The loss of the tax exemption afforded by the now-expired Mortgage Forgiveness Debt Relief Act is probably one of the primary factors causing a precipitous drop in short sales in the housing market. That is one of the key findings of CoreLogic’s April MarketPulse report.
“Since the act expired on Dec. 31, 2013, CoreLogic data shows that borrowers are likely thinking twice about pursuing a short sale without the tax exemption,” the report concluded.
Throughout late 2012 and into 2013, short sales experienced a steady decline as a natural consequence of the recovery of the market from the housing crisis that began in 2007. As home prices recovered, fewer sellers found themselves in a position of negative equity.
However, the April MarketPulse report found that the pace of the decline in short sales picked up at the beginning of 2014, with short sales dropping 0.6 percent from 5.2 percent of total sales in December 2013 to 4.6 percent in January 2014.
Moreover, preliminary February data signaled a more dramatic drop, with short sales projected to account for only to 2.2 percent of total sales.
The authors of the April 15 report — CoreLogic economists led by Chief Economist Mark Fleming — found that the expiration of the Mortgage Forgiveness Debt Relief Act is a likely factor in the short-sales “cliff” shown by the data.
The law was passed in 2007 in response to the housing crisis and allowed home borrowers to exempt the amount of forgiven mortgage debt from their income, making a short sale a more attractive option to homeowners trying to avoid foreclosure. With the expiration of the law on Dec. 31, home sellers must now treat any debt forgiven by a lender in connection with a short sale as taxable income.
The CoreLogic economists said it was not mere coincidence that there appears to be a precipitous decline in short sales following the expiration of the Act.
“[T]he REO-sales share has not declined in the same way, moving instead in accordance with the normal seasonal pattern,” the report’s authors observed. “This implies that although home appreciation and other factors have contributed to the decline in short sales, the expiration of the Mortgage Forgiveness Debt Relief Act could be having an impact.”
There were other key findings in the April MarketPulse report.
The report found that as borrowers regain their equity, and interest rates continue to increase over the next few years, the incentive to stay in one’s existing home and finance home improvements though home equity lines of credit will likely increase relative to purchasing a new home or refinancing with cash out. This is good news for the home improvement industry and mortgage lenders who focus on home equity lending, the analysts said, as both will benefit from the resurgent consumer demand.
Additionally, the report found that, relative to the past couple years, the home construction industry is improving. According to a Bureau of Labor Statistics report released in early March, nationwide construction employment increased 2.6 percent year over year in February and has been increasing on a year-over-year basis since June 2011. Although these year-over-year increases look tepid, they are strong when compared to the period of double-digit decreases in construction employment from January 2009 to March 2010.
CoreLogic released the April MarketPulse report on April 15. The global provider of property information and analytics issues the report as a comprehensive look at the prevailing trends impacting the housing industry every month.