On Tuesday, the Federal Housing Finance Agency announced new guidelines that are supposed to make it easier for home owners to sell their properties in a short sale — when a home sells for less than the borrower owes on the mortgage.
In addition, the new guidelines, which kick in on Nov. 1, allow owners with a Fannie Mae or Freddie Mac mortgage to pursue a short sale even if they haven’t fallen behind on their mortgage payments but have a hardship, such as a job loss or divorce.
Consumer advocates say the changes will help some of the borrowers who’ve been unable to sell the estimated 11 million U.S. homes worth less than the value of their mortgage, according to CoreLogic. However, not all homes would qualify in this new program.
And while the changes provide new hope to distressed home owners, experts say they could negatively affect prices in neighborhoods that get an influx of new short sales. A rise in short sales will result in “downward pressure on home prices until we clear out the majority of these distressed properties,” said Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.
Home prices had been rising in recent months, a trend experts say is due to the limited inventory and the smaller number of distressed properties on the market.
In June, median home prices were up 8% from a year prior, according to the National Association of Realtors. That marked the fourth back-to-back monthly increase in home prices — the longest streak since 2006. Inventory was down 24% from the prior year. And distressed sales — including short sales and foreclosures — accounted for 25% of all sales, down from 30% in June 2011.
For its part, the Washington-based NAR says it’s called for an expedited short-sales process to help boost inventory. The Federal Housing Finance Agency says that it expects short sales to settle at market prices and that they’ll help avoid foreclosures and long vacancy periods that result in declines in home values.
Still, data suggest that the impact on home owners who aren’t in distress could be lower values for their properties in the near term. Even if short sales fly off the market, they’ll likely go at a discounted price. According to the NAR, short sales sell at prices that are 15% lower than regular home listings, on average.
Instead, the benefits for homeowners could be bigger in the long term. “It’s a better idea to clear out the backlog of distressed homes rather than delay the process in the name of supporting [home] values,” said Brad Hunter, chief economist at Metrostudy, a market research and consulting firm.