Why are all the listings bank-owned or short-sales?

I had a client ask the other day why we can't find any listings in her price range that are "normal".

You know, Person A wants to sell his home, he lists it with an agent on the MLS, Person B sees the pretty house, offers to buy the house, they negotiate a bit, come to an agreement and move smoothly to closing with no delays.

Instead, it feels like every promising listing that comes up is either bank-owned or a short-sale. Short-sales can take a very long time to negotiate, a buyer can expect a 30 to 45 day wait for a response to their offer or counter-offer. Bank-owned homes have a reputation for being slow to close and rife with endless addenda and forms and paper... you know what I mean. Not 100% true, but it is certainly a fact in many transactions.

So where have the normal sales gone? In my opinion, they are going to be few and far between for the next year or so. Let's consider a few facts. Everything is based on that magical thing called "market value", i.e. what the buyer's think your home is worth. How is market value measured? By comparing one house to others like it, near it, that have sold in the recent past. Well, the banks are dumping these foreclosed properties for pennies on the mortgage paper they are writing off. So these fire-sale prices are sucking down the market value of every house around them. My MLS system tells me today that 2443 homes were sold in the three months between December 1, 2008 and February 28, 2009. 1112 of those homes were flagged in the system as Bank-owned or Corporate-owned. Forty-five percent of the homes potentially sold significantly under market price! The fact is, right now the market value of the homes in Orlando is at the same level they were back in the early 1990s!

So now we have to figure in how people bought their homes. In this crazy market of the past decade, very few people have held onto the same property they bought back in 1990. Why would they when they could sell it for a big profit and re-invest their money in a bigger and better house? Did they purchase these homes with a conservative conventional mortgage putting 20% down and financing 80%? No siree, why would they when they are qualified for 3% down, or nothing down, or even closing costs financed? No need to worry, real estate values always increase, right? Even people who didn't take a second mortgage or one of those crazy home equity line of credits for up to 125% of a home's value have had to sit back and watch their home's value spiral away down below what they owe the bank. Any home financed since the late 90's for any percentage over 80% is going to be upside-down unless the purchaser has been making payments over the payment schedule.

Absolutely, there are homes listed for sale that are not short-sales, pre-foreclosures, foreclosures or bank-owned. Some are the new flips: homes purchased at auction or from the bank, cleaned up a bit and put right back on the market. Most are homes that are listed for more than their market value and the owner's cannot afford to drop their asking price or else they slide down into a short-sale situation.

Here's the rub, though. Unless there's a buyer with cash to pay an above market value price, there is a lender in the mix. And lenders are appraising homes at 90% of market value! If your house doesn't appraise to meet the financing, the sale falls through. So everyone's time and money has been wasted and that is why I think that the "normal sale" is not going to be seen very often for quite a while.