As the stock market reached record heights in the light that the credit crunch may be over, we need to take a look at what is happening on the street. Since we aren’t privy to the Kool-Aid drinking of Wall Street, all we have is data and two eyes that relay a message to our brain regarding the insanity of the current housing market. Wall Street reacted on a positive note because of the mere implication that this mortgage credit crunch is already passed the worst stage. The view is that we will avoid a recession simply because of the fact that housing is such a minor component of the overall economy. Countless times we have demonstrated that housing and jobs related to this market are at unbelievable rates. In addition, this credit bubble has reached epic proportions that we now stand at a crossroads with only two viable options. One is to inflate ourselves out of this current market. Another option is deflation which the Fed is vehemently fighting against even though they openly acknowledge inflation as their primary concern. But what is the data telling us? Is the worst over? I will be starting a weekly report called the Short Sale Report highlighting the current Southern California housing market.

Scouring the Short Sale Data

Why look at short sales? It is important to note that short sales may be one of the best indicators of pending housing distress. A growing number of short sales point to a market that is correcting and pushing prices downward. Keep in mind that a short sale, for those of you who are unfamiliar with the term, is selling a home for less than the current mortgage balance(s). A seller must first get approval from the lender before having a short sale. This again is a telling sign of market distress. A lender will not approve a short sale if their perception is that they can recover the house as an REO and sell it via foreclosure for a higher profit. The growth in short sales numbers tells us that lenders are realizing that competing with other foreclosures in a downward market is not the best strategy. And many of these sellers need to sell for various reasons. In Southern California, short sales even as late as 2007 were a non-factor in housing data; they existed only for the rare exception of a buyer who couldn’t find a buyer who was gaga over a subprime loan. Now they are becoming a large part of the housing market. I have painstakingly been keep track of short sales for the past 3 months on a weekly basis and have found that each consecutive week, the numbers go up. There has yet to be a week where the numbers go down. Here is a chart of short sales in Southern California:

Aside from the obvious trend, short sales in Southern California now equal 5.8 percent of the entire market. You may think this is no large number but the actual figure is 9,711 homes are short selling out of a market inventory of 166,514. What was the starting point data in July 14? The inventory stood at approximately 156,000. In 3 short months we’ve added 10,000+ homes and approximately 3,000 of these homes are short sales. So what does this tell us? For one, many of the homes coming on the market are distressed sellers. If we are to look at inventory numbers, the increase over this 3 month period is only about 5 percent for the entire market. But if we look at the short sale number jump, we realize that many current sellers are selling not because they want to but because they have little choice.

Disconnected Leaders and Wall Street

When we look at data like this and the raw numbers I have come to believe that the current housing pundits and many of our leaders are simply disconnected with the man and woman on main street. Is it because they are so far removed from the daily nuances of life that they simply do not get it? It seems that we are having another bubble forming; that of a bubble around many of our current leaders from hearing the true situation on the street. If you haven’t noticed the dollar is at an all time low again. How can these people stand up and purport the prosperity of the country when they sit by neutrally while the dollar is decimated? This isn’t the first time. After all, even with the New Deal Roosevelt allowed the dollar to devalue but this was in light of years of the Great Depression. According to the pundits we have record low unemployment, fantastic restraint in our inflation numbers, and a growing economy. Then why lower rates so quickly? Well when you look at the numbers such as short sales, you realize that this credit crunch is far from over. When you glance at the Real Homes of Genius that are making their way on the market each and every day, you know we have a long way down. Perception is reality in the current market and the reality is housing is falling and falling fast.