The number of short sales grew steadily through the end of 2011 and is expected to continue to grow in 2012.  NAR Research estimates that the number of short sales in the United States will increase by 9.2% in 2012.  This trend will continue a shift towards alternative methods of transitioning underwater owners who can no longer afford their mortgages out of homeownership without excess cost to banks and negative ramifications on homeowners of foreclosure.

While the share of short sales fell to 11% in March from 13% a month earlier, according to the  REALTOR® Confidence Index, the share of short sales is following the typical seasonal pattern where non-distressed sales rise through the summer reducing the share of distressed sales.  However, the share of short sales for all of 2012 is expected to remain roughly the same at 12.1%.  The total number of short sales, though, will rise with the national trend, reaching 546,500 in 2012.

Demand for short sales increased over the last year as the timelines for foreclosures in process continued to rise in both judicial and non-judicial states.  Banks accrue additional costs on maintenance and forgone interest or investments as properties sit in foreclosure.  Consequently, it is to their advantage to prevent properties from reaching foreclosure.  While the number of new delinquent loans has fallen in recent months, there remain a large number of underwater borrowers, more than 11 million by some estimates, who are at risk of falling behind on their payments.  As these properties come to market, they will need to be liquidated below their mortgage amount.

The states with the highest number of short sales in 2012 will remain those that experienced the largest price increases during the boom: California, Florida, Arizona, and Nevada.  However, Texas, Illinois, and Georgia will each have large volumes at 22,000, 19,000, and 15,900, respectively.

There is potential for a surprise on the upside to our estimates for 2012.  Both Bank of America and the Federal Housing Finance Agency have announced new programs in the past few weeks that are aimed to streamline the short sale process, reducing the time for buyers to hear back about offers and improving the communications between sellers/buyers and the bank or Fannie Mae/Freddie Mac.  Improvements in the short sale process could have important impacts on the market.  Buyers often wait months to hear back about offers on short sales.  If response times decline or if the uncertainty to the consumer is reduced by having a finite timeline, demand for short sales could rise, reducing their price discount to the market.  Stronger prices would make short sales even more attractive to the banks.  A virtuous cycle like this would help to stem the flow of properties into foreclosure.

Short sales have increased steadily in 2012 and are expected to continue to rise in 2012.  While still distressed sales, a shift toward short sales is a sign of improvement in how the market handles distressed properties and is a trend that is in the best interest of homebuyers, homeowners, and the communities that they live in.