems to be picking up again. The cycle continues as we try to make sense of the good news/bad news coming out of the media these days. While most indicators seem to be moving in a positive direction, the jobs market gets most of the blame for keeping the housing market in the doldrums. Click on the image below to see a larger version and let me know if you have any questions on the current market conditions.

Good News for Coastwalk Fans

The Sonoma County Board of Supervisors passed a plan calling for $250M in projects connecting parts of the county. Fortunately, the Coast appears to be one of the five major projects slated for funding over the next five years. While there was similar talk about doing this in 2005, it seems that there may be Federal incentives to give residents an alternative to driving and a State requirement to give non-motorized transportation equal weight on our roads.

For the entire article, click here and support the organizations that will bring the project to the Coast.

Bad News/Good News

We'll start with the bad news...You probably heard that homes sales in July were at the lowest levels in 15 years and took the largest drop ever. I'm not surprised at this since we had one of our worst months in Bodega Bay with a whopping five sales.

Nationally, this drop is being blamed on the phase-out of the $8000 tax credit. Personally, I saw little impact of that credit here on the Coast so I don't think it had anything to do with anything here (except for the potential psychological effects on buyers) since an $8000 credit on a million dollar home is hardly a motivating factor.

That said, we did have some positive news in California as a whole. While the nation saw some scary numbers, California actually saw a 10% increase in the median price, although the number of sales dropped significantly. We've seen increases for nine consecutive months - a nice streak in this unstable and unpredictable market...

Fast Facts from CAR

Home affordability remains high as prices drop and interest rates hover in the 4's...


Calif. median home price: June 2010: $311,950 (Source: C.A.R.)

Calif. highest median home price by C.A.R. region June 2010: Santa Barbara So. Coast $914,760 (Source: C.A.R.)

Calif. lowest median home price by C.A.R. region June 2010: High Desert $125,620 (Source: C.A.R.)

Calif. First-time Buyer Affordability Index - First quarter 2010: 66 percent (Source: C.A.R.)

Mortgage rates: Week ending 7/29/2010 30-yr. fixed: 4.54 Fees/points: 0.7% 15-yr. fixed: 4% Fees/points: 0.7% 1-yr. adjustable: 3.64% Fees/points: 0.7% (Source: Freddie Mac)

Supervisor Efren Carrillo to Visit Bodega Bay

When: Wednesday, August 18 at 5:30
Where: Bodega Bay Fire Station - 510 S. Highway 1
More Info: (707) 565-3760

Supervisor Efren Carrillo is hosting this meeting to provide an opportunity for the public to receive an update on county issues and raise any issues of concern. The format will be informal and allow for the greatest amount of dialogue. Members of the community are encouraged to attend.

Click here for a flyer:

Market Summary for July 2010

The numbers are in for July and they aren't impressive. We've had little movement in the median price over the last year with little ups & downs along the way - this month is one of those downs. A big contributor to this decrease in price is the lack of activity we've seen during the early summer months. We don't generally see the predictable periods that many places experience (lots of activity in late Spring/early Summer) but momentum seemed to be headed that way. It didn't continue and we can only hope for an active Fall & Winter in 2010.

That said, interest rates are still at or near historic lows and money seems to be loosening up a bit as banks get caught up after the foreclosure onslaught. I guess they need to get back to the business of lending money again. It's a great time to buy.

If you have any questions or comments, don't hesitate to call or email via my new contact information:
Artisan Sotheby's International Realty
(707) 481-8474 or steve@coastalagent.com

Here's a new and improved version of the market report.

Fannie & Freddie Threaten SoCo Energy Independence Program

The 18-month old program that allows homeowners increase the efficiency of their home (like high efficiency heaters, solar panels, insulation, etc.) and finance the cost through the County is being threatened by the agency that oversees Fannie Mae and Freddie Mac.

In my opinion, this organization misunderstands the program and potential benefits that these organizations may realize should they fully support it.

Although the cost of the improvements is attached to (and paid back through) the annual property taxes, the increased value of the home should more than cover any increased risk of foreclosure. Spreading the cost of the improvements over a 20-year period helps minimize that risk and reduces the cost of ownership through lower energy bills. And that's the whole point, isn't it?

Here's an article from NPR that summarizes the current situation.

A quick update on the market...

Following a strong Month in May, June took a step back with only five homes placed in escrow - compared to 17 last month. Nine homes closed escrow in June at a median price of $575,000 and nearly half were bank-owned or short sales.

That said, the number of REO's appears to be dwindling which could lead to some more stability. We've held a very steady median price over the last 12 months and I'd expect that to continue.

In addition, we're seeing continued near-record lows on interest rates - even for jumbo loans - and inventories are higher, but not out of our normal range.

I'll have a full report on July's numbers around the first of August.

Coast to Get New Verizon Wireless Tower

Verizon Wireless is installing a new tower at 5827 Sierra Grande Drive in Sereno del Mar, approximately five miles north of the town of Bodega Bay. Placement of the county-permitted 40 foot high pole will happen this month.

The cell site is meant to cover the area between Carmet and Sereno del Mar and parts of Highway One.

Heidi Flato, Public Relations Officer for Verizon Wireless Northern California and Nevada Region, said, “Our goal is to provide the best possible wireless voice and data service for our customers.”

“We are trying to improve service in the West County, parts of which are currently un-served.”

Click here for the Press Democrat blog post

Market Summary for May 2010

As predicted for May, we have seen a marked increase in activity and the median price, number of homes sold and those placed in escrow are all up. With the strengthening dollar and European struggles, already low interest rates are hovering just under 5% and we're seeing this help expand the range of homes purchased. In the first quarter of 2010, there was little or no interest in homes above the median. In the last two months, we've seen several sales posted over the current median. This suggests, once again, that the market is opening up and we may be headed toward a more balanced situation for both buyers and sellers.

Foreclosures are often asked about and it feels like those are slowing down for us on the Coast - especially after the slew that occurred a couple month ago. Those homes certainly had an dramatic impact but the effect seems to be fading away and again, we should be headed toward balance.

Attached is the market summary for May 2010. Just click on the image to enlarge or feel free to call me to discuss.

3 Million Salmon Released in American River

California Department of Fish & Game released three million three-inch salmon smolts into the American River with the goal of helping to replenish the low levels of salmon we've had over the past several years. The causes are many and the solutions are few and there's certainly no guarantee that this will have a significant impact, but it's good to see some potential help coming for the local fishermen.

click here for the Sac Bee article

Valley Ford Fire Dept. Pancake Breakfast

I joined Valley Ford's fire board last year and recently started training as a volunteer firefighter. I realize it's probably a bit late to start this process, but it's a small sacrifice and good for the community. But I won't be donning the standard issue firefighter mustache.

Part of the Board's function is fundraising and we're doing a gourmet pancake breakfast on June 5 (including buttermilk pancakes made by scratch). Come on out to Valley Ford for a great meal with lots of local ingredients and help support the local fire department. We've had lots of local business support so far, including Koslowski Blackberry syrup, Farmer's Coffee, Sweetwater Distillery gin/vodka, Clover butter and dairy items, Willi Bird Sausage, VFMarket Ham and more.

And if you happen to be in town next weekend, the town of Bodega kicks off pancake season at their station on Sunday, May 16.

Click on the image for a larger version of the flyer (and feel free to print/distribute).

Market Summary for April 2010

Here's the market summary for April. You'll see a bit of a bounce back up after the REO/short sale effect from last month - and you'll continue to see more of that in the near future. Regardless, we've been relatively flat since late Summer 2009 and I don't see significant changes coming. Don't hesitate to email or call if you have any questions about the current conditions - as unpredictable as they are...

Click on image for larger version

Buy or Rent? The Gap Reaches 17 Year Low

We've reached a point in the market where the monthly mortgage payment is about the same as rent. This article from LA Daily News points out the areas where that difference is minimal and where it reaches as much as $4000 (Manhattan).

Click here for the entire article

Fast Facts for April 2010

Calif. median home price: February 2010: $279,840 (Source: C.A.R.)

Calif. highest median home price by C.A.R. region February 2010: Santa Barbara So. Coast $795,000(Source: C.A.R.)

Calif. lowest median home price by C.A.R. region February 2010: High Desert $122,580 (Source: C.A.R.)

Calif. First-time Buyer Affordability Index - Fourth Quarter 2009: 64 percent (Source: C.A.R.)

Mortgage rates - week ending 4/15/10
30-yr. fixed: 5.07 Fees/points: 0.6%
15-yr. fixed: 4.40% Fees/points: 0.7%
1-yr. adjustable: 4.13%
Fees/points: 0.5% (Source: Freddie Mac)

How Goldman Sachs Did It

Read this article about a company called Magnetar from ProPublica. It's shocking how bold some of these companies were/are. One company sells a financial product that was influenced by another company that bet on that product's failure - making money on both sides. This is the same process that Goldman Sachs is being accused of performing. Every week it's getting clearer and clearer how we ended up in this mess...

Biggest Crowds Ever at Fisherman's Festival!

The turnout was excellent and the weather was even better this year as the festival broke previous records. And the fish & chips were outstanding!

Article from Press Democrat

Bay Area home sales and prices up in March

There is a lot to interpret when reading any article about real estate and the one below is certainly no exception. But what can't be denied is that activity is certainly up on the Coast and in the Bay Area. What's different here on the Coast is that we're seeing a spike in the percentage of REO's being purchased instead of a decrease (but that should change soon with the depletion of a group of REO's). The deals that are happening do seem to have a larger percentage of cash than in the past, as is seen in other areas.

Article By ROBERT DIGITALE of THE PRESS DEMOCRAT

Bay Area home sales and prices jumped in March, but analysts largely discounted the changes as the result of the annual spring selling season and an increase in purchases of higher-end homes.

March sales jumped 40 percent from February to 6,992 new and existing homes and condominiums in the nine-county Bay Area, according to MDA DataQuick of San Diego. Sales were up nearly 11 percent from a year ago.

The median price climbed 7 percent from February to $380,000. That amount was 31 percent higher than a year ago when the price reached $290,000, a low point in the Bay Area's current housing cycle.

The increase in sales and median price was expected. March sales typically exceed February, though the March 2010 sales still were 22 percent short of the 22-year average for the month.

Similarly, the median price a year ago was affected by a lopsided number of home sales in inland areas that had been hard hit by foreclosures, DataQuick reported. Last month, nearly 35 percent of Bay Area sales were of homes above $500,000, compared to 24 percent a year ago.

“While March's big annual gain in the regional median tells us a lot about what's changed in the market, it shouldn't be viewed as evidence of surging home values,” said John Walsh, MDA DataQuick president.

Walsh called the results “a statistical quirk.” The data indicates that prices in many communities “have more or less flattened out or risen modestly, while they remain soft in others,” he said.

In general, the Bay Area is still impacted more by the credit crunch than many other markets, he said.

“It's tougher to get the ‘jumbo' mortgages and adjustable-rate financing that had long been staples there. Looking ahead, stability in the housing market will rely more heavily on a strengthening economy.

“Government housing stimulus is fading,” Walsh said, “and there are threats from higher mortgage rates, more distressed properties hitting the market and continued job losses.”

Foreclosure resales – homes that had been foreclosed on in the prior 12 months – made up nearly 32 percent of the resale market in March. That compares with 50 percent a year a ago.

Absentee buyers – mostly investors – purchased nearly 18 percent of all Bay Area homes sold. Buyers who apparently paid all cash – meaning there was no corresponding purchase loan found in the public record – accounted for nearly 25 percent of sales.

No More State Tax on Debt Relief

From the California Association of Realtors (CAR):

Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification. Enacted into law yesterday, Senate Bill 401 generally aligns California's tax treatment of mortgage debt relief income with federal law. For debt forgiven on a loan secured by a "qualified principal residence," borrowers will now be exempt from both federal and state income tax consequences. The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.

"Qualified principal residence" indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence. It includes both first and second trust deeds. It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.

The tax breaks apply to debts discharged from 2009 through 2012. Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.

Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions. Most notably, taxpayers who are bankrupt are exempt from debt relief income tax. Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

For more information about mortgage forgiveness tax consequences, go to California Franchise Tax Board's Mortgage Forgiveness Debt Relief Extended webpage and the Internal Revenue Service's Mortgage Forgiveness Debt Relief Act and Debt Cancellation webpage. The full text of Senate Bill 401 is available at www.leginfo.ca.gov.

Market Summary for March 2010

As expected, we're still seeing some downward pressure from the REO's that have been snapped up lately and you'll see that the median price in Bodega Bay has dropped to its lowest level since July 2003. However, what we're seeing this month is a sign that more expensive properties are beginning to get some interest. All three Bodega Harbour homes put into escrow were over $750K - expect to see more of this in April - and activity seems to be steadying a bit after LOTS of fluctuation. This continues to be a good time to buy.

Click on image below for a large version.

Santa Rosa Projected to Lead Nation in Real Estate Recovery

Money Magazine compiled a list of metro areas with a forecast of 6% growth in Santa Rosa for the period of first quarter 2010 through first quarter of 2011.

Click here for the table

Fast Facts for March 2010

Calif. median home price: January 2010: $287,440 (Source: C.A.R.)

Calif. highest median home price by C.A.R. region January 2010: Santa Barbara So. Coast $760,000(Source: C.A.R.)

Calif. lowest median home price by C.A.R. region January 2010: High Desert $124,480 (Source: C.A.R.)

Calif. First-time Buyer Affordability Index - Fourth Quarter 2009: 64 percent (Source: C.A.R.)

Mortgage rates - week ending 3/11/10 30-yr. fixed: 4.95 Fees/points: 0.7% 15-yr. fixed: 4.32% Fees/points: 0.7% 1-yr. adjustable: 4.22% Fees/points: 0.6% (Source: Freddie Mac)

Sonoma County Energy Loan Program Gets State Support

I wrote about this program in an earlier blog and it appears that the State is finally jumping on the bandwagon - with consequences, of course. While there are more restrictions (and a few more minor costs), it's still a great way to green up your home while not taking on the entire burden of the cost upfront. Should you sell your home, the remaining cost of the loan passes to the buyer - and that makes sense since they'll be benefitting from the system or equipment that stays with the property.

The link to the article is here

Information also is available at the program Web site, sonomacountyenergy.org

Bodega Bay Cabaret a HUGE Success

The Bodega Bay Cabaret was a huge success in its first attempt and everyone is looking forward to the next. About $3000 was raised for local charities including:
Bodega Bay Grange
Bodega Bay Fireworks
Bodega Bay School Art Program
Bodega Bay Community Center

Thanks to Michael & Diana Bundy for directing and producing a fantastic show.

To see a gallery or YouTube video of the event, click here.

Market Summary for February 2010

The numbers are in for February and once again we saw little or no change. Don't hesitate to email or call if you have any questions or comments about the current market conditions...

CA Market at a Glance

In relation to the previous blog, here's a quick overview of the California market over the last year...

California Housing Market Continues Upward Trend

While the number of existing home sales was down this month over last year, the median price is up 15% in California (see graph). Here on the Coast, we're not yet seeing that trend. However, it seems that we've been behind the curve over that last couple of years as we didn't see the downturn until it was well established elsewhere and we've been holding steady at our low for over six months now. If the trend continues, I'd expect to see Bodega Bay and surrounding areas begin seeing a relaxing of the downward pressure and some normalcy begin to re-establish itself this year. As mentioned in previous blogs, we have a series of foreclosures coming through and with the market easing a bit we may see those properties picked up relatively quickly, easing the pressure on the overall local market as they begin to disappear. This certainly appears to be a relatively safe time to purchase.

Vacation rental company’s closure stirs outrage in Bodega Bay

For everyone who has been wondering what has been going on with Vacation Rentals USA, This link takes you to a story from Santa Rosa's Press Democrat about the closing of the business and the fallout that has occurred because of it.

Fast Facts for February 2010

Calif. median home price: December 09: $306,820 (Source: C.A.R.)

Calif. highest median home price by C.A.R. region December 09: Santa Barbara So. Coast $847,500(Source: C.A.R.)

Calif. lowest median home price by C.A.R. region December 09: High Desert $121,010 (Source: C.A.R.)

Calif. First-time Buyer Affordability Index - Fourth Quarter 2009: 64 percent (Source: C.A.R.)

Mortgage rates - week ending 2/11/10 30-yr. fixed: 4.97 Fees/points: 0.7% 15-yr. fixed: 4.34% Fees/points: 0.6% 1-yr. adjustable: 4.33% Fees/points: 0.6% (Source: Freddie Mac)

Sales of existing homes increased 13.9 percent nationwide in Q4

We're still seeing increases in general home sales and a decrease in foreclosures, but they still account for about a third of all sales and we appear to be behind the curve on the Coast - probably due to the delayed effect we saw when all of this started. Below is an article from Realtor.org (click here for complete article).

Sales of existing homes, including single-family and condos, increased 13.9 percent to 6.03 million units in the fourth quarter, compared with 5.29 million units in the third quarter, according to a report by NAR. Sales also were 27.2 percent higher than the fourth quarter of 2008. Distressed properties accounted for 32 percent of fourth quarter transactions, a decline from 37 percent a year earlier.

The national median home price for existing, single-family homes was $172,900 in the fourth quarter, a 4.1 percent decrease compared with the fourth quarter of 2008. In the West, which includes California, existing-home sales increased 16.2 percent in the fourth quarter to an annual rate of 1.38 million units, 18.2 percent higher than a year ago, according to the report. The median home price of existing, single-family homes in the West was $227,200, a decline of 8.9 percent compared with the fourth quarter of 2008.

Market Summary for January 2010

After seeing six months of flat prices in Bodega Bay, we saw a slight decrease in January to $695,000 ($742,500 in Bodega Harbour). We're currently revisiting February 2004 price levels and have seen the gains of the last six years removed. Of course, this, and more, has occurred throughout the state and country with some signs that prices will be bouncing around for months to come. While economic numbers appear to be headed in the right direction, employment numbers indicate that more foreclosures could be on the way.

In addition, locally there will be a series of at least eight foreclosures occurring from one investor who has lost all of his properties in Bodega Harbour and Bodega Bay. What impact this has will be determined as they hit the market and while they will certainly be opportunities for buyers, it could be another negative factor for current sellers to consider.

If you have any questions, please don't hesitate to call or email...

CA adopts greenest building codes in U.S.

Newly constructed hospitals, schools, shopping malls and homes in California will be some of the greenest in the world, after a state commission voted unanimously Tuesday to approve the most stringent, environmentally friendly building code standards of any state in the nation.

The new code, dubbed Calgreen, will take effect next January and requires builders to install plumbing that cuts indoor water use, divert 50 percent of construction waste from landfills to recycling, use low-pollutant paints, carpets and floorings and, in nonresidential buildings, install separate water meters for different uses. It mandates the inspection of energy systems by local officials to ensure that heaters, air conditioners and other mechanical equipment in nonresidential buildings are working efficiently. And it will allow local jurisdictions, such as San Francisco, to retain their stricter existing green building standards, or adopt more stringent versions of the state code if they choose.

Read More

California home sales, median price rise in December

Sales of existing, single-family homes rose 1.7 percent in December, while the median price rose 8.4 percent compared with the prior year, according to C.A.R.’s latest sales and price report. The median price of an existing, single-family detached home in California during December 2009 was $306,820, an 8.4 percent increase from the revised $283,060 median for December 2008, according to the report. The December 2009 median price rose 0.8 percent compared with November’s $304,520 median price.

“As expected, the large year-to-year sales gains have diminished substantially compared with earlier in the year,” said C.A.R. President Steve Goddard. “However, home sales in December were strong, and were comparable to sales of late 2008. Activity in December can be attributed in part to the extension and expansion of the home buyer tax credit, as well as near-historic highs in affordability due to current price levels and low interest rates.”

More info

Why Short Sales Don't Work

Prior to a couple years ago, short sales were of little significance (and of little interest) here on the Coast. They happened so infrequently that few of us ever had to deal with them. That changed when the market began its collapse in late 2006.

Since that time, short sales have become relatively prevalent in many areas and have certainly had their impact in Bodega Bay and the surrounding areas. While I wouldn't consider any of the agents on the Coast experts in short sales, many of us do take our work seriously and keep up to date on most issues that come our way. And that is what makes this short sale debacle so befuddling. Why can't anyone seem to get a short sale completed?

On the surface, it would appear that short sales make sense for everyone involved. It makes sense for sellers because they get to relieve what may be an unrecoverable financial burden - with associated penalties like a damaged credit score and a significant amount of work to justify their position. It makes sense for buyers because they're getting a home for a fair market price and one that is presumably in good condition (compared to many neglected foreclosed homes). It makes sense to the banks because short sales inevitably bring in more cash than the eventual foreclosure normally does.

But that's where the buck seemed to stop. Reasonable offers were being submitted to the banks and those offers were sitting on their desks for several frustrating months before responses, usually declines, were returned. Even when agreement could be reached it seemed inevitable that the deal would dissolve, only to see the property go into foreclosure and show up on MLS for a price lower than the agreed-upon short sale price.

Why is that?
There are many theories that address this issue, including government subsidies that encouraged foreclosure, accounting policies, an inadequate infrastructure, inexperience and even flat-out fraud. But I recently read an article from May 2009 in the Huffington Post that seems to make perfect sense to me. It's all about securitization.

Securitization isn't an simple concept but it's well documented and there have been many stories that help explain it. If you haven't taken the time to listed to This American Life's two-part series called the Giant Pool of Money (Part 1) (Part 2), it's well worth the time if you're interested in how this all began.

Basically it works like this (and this is my simplified interpretation only)...a buyer gets a loan and the bank immediately sells it to an investor who bundles up loans for a living. The investor takes this bundle of loans and chops it up into pieces that get graded according to risk. These "portfolios" are called tranches. The tranches get sold to groups of investors who expect to get income from these investments. However, when the mortgages inside these tranches start going bad, the investors have no interest in getting shorted out of their investment and choose not to negotiate. So the banks end up holding onto the soon-to-be defaulted loan and get to dump them off their books as losses once it goes into foreclosure (I'm not sure how the accounting works here). It's not only the bank's fault - it's the Investors who are preventing the shorts.

What's the solution?
I'm certainly no expert, but it seems that the basic problem is that banks have no responsibility for the loans that they perform. Once the loan is funded, they sell it off and give up any responsibility for their work, leaving that risk in someone else's hands. That risk eventually exposes itself to someone who doesn't have to bear it. So it works it's way back down the chain. If the banks were required to hold a piece of their loans on the books ("skin in the game"), then perhaps they wouldn't be able to sell them off so easily and might act more responsibly in their decision-making process.

There are many more pieces to the solution and each one has it's consequences, but it's obvious that the system we have in place is broken and needs to be rebuilt. Regulation may or may not be the answer but I think there's an opportunity in here somewhere for a industry with a proper business model that looks at the long-term implications of their practices. That would be in everyone's best interest.

Let me know what you think...

Market Summary for December 2009