Short Sales in Real Estate vs. Short Sales on the Stock Market - An Explanation

News & Commentary, September 19th, by Chris McLaughlin
http://www.shortsalesriches.com

What a week! Aren't we glad it is Friday? If you thought as a Realtor or real estate investor you had a tough week, imagine if you worked at Lehman Brothers, AIG, or any number of major financial institutions. It was truly a historic week. And many are glad it is over.

But today was a better day than most this week. Wall Street investors applauded US Treasury Secretary Henry "Bail 'Em Out" Paulson after he announced yet another massive bail out initiative. He's bailed out Bear Stearns, Fannie Mae, Freddie Mac, and AIG. And today Paulson announced that he would form a new entity similar to the Resolution Trust Corporation (during the S&L crisis in the late 80s) that would oversee the orderly liquidation of bad mortgage related debts. This was by far the biggest move to date, as Paulson suggested that it would be "hundreds of billions of dollars." But specifics weren't available, and Paulson plans to meet with members of Congress over the weekend to start shaping the plan.

What else happened? Well, it looks like Securities & Exchange Commissioner Christopher Cox didn't like hearing chuckles from all his friends that Presidential Candidate John McCain would fire him if elected President (I guess we know who Cox will vote for in November, huh?). So Cox made a dramatic move today to show that the SEC is doing something: banning short sales of 799 financial stock.

"This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress," Cox said. The ban went into effect immediately and expires at midnight on October 2, 2008.

NOTE: THIS HAS NOTHING TO DO WITH REALTOR AND INVESTORS NEGOTIATING A SHORT SALE, OR REDUCTION IN PRINCIPAL AMOUNT OWED ON A LOAN.

Let me make this very clear: this ban on short sales has nothing to do with real estate short sales that we're primarily focused on. PLEASE FORWARD THIS E-MAIL TO REALTORS AND INVESTORS YOU KNOW, AS THERE IS MASSIVE CONFUSION RIGHT NOW. A short sale when it comes to the stock market is generally considered this: short sellers borrow stock in a company that they don't actually own and then sell it, hoping that they can buy the stock back at a lower price and make a spread on the difference. This leads to wild swings in a stock price, and perhaps an exaggerated movement--and such was the case this week when financial stocks plunged.

And a final note... As I was walking down the hallway, one of our realtors here at Keller Williams, Alison Terry, grabbed me and said: "Hey Chris, doesn't this meltdown on Wall Street mean that more people are going to be interested in real estate again?" To which I responded that she needed to go to my blog, since I mentioned that earlier in the week. Folks there is only so much gold someone can buy. Americans aren't stupid, they are incredibly smart. They will begin moving more and more assets over to things they can touch and feel. They can't touch and feel stock in Morgan Stanley, but they can touch a foreclosure they bought on Morgan Street and Stanley Drive, right?

So, stay tune in for more commentary and announcements next week. It has been a truly exciting and memorable week. And real estate will be a huge beneficiary of all the events of late.


This posting compliments of www.shortsalesriches.com/blog.