What sets market value?  Not the prices people ASK, but what buyers are willing to pay for a house.  When something does not sell you lower the price as an incentive.  SO when selling slows down, prices get lower.

The price of recently SOLD houses tells you what a house can likely be sold for.  If prices people are willing to pay drop below what is owed on a current mortgage, then a Short Sale is the primary way to make an adjustment.

A “short sale” is the term used when the bank holding the mortgage agrees to take less that currently owed.  In our market, a huge percentage of homes are upside down like this.  The owner now owes more than the home is worth!  (More than anyone is willing to pay or is paying for neighboring houses.)

If the homeowner decides it is not worth it to keep paying on such a house, or loses their job and cannot keep up the payments, the house will likely be foreclosed.  But then the bank cannot price the house above the market, so it normally needs to be discounted anyway.

So we see more banks now agreeing ahead of time to let the buyer advertise the house for sale, and agree to take a “short” offer, eating the loss.*

Thus short sales are not a decrease in value, but a way to adjust to the current value, or BUYING price.  Unsold houses further depress the economy.  Lower prices create sales.  In many cases, this makes a great deal for the home buyer.

Market value is what buyers are willing to pay for a house.

*(Although most people are not aware of [1] a back-door deal that actually insures them against this loss.  You and I, the taxpayers, will pay the difference!  Or rather, we will begin paying the interest on the money the government borrows to enable FDIC to bail out the bank on that particular mortgage.)

Initially written as comments on [2] a Real Estate blog
Developed for the Home Strategies blog 8 July 2011

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