Housing's Dark Secret: Failed Sales
By: Brian O'Connell

NEW YORK (BankingMyWay) – The housing recovery seems to be gaining steam, with Re/Max reporting that U.S. home sales rose 10.3% from July 2011 to July 2012, with home prices up 3.7% over the same period.

As usual, there are no guarantees in the housing market, but so far in 2012, so good.

“It’s reassuring that both sales and prices continue to rise higher on a yearly basis, indicating that this housing recovery is real,” notes Margaret Kelly, CEO of Re/Max.  “Overall, the picture is getting brighter each month, but what we need for a sustainable recovery is a turnaround in unemployment and better availability of mortgages, especially for higher-priced homes.”

One underreported fly in the ointment is the fact that the housing recovery would be greater but for one downbeat issue: Too many home sales fall through at the last minute.

The analytical firm Capital Economics aimed a spotlight on the issue and found that 15% of all contracted homes sales fall through for various reasons at the last minute.

In a research note from economist Paul Diggle, published on HousingWire.com this morning, Capital Economics says pending home sales were up 6.9% from December through July, yet actual home closing were only up 2.1%.

Some of the reason for the gap in closings compared with the pending sales number are just statistical noise. But Diggle does say it’s apparent “failed sales” rate have spiked upward.

"We suspect that the bulk of the divergence reflects the fact that cancellation rates have increased," Diggle says. "And this divergence creates problems in a market that is struggling to recover."

Typically, the most common reasons home sales wither on the vine are lower-than-expected home appraisals, failed or troublesome home inspections, bank financing and home title issues, Diggle adds.

While he doesn’t say why failed sales in the current market are any different from failed sales in real estate markets five, 10 or 20 years ago, Diggle does say it is relatively easy for homebuyers to pull out of a deal these days, because they can withdrawal at a “relatively low cost.”

It could be simply a matter of a new homebuyer having cold feet finding a low appraisal or poor home inspection enough to sour the deal.

But even so, there is little doubt the U.S. housing market could be more vibrant if agents and homeowners weren’t blindsided by so many canceled home sales.

 

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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