The New Economy
Much has been made about Marissa Mayer, Yahoo!'s new chief executive. But shareholders need to know what will become of the company, not the CEO. Her challenge is big and urgent, but not impossible if Ms. Mayer and the board have the guts and business acumen to transform the company from providing services to creating products. Think of the revamped Yahoo! as a utility that offers other companies the online tools they need to succeed. Here are five things she must do – and soon:
1. Take an inventory
The company's product mix needs an asset inventory. Today, Yahoo! places a distant third in the online search market today, a business they arguably helped create. Over the years Yahoo! has been building infrastructure that powers and, more importantly, generates content. For now, Yahoo! is the only broad-based Internet medium that generates content that doesn't come from its users. It has many products (search, mail, mobile ads) that provide bits and pieces of the end-user experience, but its mission statement “Your world, your way” is too vague and its market target too broad to be best in class at any one thing.
Yahoo!'s opportunity is to focus its people and development talent in mobility, advertising, entertainment and search and target them to a smaller market segment.
2. Know the competition
In the new digital world, users are consumers and, equally, competitors as they bring content to life on other platforms. The sale price of Instagram, a photo-sharing service and social network, and the purchase of face-recognition technology by Facebook are some leading indicators of where Yahoo!'s competitors are looking to up their game. Yahoo! has enough of the technology built out to be a provider – a utility company, if you will – to Internet and traditional enterprise companies as well as consumers. Its competitors have already leapfrogged it and learned what the consumer and enterprise want. Yahoo! should provide the infrastructure to them.
3. Build products. There are two types of leaders: subject-matter experts who lead through insight and relevance in their field; and those who build great teams and know how to fill the white space around their personal strengths. Mayer, a former executive at Google, is in the first category. Her relevance to Yahoo!, and shareholders is the ability to identify products, form them into an integrated mix, and push them to market. Yahoo!’s new CEO has the opportunity to apply what I have termed "constructive disruption" to the business model to bring innovative products to market.
4. State a direction. “Bad decisions can be reversed, slow decisions sow doubt.” On Wall Street, doubt is worse than bad earnings. Yahoo! must have a clear message as its value proposition. Time is not on Yahoo!’s side. Its relevance in the marketplace is rapidly eroding. Google's large and splashy entry in the consumer market with Google Fiber, which will provide high-speed Internet service, telephone service, and TV, movies, and other content, make Yahoo!’s content less appealing. That’s part of the problem, now that the digital domain has become richer and more diverse, Yahoo! needs to have laser focus on what it will evolve into. That will help define its trajectory.
5. Fail fast, fail early
Mayer could take a page from agile development methodologies. Agile is a software development life cycle where code is developed in short (14- or 30-day) “sprints,” based on simple but direct user requirements. It allows development teams to deliver many things into the marketplace quickly. That suggests Mayer should focus on small products that meet an immediate need. Today’s market is primed for the mobile marketplace; entertainment, advertising, micropayments, and geo-fencing (creating virtual borders for geographic areas) are a few examples of what Yahoo! could quickly deliver. Not every new product or service from Yahoo! must be a win, but it must demonstrate that the company can turn out successful products quickly and learn from its mistakes.
Want a glimpse into the life of the super rich?
Try this penthouse apartment in midtown Manhattan. Listed at $100 million, it's the most expensive residence for sale in New York.
It boasts a "media room" that all by itself would qualify as a small Manhattan apartment. In addition, there are five bedrooms, eight bathrooms, and a conference room conveniently located on three octagonal floors. Throw in a separate guest apartment one floor below and you have 11,000 square feet of luxury in one of the world's most expensive cities.
If the price tag doesn't seem daunting, the panoramic views from the terraces might just take your breath away: a 360-degree view of the city from what listing agent Raphael De Niro (son of actor Robert De Niro) calls "the highest terraced apartment in New York City."
How can you afford a $100 million apartment? It helps to be a great businessman.
The property is owned by real estate developer Steven Klar, who reportedly bought it for $4.5 million in 1993. Mr. Klar says he has put at least $5 million into renovations. So if he gets his asking price, he would make about 800 percent on his original investment.
And you thought the housing market was in the doldrums!
Click on the video above for a closer look at the $100 million apartment.
What is it about fast food and politics? Maybe it’s the super-charged presidential election or shoot-from-the-hip company executives. For whatever reason, fast-food companies are developing a knack for parachuting into the middle of political minefields.
First it was Chick-fil-A, whose president disparaged gay marriage in print and on the air, igniting a new battle in the culture war over chicken sandwiches.
The blow-back has been fierce:
“Papa John’s pizza extortion,” ran the headline for a story Wednesday from Salon, a news website.
But such reactions may be overdone. Was Mr. Schnatter making a political threat – or simply explaining the economics of the pizza business? You be the judge.
In the middle of an Aug. 1 conference call with reporters and analysts to discuss the chain’s second-quarter results, Schnatter was asked about the impact of the new health-care law on Papa John’s. Here’s what he said, according to a recording of that call on the company’s website:
“Our best estimate is that the Obamacare [law] will cost about 11 to 14 cents per pizza – or 15 or 20 cents per order from a corporate basis. To put that in perspective, our average delivery charge is $1.75 to $2.50 – or about 10-fold our estimated cost of the Obamacare [law] to Papa John's. We're not supportive of Obamacare, like most businesses in our industry. But our business model and unit economics [are] about as ideal as you can get for a food company to absorb Obamacare…. We have a high ticket average with extremely high frequency of order counts – millions of pizzas per year. To give you an example, Peter, let's say fuel goes up, which it does from time to time, and we have to raise delivery charges. We don't like raising delivery charges. But the price of fuel is out of our control, as is Obamacare. So if Obamacare is, in fact, not repealed, we will find tactics to shallow out any Obamacare costs and core strategies to pass that cost onto the consumer in order to protect our shareholders' best interest.”
Several points stand out: The 15 to 20 cents he’s talking about are costs, not prices. If he was making a political statement, would he really make the point that delivery charges, based at least in part on fuel costs, are 10 times the size of the hit from Obamacare? And he is promising to cut or “shallow out” the costs of healthcare before passing any price increase to the consumer.
Is that a threat? Really?
Schnatter is certainly no fan of the president or the health-care law. Who knows? Perhaps he’ll cut health-care costs by shafting his employees. But he deserves to have his words quoted in context, before another battle of the culture war is fought over fast food.
The United States created 163,000 additional jobs in July, a number that will help dissipate some of the economic gloom that has settled on the world lately.
The better-than-expected number suggests that the US is not headed into recession, may not need an immediate boost of stimulus from the Federal Reserve, and will continue to buy products from Bangalore, Shanghai, Mexico City, and so on. While July’s job growth was not enough to bring the unemployment rate down – the rate actually ticked up from 8.2 percent in June to 8.3 percent – in the context of a global slowdown in economic activity, it was cheering.
“This was a good report,” says Scot Melland, president and chief executive officer of Dice Holdings, which runs specialized career websites in the technology, financial services, and health-care industries. “If you look at it on a global basis, the US continues to do well, certainly relative to Europe…. But we haven't quite made the medal stand yet.”
“Given global events, recent evidence that new orders in the manufacturing and non-manufacturing sectors are softening considerably, and enormous uncertainties related to US fiscal policy, we believe that job growth is going to be anemic in the coming months and that it would be a mistake to conclude that today’s better result represents a harbinger of things to come,” writes Joshua Shapiro, an economist for New York-based MFR, in an analysis.
One of the big question marks is the ongoing sovereign debt crisis in Europe.
In June, the eurozone reported record unemployment – 11.2 percent. Since April 2011, the 17-nation region using the euro has lost nearly 2.3 million jobs. (By contrast, the US added 1.9 million jobs in the same period.) In some European countries, the situation is far worse: a quarter of Spanish workers are unemployed and so are a sixth of Portuguese workers.
Those sobering trends, combined with a slew of weaker-than-expected US data in recent weeks, have caused some analysts to reduce their growth forecasts for the US economy. They now see a continuation of the first half’s anemic growth, while many analysts expect the US economy to pick up somewhat in the second half of the year.
Either way, few expect a further slowdown, which means that America’s plodding recovery will continue to poke along.
A similar picture of stable growth emerges from the unemployment numbers. Last year, the economy added an average 153,000 jobs a month. So far, 2012 is nearly matching that pace with 151,000 jobs a month.
That is good news for emerging markets in Asia and South America. The so-called BRIC nations (Brazil, Russia, India, and China) are growing much faster than the US, but they are clearly slowing. Given the contraction in Europe, they need to see growth somewhere for their exports.
“The bigger than expected 163,000 increase in non-farm payrolls in July … will ease fears that the US economy is following Europe into recession,” writes economist Paul Ashworth of Toronto-based Capital Economics in an analysis.
The financial crisis, the 2008/09 recession, the banking scandals that have followed, and today’s limping recovery are all linked. The common factor is the absence of a real international monetary and banking order. Only when such an order is restored will companies and consumers feel confident to open their wallets again.
At the heart of this revamped order should be a new world currency, one that irrevocably ties money to the real economy. The current dollar-based model is broken and can’t be put together again. The trouble is, governments have yet to recognize this. That failure is the main source of our continuing problems.
After the demise of the Bretton Woods system in the early 1970s, governments built a monetary order round two pillars – central banks and financial regulators. Central banks were charged with ensuring low and stable inflation; regulators were instructed to reduce risks to financial instability (in some countries the central banks doubled up as regulators). This system helped the world economy through the big shocks and geopolitical shifts of the late 20th century – notably volatile energy prices, the collapse of the Soviet bloc, and the emergence of China, India, and other emerging markets. The fact that it proved adaptable and flexible was due in no small part to the “glue” provided by the global use of the US dollar. The euro took its place inside a dollar world.
However, around the turn of the millennium, this order began to fray. Confidence in the US dollar – and, crucially, in the monetary standard it provided – declined as a result of the huge build-up of US foreign indebtedness and growing fiscal problems. Just as important, the major players in the system – governments, banks, financial intermediaries – started to exploit the opportunities offered by the system for their short-term ends.
Governments of countries ranging from the US to Japan and the eurozone found it just too easy to borrow. Bankers were happy to oblige. Households joined in, vastly increasing leverage as property prices continued a seemingly never-ending ascent. Currency values were at the mercy of unpredictable capital flows and often artificially manipulated by governments to server their short-term ends. Western governments pointed the finger at China, but were equally blameworthy for excessive borrowing while regulators simply failed to realize how quickly innovation was leading to a lowering of standards.
Within a very short time, notably in 2005 and 2006, every link in the chain of credit designed originally to provide security for the ultimate lenders became loose. Intermediaries of all kinds fattened profits by lowering credit standards, neglecting due diligence, and buying and selling dodgy derivatives.
Success bred complacency and foolish risk-taking. Yet the resilience of the expansion during Alan Greenspan's tenure as chairman of the Federal Reserve (1987-2006) silenced critics. People who tried to raise concerns were ignored.
Since the crisis, governments and banks have tried to patch up the old model. They have pretended that more regulation would make the banks stable, and that more central bank liquidity could restore growth. These are dangerous delusions, as a growing number of central bankers privately admit.
We need to go back to basics. The dollar is unlikely to be able to provide that key benchmark for the world monetary system in the future. American politics has become too fractious to allow an early resolution of its fiscal problems. Quite apart from that, the world has become too multipolar and diverse to allow one national currency to provide the common currency platform of the future. Nor is providing the world’s main reserve and trading currency any longer unambiguously in the US national interest.
A financial system can only work properly in the context of a strong monetary order. That must go far beyond the usual calls for “enhanced international cooperation” or “coordinated regulation”. It must replicate the classical gold standard in its insistence that governments as well as private agents should obey common rules. For a global economy, those rules also have to be global.
We must also end forever the damaging divorce between money and the real world of jobs that has been the defining feature of the crisis. In my new book, “The Money Trap,” I propose that the global monetary unit – which I call the ikon - be expressed as a fraction of the global portfolio of all productive assets. The closest proxy for this is a diversified basket of global common stock (equity shares). Banks would compete with each other to produce money defined to these standards.
The dollar and other national currencies would continue to circulate, but they would be linked by a silken thread, as they would have a common reference or benchmark. Gradually, this would become the new ‘gold standard’ – the modern, respectable, monetary standard for the 21st century.
If money were linked to global productive capacity, the real value of money would gradually rise. Everybody holding money would, over time, become wealthier. Critics say that a currency defined in this way would be unstable. But the market would provide solutions to that – a means of insuring against such fluctuations in purchasing power. As the underlying value of the unit can be expected to increase in the longer term, market institutions would be able to afford to provide people with deposits guaranteed to be stable against a particular index of purchasing power – if that was what they wanted.
This should be a voluntary standard. But I believe that over the years, it would gradually acquire acceptance, as the most modern currency not only for the US and Europe but for the world as a whole. Then it would indeed become a worthy replacement to the gold standard.
Critics say that adherence to such a standard would involve loss of monetary autonomy. There are two answers to that. Much of the autonomy that countries like the United States and United Kingdom have at present is illusory – often providing an excuse for failing to address real structural and budgetary issues. Tricking the public by such monetary maneuvers was part of the bad old system that landed us all into trouble. Secondly, adherence to a common standard would provide incentives for us all to tackle the real problems and enjoy the real opportunities opened up by the new world economy.
When consumers and businesses – in the US and around the world – gain confidence that governments have correctly diagnosed the problems and are putting in place an adequate response, they will be willing to seize those opportunities and put the world’s economies on a sustainable path of growth.
– Robert Pringle is author of “The Money Trap: Escaping the Grip of Global Finance” and chairman of Central Banking Publications, a financial publisher in London.
Suddenly, the US housing market is a bright spot for the economy – mostly by default.
While growth prospects for much of the rest of the economy are dimming, the housing market is looking brighter. New residential construction is at its highest level in nearly four years. Home prices are rising. And sales of existing homes – which fell last month, according to a new report – are still trending higher year over year, despite weakening growth in the rest of the economy.
“The fundamentals of housing are really poised for strong growth once demand picks up,” says Celia Chen, housing economist at Moody's Analytics, an economic research subsidiary of Moody’s Corp. and based in West Chester, Pa. The housing recovery “is sustainable as long as the economy continues to add jobs.”
Housing still faces a long, hard slog. Existing home sales, for example, slowed 5.4 percent in June from an upwardly revised May figure, the National Association of Realtors (NAR) reported Thursday. But in comparison with everything else – a slowdown in job growth, weakness in manufacturing, and concerns over the European debt crisis and China’s slowdown – the housing market looks relatively strong.
For the first time in six years, residential housing in 2012 is expected to add to US growth rather than dragging it down, he forecasts. In the first quarter of 2012, it was responsible for more than a fifth of the nation’s growth.
With the inventory of new homes for sale at record lows, home construction is rebounding. Housing starts reached an annualized rate of 760,000 in June, the highest level since 2008.
Housing prices have also been on a tear. In June, the median existing home price rose 7.9 percent in June from a year ago, reaching $189,400. That’s the biggest year-over-year increase since February 2006, according to the NAR. From January through April, home prices have risen at an annualized rate of 13.1 percent, the strongest performance since 2005, according to Lender Processing Services, a data and analytics firm based in Jacksonville, Fla.
These price increases probably overstate the improvement, Ms. Chen says, because of the influence of foreclosed homes among other factors. These homes typically sell at a discount. Since foreclosures represent a smaller share of June sales than the June 2011 sales, the price increase looks exaggerated. Still, other surveys suggest that home prices are firming.
And pending home sale numbers suggest that, despite June’s disappointing report, home sales will rebound in the next month or two.
“Ironically, the housing sector may be a key factor in terms of keeping the US economy from falling back into recession,” writes Brian Bethune, president of Alpha Macroeconomic Foresights LLC in Wenham, Mass.
Other economic challenges, especially the weak job market, are holding back the housing sector. Housing “is still a bright spot, but with lots of risks,” says Ms. Chen of Moody’s Analytics, “an LED light, maybe.”
It's called elder financial abuse and, unfortunately, it's a growing phenomenon that can put retirement plans and other savings at risk.
It costs senior citizens an estimated $2.9 billion annually, according to a MetLife study, a 12 percent increase from 2008. Elder financial abuse takes place when someone uses an elderly person's funds or property without authorization.
The perpetrator can be an outside scam artist offering phony investments or prizes. Even more troubling, it can be a caregiver, friend, or family member who steals cash or household goods, engages in identity theft, or misuses checks, credit cards, or other financial accounts.
Strangers are involved in 51 percent of the crimes, the MetLife study finds, while family members, neighbors, and friends take part in 34 percent of financial abuse cases. (Business and Medicare/Medicaid fraud accounted for the rest.)
Most victims are between the ages of 80 and 89, and women are nearly twice as likely to be victims of elder financial abuse as men. Most victims live alone but need some help with either home maintenance or health-care.
This threat is expected to increase as the population ages. In 2009, there were 39.6 million people 65 years or older, according to the US Administration on Aging. By 2030, that number is projected to nearly double to 72.1 million.
If you are a senior citizen, or help care for one, it is important to recognize the signs of financial abuse:
- Items or cash missing from the house
- Questionable changes in wills, titles, policies, and power of attorney
- Significant or unexplainable withdrawals from the senior's accounts
- Addition of names to financial accounts or credit cards
- Changes in shopping patterns
Here are some tips on how to prevent financial abuse of the elderly:
- Make sure financial and legal affairs are in order. If they aren't, enlist professional help to get them in order.
- Avoid becoming isolated, which increases the vulnerability to elder abuse.
- Shred or dispose of papers with personal information, such as charge receipts, bank statements, expired credit cards, or new credit-card offers.
- Do not give out your Social Security number or personal account numbers unless you made the first contact and know the institution.
- Watch sales people, wait staff, and anyone who asks for your credit card. Anyone who handles a credit card may be able to get access to financial records when they swipe a senior's credit card for a purchase.
- Close unneeded lines of credit and cut up those discontinued credit cards.
- Reduce junk mail and unsolicited credit card offers to reduce your chance of identity theft. Call toll-free 1-888-5-OPT-OUT (888-567-8688) or do it through this online link: https://www.optoutprescreen.com/?rf=t)
- Get on the National Do Not Call Registry to reduce telemarketing calls. Visit its website or call 888-382-1222 to register your phone number.
- Hold monthly meetings with someone you trust?? to go over financial statements, bills, and credit-card accounts.
- If you are concerned about the abuse of credit cards, switch to a prepaid card. The deposit determines the spending limit.
- Before making a large purchase or investment, talk it over with someone you trust. Don't be pressured or intimidated into immediate decisions.
If you suspect financial abuse has taken place with an elderly friend or relative, contact the elder abuse helpline in your state.
It sounds encouraging: Since the beginning of 2010, the credit card debt of the average American household has fallen by $2,150.
From around $15,000 in 2006 to a peak of $18,000, average credit card debt then plummeted to around $14,500 by the end of 2010 and hasn't moved much since. Unfortunately, that's not nearly as good as it sounds.
Credit card debt has dropped not so much because the job market is improving or borrowers are more financially responsible. It has fallen mainly because in 2010 banks gave up trying to collect bad debt. In the second quarter of 2010, the charge-off rate, which is the percentage of debts declared uncollectible, spiked over a full percentage point from the same period in 2009. Banks took their losses and wiped those delinquent loans off their books.
The result for households? With fewer seriously delinquent accounts skewing the average, the typical household in the United States owes less credit card debt. But a greater percentage of households is indebted than in 2010. The overall debt picture doesn't look much better for most indebted households and, in one area, could be getting worse.
At $13.5 trillion, mortgages account for the lion's share of the average American family’s debt. Credit cards are the third largest debt category at $803.6 billion. What takes second place? Student loans. Student debt stands at a whopping $1 trillion.
Let's do a little extrapolation. The subprime mortgage crisis was caused by too many loans to people who couldn't pay them off. The credit card bubble burst because too many cards were given to people who couldn't make their payments. Student loans are among the easiest financial products to obtain. Borrowers do not need to demonstrate fiscal responsibility or a trustworthy credit history. Virtually anyone can acquire loans to fund education. Do you see where this going?
The past five years of credit card debt signal a deep economic trouble that goes far beyond consumer irresponsibility. The nation's debt is not merely a consequence of extravagance and material excess. Just over half of low- and middle-income Americans who were carrying a credit-card balance for at least three months are using credit cards for day-to-day living expenses, according to a recent national survey by Demos. The recession has left many consumers relying on plastic to stay afloat.
It's not just young people or families. According to the same survey, low- and middle-income seniors have turned to credit cards, too. With their retirement savings decimated by the financial crisis, Americans 65 and over now average $9,283 in card debt. Reckless spending is not necessarily at the root. If the choice is between deeper debt or declining health, most will choose to survive.
For the moment, private debt isn't rising because banks are leery of lending. With the housing bubble bursting so recently, it will take a few years for memories to fade. But they will.
As we continue climbing out of recession, you can count on lenders to lower standards and again start loaning money to high-risk borrowers. The Consumer Financial Protection Bureau hopes to increase transparency in credit cards and student loans through better disclosure, but how much can reason-based initiatives counter the lure of cheap money or higher education?
We've seen it with housing, we've seen it with credit cards, and we will soon see it with student loans. It's time we make an earnest attempt to start deflating economic bubbles before they burst. If we continue taking large risks during times of economic prosperity, we're doomed to a very cyclical existence of crippling debt and sluggish recovery.
We need more permanent solutions. The credit card, housing and student loan bubbles all share a common denominator: untenable financial products issued to high-risk consumers. Either the products (loans, mortgages, credit cards) require greater regulation, or consumers need a helping hand (affordable tuition, financial literacy programs, increased medical assistance). One or both variables must change if America is to end chronic
– Stephen Vanderpool is a senior content specialist at the personal finance and credit card website NerdWallet.com.
Employers are slowing down their hiring. Consumers have turned cautious. It's not the present state of affairs that's got them worried, it's what lies ahead: the potential breakup of the eurozone, the uncertainty around US elections, and the coming expiration of US tax cuts.
"We hear that up and down the food chain," says Jim John, chief operating officer of Beyond.com, an online career network based in King of Prussia, Pa., for employers and job-seekers. "Employers are pulling in their horns."
The latest employment report, released Friday, confirm the jitters. Employers added only 69,000 jobs in May, the Department of Labor reported, the smallest increase in a year and less than half what a consensus of economists had forecast. Employment gains for the two previous months were also adjusted downward by a combined 49,000 jobs. The unemployment rate ticked up from 8.1 percent to 8.2 percent.
For the past two months, economists have speculated that the weaker-than-expected jobs numbers were a kind of "payback" for the unusually strong employment gains in the winter, caused by unusually warm weather that boosted everything from construction work to car sales. Now, however, they're acknowledging that other factors are at work.
"It does now appear that the global slowdown, and events in Europe particularly, are beginning to have a more marked impact on the US economy," writes Paul Ashworth, chief US economist at Toronto-based Capital Economics, in an analysis of Friday's numbers.
"The latest figures cast doubt on whether the economy has enough momentum to achieve even the 2.2 percent growth rate we had expected for this year," writes Nigel Gault, chief US economist at IHS Global Insight in Lexington, Mass., in a research note. "Given the uncertainties over the eurozone crisis, emerging market growth, the US elections and the 'fiscal cliff,' there are plenty of reasons for businesses to stay cautious in their hiring plans, even if surging gasoline prices are for the moment no longer on the list of things to worry about."
The weakness in hiring appears to be centered among large companies, says Mr. John. Since March, Fortune 100 companies in retail, financial services, and communications began advertising fewer job openings on Beyond.com. The good news is that the number of jobs posted on the company's websites are more than double the level of a year ago. But the slowdown in job ads from big companies continues to intensify, a trend he expects to last for several more months.
"The [large] employers are saying: 'Let's wait and see,' " he says, as uncertainty mounts about Europe, the outcome of the US elections, and tax policy. That could lead to a mild recession. "We might talk ourselves into negative growth for a quarter or two," he cautions.
Even before the unemployment numbers came out, former Fed Chairman Alan Greenspan was sounding a cautious note. "There is a fear of the future," he told CNBC Friday, "and when you begin to try to disaggregate what's causing that, you come up with probably 40 percent of it is the fact that the economy is sagging."
Preforeclosure sales – commonly called short sales – are quickly becoming lenders' preferred method to clear their backlog of delinquent home loans.
Banks are slashing the asking prices of homes with delinquent loans to their lowest levels in at least seven years, making it easier for homeowners to get out from under troubled mortgages and more appealing for homebuyers to snap up properties at a discount. The number of short sales could top foreclosure sales as early as this quarter.
"Lenders are more aggressive about short sales, and they're more realistic about the price they need to set to get them sold," says Daren Blomquist, vice president at RealtyTrac, an online marketplace for foreclosure properties based in Irvine, Calif.
Lenders sold off 109,521 residential properties through short sales in the first quarter, according to a RealtyTrac report released Thursday. That's up 25 percent from the same period a year ago. Lenders unloaded 123,788 properties through foreclosure sales in the first quarter, down 15 percent from a year ago.
One reason for the move is that conventional foreclosures have become more risky, Mr. Blomquist adds.
Foreclosing on a property is a long and costly process, which forces people out of their homes and has become more difficult for lenders. Regulators are scrutinizing foreclosures more closely because many lenders were found to be using shortcuts that flouted the rules of the process.
In a short sale, by contrast, the lender and delinquent homeowner agree to sell the home at a reduced price below the value of the mortgage. By forgiving part of the loan up front (a loss that's usually unavoidable even in foreclosure), lenders can dispose of troubled mortgages more quickly. Homeowners get out from under debt with less damage to their credit rating than if they had gone through a foreclosure.
Of course, short sales are also more complex than foreclosures, because the bank and homeowner have to find and negotiate with a willing buyer. That may explain why banks have lowered the average price they're willing to take on a short sale.
Nationally, the average price of a home in a short sale was $175,461 in the first quarter, down 4 percent from the fourth quarter and down 10 percent from the first quarter of 2011, according to RealtyTrac. That's a record low for the seven years that the company has been tracking the price. In 2006, at the peak of the real estate boom, the average short sale home sold for $293,595 (click on the chart above left).
Expect the dealmaking to continue. With more than a million homes expected to enter the foreclosure process, it will take more than three years of short sales and foreclosure sales to work down the inventory of distressed mortgages to historic norms, Blomquist says.