California home sales declined slightly on a month-to-month basis, but continued to improve year-over-year for the third consecutive month in September. There were 487,940 sales of existing single-family homes in September, an increase of 4.1 percent from September of last year, but a decrease of 2.1 percent from 498,320 sales in August. The statewide median price dropped 3.2 percent from August and declined in year-to-year terms for the eleventh consecutive month, falling 8.3 percent from $313,460 to $287,440.
The supply of housing continued to be lean at the state level, with an unsold inventory index of 5.1 months for September, a slight increase from 5 months in August but a decline from 5.9 months in the same month of last year. However, inventory levels varied considerably across segments of the market. As discussed in last month’s article, inventory levels are tightest for Real Estate Owned (REO) properties, followed by equity or non-distressed sales, with short sale inventory considerably higher. In September, the unsold inventory index levels for these categories were 2.6, 5.9, and 7.9 months respectively. But with the short sale median price averaging nearly 40 percent higher than the REO median price since the start of the year, the question arises, why are short sale inventories so much higher than inventory levels for the other categories?
Looking deeper into the numbers, a large number of properties in the short sale inventory show some type of contingent status. In September, 28 percent of the short sale inventory – about 2.2 months of unsold inventory - had a contingent status. By comparison, contingent sales made up 11 percent of the equity sale inventory (0.7 months) and 7 percent of REO properties (0.2 months) in the same month. In general, listings with a contingent status are properties that received an offer under the requirement that certain conditions are met. For many of the short sale properties, the contingency is that lenders’ approval is required.
Short sales contingent inventory has been at a relatively high level primarily because many of these properties stay on the market much longer than equity sales and REO sales. In September, an equity sale typically stayed on the market for 52 days before opening escrow, an REO remained on the market for 36 days, but a short sale property stayed on the market for 111 days. Short sales stay on the market for a much longer time frame because of the additional time needed for lenders to approve a short sale offer. There are multiple reasons for the long approval process:
• Lenders may not be devoting enough staff to handle the ongoing volume of short sales
• The loan on the short sale property may be bundled into mortgage-backed securities, making it more time consuming for the mortgage servicer to identify the owner of the mortgage and obtain permission to sell the property
• Lenders may be waiting to see if they could get a better deal through a foreclosure sale than the short sale offer
• Lenders may agree to list a property as a short sale while also pursuing foreclosure on that property in anticipation of an insurance payout to cover the loss of the property through mortgage insurance.
The inventory level for short sales is likely to remain high in the foreseeable future as long as the log jam situation mentioned above remains an issue with the lenders.
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