America’s Housing Crisis – Is Short Sales a Solution?

America’s housing crisis has flummoxed many people and in attempting to divert this situation, a new solution has emerged – short sales. Basically, the banks are offering money to the defaulting owners at a price that is much less than the actual cost of the house. Even though the sales are at a loss, some amount of congestion would still be cleared. The question one needs to ask is – whether this is a practical solution to American housing crisis? Or, is it simply paving way for another problem?

• What Is Short Sales And How Does It Work? – The principle behind short sales is that you owe a particular amount to the bank but the bank lets you off for less than the said amount. There have been instances where even the principal doesn’t seem to get covered in the amount paid but the banks seem to be following the something-is-better-than-nothing approach.

• Why Enter Into Short Sales? – Given the current scenario, the question should be ‘why not?’ Not only is the delinquent owner getting to pay back the loan at a much lesser price, the banks are at least cutting down on their losses. This is compared to the amount of losses that would have occurred had the deal been a foreclosure, which is almost 15% less, if the statistics are to be believed. Also, the process is a lot quicker.

• Are Short Sales Affordable To The Banks? – Yes, short sales are affordable because of a simple reason that it is much better to get back some amount instead of letting a defaulting owner stay until the foreclosure process gets finalized. If the policy of short sales wasn’t followed, the defaulter would be living rent free for months or even years before any action was taken. Moreover, short sales made up for 9% of house sales in 2008 before the crash and have only gone up to 11%.

• How Win-Win Is The Situation In Reality? – Ben Walsh of Business Insider has expressed his point of view by saying that it is good for the banks in the way that they are not really damaging their balance sheets. His point is that foreclosures never improve your year-end statements and short sales are, in fact, helping in pacing up the recovery process, so why not?

Felix Salmon of Reuters, however, draws attention to the negatives of this solution by pointing out how short sales are just a way to procrastinate and not really solve the issue. He believes that this is like encouraging people to be delinquent.

Short sales are looking attractive to the defaulters because banks are offering as much as $35000 worth of set offs. There are others who are offering more. Looking at the current state of the housing crisis, it seems that the policy of short sales is the best practical approach, if only for short term.

There is no denying the fact that this decision will haunt everyone when the housing market gets depressed but, for the time being, one can safely assume that the decision is a sound one.