Short Sale March Madness

The Spike is Coming…

It was back in July of 2008 when the economist Alan Blinder starting arguing that the Federal government should start a “Cash for Clunkers” rebate program. He was convinced it would be a total victory across the board: it would help the environment, it would stimulate the economy, and he even claimed it would “reduce economic inequality.” Right or wrong, Alan Blinder got what he wanted by 2009. The CARS program – “Car Allowance Rebate System” – was scheduled to run for 5 months and cost $1 billion dollars. It wound up costing over $3 billion and it still ran out of money less than 3 months in.

When it comes to business, money should always trump politics…otherwise, you’re not doing good business. Right and Wrong matters less than Cause and Effect, so even though I suspect Alan Blinder was Wrong, that’s got nothing to do with your Real Estate investments and career. So why do I think it’s so important to look back?

Well, because history is about to repeat itself, as it tends to do. The CARS program was a cash payment from the Federal government straight to the consumer to stimulate the market for cars. At the end of this month, the HAFA Short Sale incentive program begins: a cash payment from the Federal government straight to the homeowners (and lien-holders) to stimulate the market for homes. So now you can see where I’m going with this: how the vehicle market responded to CARS is worth looking at because we can expect similar results in the housing market.

Get Familiar with The Spike

As soon as the CARS program launched, it failed. I’m not being sarcastic or mean: their computer processing system was not built for the scale of demand they received and it crashed on the first day.  These problems persisted throughout the program, and once the data started coming in September and October, this is the picture that emerged:

CLICK TO ENLARGE

Here’s the biggest point I want to make: right now is the most crucial time to be tightening up your business operation and getting ready for a serious spike in your sales volume, your workload and your profit margin. As we’ve been reporting, in the past 6 months Short Sales have gone from obscurity to constant media headlines, and public awareness is at an all-time high. Add the pressure of shadow inventory, the volume of homeowners disqualifying and flunking out of HAMP modifications, and now thousands in cash incentives from the Federal Government…I think you’ll agree, the spike we’ll see this Spring is going to be one of the defining moments that makes 2010 the Year of the Short Sale.

If you’re interested enough to bear with me, though — there’s still more to be learned from this story…

Get Ready for The Hangover

Here’s the ugly side: the way the Federal government treated car dealers throughout this program was…well, pretty appalling. Car dealers invested major ad money in the CARS program, believing it was going to be their biggest profit center of the year. Most of the public education going on was coming from dealers, not the government, so dealers felt outright betrayed when Bailey Wood of the National Auto Dealers association declared the government was suspending the program months before it was supposed to expire.

In other words, not only were dealers being cut off early, but they were going to look bad for feeding the public bad information — information they were relaying directly from the Government! On July 31st, 2009, White House press secretary Robert Gibbs was denying it, but the same day the Department of Transportation contradicted him, releasing figures that proved the fund was completely out of money.

The end result satisfied nobody: a compromise where the program got another $2 billion dollars but still didn’t last long enough for the November 1st ending that dealers around the country invested millions educating the public about. The CARS program finally imploded in August, creating a memorable Spike indeed, but the real horror story begins in September…

That was Clusterstock’s Chart of the Day for October 1st, 2009. The reason spikes hurt, of course, is the downside…and US auto sales immediately returned their previous, Emergency Code Red levels once the CARS program was gone.

This Time is Different

I have great news, though: HAFA Short Sales are not going to play out the same way. First and foremost, car inventory is not nearly the same as housing inventory. The costs, the financing, and the consumer behavior patterns are all quite different. The supply and demand curves are radically different: housing inventory is more static, and auto dealers don’t have to be concerned with “Shadow Inventory” like we do.

Still, there’s common sense cautionary advice here. If the HAFA Short Sales catch on — which is really a question of “When” — their runaway success might bring about an early end to the incentives. Most of the HAFA critics, especially those in the mortgage banking industry, have been raising concerns about Short Sale fraud. This is something the US Treasury disputes, but I won’t re-write an excellent article when I can just link you to one: check out this recent Housing Wire post on Short Sale Fraud.

As always, the biggest obstacle of HAFA Short Sales is exactly the same as any other Short Sale: the problem of 2nd Mortgages. The Big 4 Banks own over $441 billion worth in 2nd liens right now, and it’s insane to think that a major financial institution will accept a $1500 payment in exchange for a mortgage that supposed to be worth $60,000. Until this core problem gets addressed, the 2010 housing market will continue to look like slowest Mexican Standoff in movie history.

What’s Your Call?

As I wrote to a Realty Infusion reader earlier today: “I love being told that I’m stupid — it’s a reliable sign that I’m about to learn something new.” So if you disagree, please let us know, and most of all, tell us why!