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Could Short Sales become the preferred and dominant sales method over regular conventional sales? and what could this lead to?

Please read Michael Abrahams blog on this topic herettp://www.trulia.com/blog/richard_michael_abraham/2009/08/could_short_sales_spell__4

Could Short Sales Spell an Endless Cycle of Doom for Home Values
Richard Mich…, Builder/Developer in Fort Lauderdale, FL
Written by Richard Michael Abra..., Builder/Developer in Fort Lauderdale

Could Short Sales Spell an Endless Cycle of Doom for Home Values

In my 32 Blogs the past few weeks, I have explained what I believed were the many causes of the housing crisis. The question now is "Could Short Sales Spell an endless cycle of Doom for Home Values?" Short sales now represent between 50%-75% of all sales. Will Short Sales, at some point, represent 100% of the sales e.g. will short sales entirely replace conventional sales? Short sales did not cause the initial 40% drop in home values, my question is, as we go forward, will short sales be the on-going, future nail in in coffin, reducing home values further and further?

What if short sales permanently become the sales method instead of the exception?

Wouldn’t that create a short sale mentality where buyers in the future would only purchase short sales homes and condominiums?

And if so, wouldn’t that paradigm shift spell an endless cycle of slow but steady doom for neighboring home values?

Short sales could be a short-term solution but short sales could be leading to an insidious and steady devaluation of home values.

Now, you may ask ‘what are the options?’

The short sale gives the lender control and helps a distressed borrower. But are the consequences causing a self perpetuating and irreversible decrease in property values?

In my research nationwide, on any given street of 50 homes, there could be about four (4) homeowners in trouble. The other 46 homeowners are financially strong, happy in their homes, with no immediate intentions of selling, even though "underwater."

If instead of short sales, the lenders auctioned these four (4) homes, took their losses, got the toxic assets off the market fast, the result could be 50 financially solvent homeowners on the street.

In other words, psychologically, if a steady supply of short sales were foreclosed and quickly taken off the market, wouldn’t the home values of the 50 homes regain some sense of stability, some sense of a bottom?

Remember, the lender is not gratuitously trying to help homeowners in trouble by allowing short sales. Lenders realized they needed to find a way of gaining control over the distressed property. Now, lenders are simply trying to conduct essentially an "auction" over time. That's essentially what a short sale is, an auction spread over time so they can try to get more money. But by dragging things out, are lenders just fostering an endless wave of on-going and future short sales that will just keep decreasing home values?

In the example above, assume the lenders foreclosed quickly and lost $50,000 on each of the four (4) homes, or a total of $200,000. But by foreclosing, instead of the pervasive short sales over time, at least, the other 46 homeowners might see their property values reach the bottom, without also loosing $50,000 each in home value (or a total of $2,300,000 in home equity). Wouldn't this be better, to auction off the properties fast, and surgically remove the tumor?

The best way I can think to raise this question on short sales is to ask "Is it better to cut the tumor out clean and fast rather than to let it fester over time"?

I'm from the old school and believe it's better to unload the toxic bank assets fast, and auction them off. To me, the short sale is nothing more than an auction spread over time. Something tells me the real estate business is becoming the short sales business. Home values went down 40% or so for all the reasons I've mentioned in my 32 Blogs. Short sales did not cause this initial 40% drop in value.

But now, is the on-going and future short sales mentality simply going to reduce values further and further. Do you think lenders should take the hit, auction off the toxic assets, or do you think it's better for lenders to prolong the financial pain over time through an on-going short sale system? Why do I feel in my gut that over a prolonged period, if short sales become the dominant sales method instead of being the exception, then short sales will just spell an endless cycle of slow, steady doom for home values.

Warmest,

Richard Michael Abraham