Written By: Michael Kraus

Some pretty stunning numbers about the Southern California housing market were posted yesterday, courtesy of Jonathan Lansner and Jeff Collins of the Orange County Register. Short sale transactions are up 74 percent in Southern California this year (Orange, Riverside, San Bernadino, and Los Angeles counties).

While short sales tend to hurt property values*, increased short sales are likely a good development for an area like Southern California that saw a massive inflation in housing prices during the bubble years.

The increase in short sales serves several constructive purposes:

• It removes housing inventory from the market, which is a key to housing recovery.
• It allows underwater home owners to shed onerous debt on houses which will take years to get back to their peak values, if they ever do.
• The decrease in prices allows many of those who were priced out of the market in the mid-2000s the opportunity to purchase a home.

*The most recent Case-Shiller home price index showed that the Los Angeles and San Diego markets both had 0.7 percent increases in home prices from March to April 2010. Much of this could be due to the California Home Buyer Tax Credit goosing demand for homes.

According to the article, there have been nearly 13,000 short sales in Southern California in the first half of 2010. As the Home Affordable Foreclosure Alternatives (HAFA) program ramps up, we can probably expect to see increased numbers of short sales across the country. HAFA is a government program that is designed to encourage short sales.

The high amount of short sales leads one to question if it makes more sense for a bank to accept less money than it is owed on a mortgage in a short sale versus negotiating a principle write-down with severely underwater homeowners in order to keep them in their homes. Either way the lender is taking a loss - albeit a highly calculated one. The bank would never agree to something outside of their interest, and nearly all banks and lenders see the value in allowing a short sale rather than go through the time consuming, expensive process of foreclosure.

We've done our best to make concepts like this as easy to understand as possible. If you'd like to know more about this subject, watch our video "Why do banks allow short sales?" or give Mark or Whitney a call at 800-829-5158 to talk about how this can help you when attempting to short sale your home.