A Big Step Forward For The US Housing Market

Published in Investing on 13 February 2012

Banks are finally accepting the inevitable and allowing the market to function.

A version of this article originally appeared on our US site, Fool.com.

For years, the US housing market has been locked in a deep freeze, as a combination of underwater mortgages, reluctant lenders and a lack of political will have kept a huge mass of homes off the market and in limbo. But as banks are finally coming to the conclusion that it makes more sense to accept smaller losses now to move forward, rather than clinging to the fading hope that they'll somehow recover more in the future, housing could finally get the catalyst it needs to recover.

Banks and short sales

Banks have had problem mortgages on their balance sheets for years. But after stubbornly hanging on to those trouble assets, some banks are coming around and changing their tone when it comes to so-called "short sales". In fact, not only are they allowing such transactions to happen, they're also giving homeowners some big incentives to do so.

Short sales occur when a prospective buyer makes an offer on a home that isn't enough to pay off the seller's mortgage. Especially in states like California, where the lender often doesn't have recourse to hold the homeowner liable for any shortfall, lenders have often resisted short sales. For a while, that made sense, as banks figured that short-sale offers were lowballing the true value of the home, and that if they foreclosed on the property then they could resell it at its higher market price.

But lately, banks have realised that the foreclosure process is long, costly and fraught with peril. With regulatory investigations into foreclosure practices adding to the potential problems of years-long delays and an obstacle course of legal requirements, banks are concluding that it's better to accept the bird in hand of a short sale than to hope for a recovery that may take years to come.

Gimme some money

What's most surprising about this about-face is the length to which some banks are going to get short sales done. JPMorgan Chase (NYSE:JPM.US) reportedly offered one homeowner $30,000 to accept a short sale on a $600,000 home, despite having a loan for nearly $200,000 more.

Real-estate agents that Bloomberg interviewed said that the company offers $10,000 to $35,000 for many (but not all) of the 5,000 short sales it approves in a typical month. Wells Fargo (NYSE: WFC.US) and Bank of America (NYSE: BAC.US) have made similar offers to certain homeowners, especially in states like Florida, where foreclosure is especially onerous.

Is it the end of the bust?

What the housing market has needed all along is a market-clearing event like this. While refinancing and mortgage modifications only kicked the can down the road, allowing actual purchases and sales to occur is a step in the right direction.

A host of companies could benefit. Already, homebuilder stocks have soared as news on the housing front has gotten progressively better, and improving employment reports suggest that consumers may finally be getting back on their feet.

But other possible winners include companies with land development opportunities. For instance, Howard Hughes Corp. (NYSE: HHC.US) owns master planned communities and other real-estate holdings in 18 states, with key properties near Houston, Las Vegas, New York and Honolulu. Having the housing market flowing again would open the door to further development. Similarly, St. Joe Company (NYSE: JOE.US) could return to profitability if its extensive Florida land holdings find themselves back in demand, which could happen once the market starts perking up again.

Move forward

It's always a tough decision to cut your losses and admit that you've made a mistake. Although it's taken too long, it's good news that banks have finally figured out that throwing good money after bad doesn't make any sense. With banks finally biting the bullet and letting the housing market breathe again, a recovery should come a lot faster than it otherwise would have.

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