While everyone is talking about multiple housing related issues, it seems that people are failing to report on the monumental record we set this week. Southern California, for the first time this millennium has hit a record of 10,000 short sales. The record occurred this week and we are currently riding high with 10,195 short sales. As you can see from the above chart, the trajectory is rather clear unlike the predictions many housing pundits are making. It is interesting to also note that while short sales are drastically increasing, inventory is either holding steady or dropping. Even if it is slightly down, this is a major change in the market as well. Since overall sales are dropping off the cliff we can safely assume one thing is going on. For each short sale that hits the market, we have some stuntman mortgage holder taking his home off the market thinking that housing Santa Clause will come in December. Why do people think winter is a good selling season? Clearly it is not a good selling season and this trend will only continue with rates resetting quicker than a broken down Atari.

I am amazed at some of the legislation that is being dished out by so-called housing experts. One amazing plan that I have heard is lenders should permanently prevent loans from resetting. Sounds great right? This is horrible public policy because what we are doing is institutionalizing trapeze mortgages and essentially saying that yes, the underlying housing price and connected mortgage reflects an accurate price, which it does not. Instead of admitting that we lived through an amazing credit bubble, housing X-men are trying to do everything to save the market and keep prices inflated. Show me a politician saying that the only economical solution to this is a massive correction and I’ll show you someone that will lose in 2008. Hence no one is admitting the truth even though it is so obvious.

Then we hear about the emotional pleas about people losing their homes. This may be the case in other areas of the country where homes cost $100,000 to $200,000 and people are facing employment hardships, but here in Southern California, 50+ percent of people rent and we have a healthy rental market. So if someone loses their home they won’t be on the street, they simply will be one of the renting majority. Lenders are loving this because it washes their hands clean from owning up to a piece of this mess. When they become unsuspecting land owners, they realize in some mystic form of poetic justice that wow, these homes really aren’t worth what they claim to be. Guess where all the pricing action on the MLS is happening? It isn’t from category 5 delusional sellers, it is from REO properties that are hanging like an albatross on a lender’s accounting books. They realize what many amateur landlords face when they own a property that becomes an alligator; that is, a property that eats up your cash-flow each month and at a certain point, eats you alive.

These short sales are a last step. What once was a thing of housing lore, we are now hearing about housing auctions. Builders and soon to be owner/lenders here stories about auctions in Florida where properties sold for 50 percent off. Trying to avoid this mortgage beat down, they try every last thing to unload properties. They have become what is known in the industry as very motivated sellers. I’ve suddenly started seeing 3 percent rebates, closing cost covered by sellers, and other kick backs. Another tipping point here; no longer are we hearing about the free Benz or trip to Tahiti, now we are having rock solid nominal price decreases. Builders loved giving away free trips and upgrades because this artificially inflated prices. So they can give you a $30,000 car and jack up the price by $30,000; what do you care if you need a car? But in terms of macro housing economics this inflates the price in all reported data. That is why housing pundits quoting absurd Wizard of Oz data are scratching their head wondering what happened. You were heading east looking for a sunset amigos! Here is an obvious indicator of how off the housing data is; last month, Los Angeles County hit a record median price of $550,000. I won’t go into the median price analysis since I’ve discussed this ad nauseum and how horrible an indicator this is for true market sentiment. Even raging housing bulls admit flaws using this indicator. In fact, sales dropped by an amazing 50 percent in Los Angeles County last month. Simply put, high priced premium homes are selling while Real Homes of Genius are sitting on the market. You don’t hit homeruns if you don’t swing and you don’t show up in housing data if you don’t sell.

Finally, we have the massive credit crunch. The perfect storm has hit. First, we have credit standards that are now being enforced although you can still find mortgage renegades that’ll fund your cat tanto with a 5 percent down mortgage. But these are now a very small segment of the market. Second, we have a massive glut of homes. Take your choice. There is no sense of urgency instilled in buyers because if they buy today or tomorrow, prices aren’t going anywhere. In fact, buyers are facing a fascinating anti-bubble psychological phenomenon which is catching a falling knife. Logic will tell you that at any point that you catch the knife, you have a potential of being harmed. On the other hand (no pun intended), what fed this hyper bubble was hearing over and over how if you don’t buy now, you’ll be priced out forever. And for a few years, these folks got it right. Not because of market or economic fundamentals but because bubbles follow typical patterns.

Where do you think the short sale number will stand at the end of 2007?