In most any market, following the laws of supply and demand, a sale does not occur until we have both a willing seller and a willing buyer.  In short sales, however, a willing buyer and seller are not enough.  For a short sale to proceed, the seller’s bank must approve the deal after the buyer and seller have agreed to the terms.  Let me describe a recent sale to illustrate my point.

After the house had been on the market for 6 months with another company, the seller approached us and asked if we could help.  The short sale situation was pretty clear – the seller’s income had gone down significantly, he could no longer afford the house, and he was behind on his mortgage payments.  The value of the house had declined with the market, making it impossible to sell the house for a price that would cover the mortgage payoff.  We listed the house for sale and immediately began working with the lender on a short sale.

That spring we got a good offer from an interested buyer and put a deal together for the bank.  Not one of those “let’s offer $150,000 for a $700,000 house and see what happens” offer, but a good, solid offer, about as good an offer as you could expect for the market conditions.  The buyers were qualified, serious, and the price was good.  The bank said “no,” and refused to even give a counter offer.  The buyers did what most people would do – they bought another house.

The months passed, and the real estate market continued its decline.  That fall another serious buyer came along, with another good offer.  It was $45,000 below the spring offer, but right in line with the current value of the house.  Again, the bank said “no.”

By the next spring, the bank had not received a single mortgage payment in over 19 months.  The third offer came around that time, but this one was a real low-ball.  This time the bank made a good decision when they said “no.”  A short time later, the fourth offer came in, exactly $100,000 below the first offer from last spring, and the bank finally took the deal.

We could talk about the wisdom of the bank clerk 3000 miles away that made the decisions to hold on to the house during the entire price decline, and then sell only after prices stabilized, and we could talk about how badly the banks needed our bailout money, but this story is not about one house.  It’s about the market in general.  More and more, banks are finally letting go of their short sales and foreclosures, clearing out one of the final obstacles to recovery.

The vacant house gets painted, cleaned, lived-in, and cared-for again.  Flowers get planted, furniture gets purchased, and people get invited over, buying a bottle of wine as a gift on their way over.  One by one, in neighborhoods and cities across the country, that’s what pushes the economy back to recovery.

To answer that question, first remember that a bottoming market is a process, not a single point in time. Taking a closer look at how the market topped will give you a wealth of insight and understanding of today’s market conditions. The markets are driven by the collective psychology of everyone involved in the market. When most people believe prices will keep going up, there are more buyers than sellers, weaker supply and stronger demand, and people worry less about paying too much for a property because the price increases will quickly make up the difference. That’s what the real estate market was like in 2005.

As 2005 approached its end, I noticed a small change in the trend. Prices were still going higher, but if you looked closely, you could begin to see changes. Houses that were selling in 4 to 6 weeks started selling in 6 to 8 weeks. In Westwood Lakes (Tampa), where there were only 5 homes for sale in a neighborhood of approx. 650 houses, there were gradually 7 homes for sale, then 8 or 9. More importantly, instead of 50% of the sales taking place with multiple buyers bidding on the property, most homes were selling with only one potential buyer. Within a few months, prices were starting to come back down.

During 2007 the inventory of homes for sale in Westwood Lakes climbed to 39. Unsold inventory around Hillsborough County peaked in October 2008 at 20,942 listings. Houses would sit on the market for months, often attracting only two potential buyers a month to come in and see the inside. Offers came only to the lowest priced homes in the best condition. If a buyer didn’t like how the negotiations were going, they could walk away to find a different property and they often did exactly that.

Fast forward to mid 2009, and you’ll see that market conditions have changed yet again. Many homes near me are now getting shown two to three times per week to prospective buyers, up from twice a month last year. You know those little info sheets in the box near the for sale sign? They are now disappearing by the handful, instead of fading from the sun and getting ruined from the rain like last year. The very best priced homes over the past two months have seen multiple buyers competing, and those homes, after months of reducing their price, are now selling at or very close to their current asking price. As I write this, the inventory of homes for sale in Westwood Lakes is back down to only 9, and inventory in the greater Hillsborough County area is down 27% to 15,273. This year there were 9.4% more homes sold during the month of May than during May of 2008. The Pending Home Sale Index, a forward looking measure of housing sales contract activity put out by the National Association of Realtors, has gone up 3.2% to 84.6 as of May.

The changes in the market are measurable, and the supply & demand equation is shifting again. So far, it’s not enough to push prices higher, but it is bringing some badly needed balance back to the market, and it’s a great start.  Once the volume of foreclosures work their way through the system, prices will be free to rise again.