Economic uncertainty leads to canceled home contracts

July 29, 2011

Are homebuyers walking away in droves from the contracts they’ve signed? Or are they essentially fouling out of the game, unable to close deals because of financing and credit issues?

Whatever the answer, this much appears to be certain: Exceptionally large numbers of signed real estate contracts fell apart last month, failing to reach settlement. According to the National Association of Realtors, one of every six real estate agents polled in June reported having signed contracts canceled before closing — up from just one in 25 the month before. The typical monthly cancellation rate over the past 16 months has ranged in a narrow band between 8 percent and 10 percent.

What’s going on here? Lawrence Yun, the chief economist of the realty association, says that the sudden swing is surprising and worrisome, and that there are no hard statistics available on the causes. The most likely suspects, Yun says, are low-ball appraisals and tough mortgage underwriting rules that knock buyers out of contracts through mortgage contingency clauses.

But interviews with brokers around the country suggest that there may be other, subtler forces at work that are busting up real estate deals.

Buyers’ confidence about the national economy has been badly rattled in the past several weeks by the gridlock in Congress over raising the national debt ceiling and cutting the deficit. In turn, brokers say, that is making buyers less willing to risk a major purchase, making them pickier and more demanding when defects are found in home inspections, and frequently leading to contract cancellations for relatively minor reasons.

Jessika Mayer, manager of professional development at Coldwell Banker Plaza Real Estate in Wichita, says she is seeing more well-qualified buyers — who would have proceeded to closing in past months — “feeling very worried and uncertain because they don’t know” if the country is headed for an economic disaster that would make their purchase difficult to sustain.

Chad Ochsner, broker-owner of RE/MAX Alliance, a 20-office firm based in Denver, says his agents are also “seeing buyers feeling remorse” and unusual trepidation because of national economic uncertainties. As a result, he says, “they’re terminating contracts that in the past would have gone to closing.”

Inspections almost always turn up problems of one type or another, Mayer says, “but lately buyers seem to be holding out for perfection.” Maybe the inspection report estimates that the remaining useful life of an air-conditioning system in a resale house is two to three years. Or maybe a floor covering is worn and should eventually be replaced. Previously, buyers who truly wanted a house might let those issues pass; now they want the contract price reduced in compensation, or they want the replacement or repair made before closing. Some sellers are willing to negotiate, but others think the contract price on the house is as low as they can go. If the parties can’t bridge the gap, the deal disintegrates.

The surging numbers of pending short sales clogging local markets are another cause of contract cancellations, brokers say. Buyers negotiating with banks often wait months to get an answer on their offer, triggering repeated extensions of the contract terms. Eventually buyers lose patience, throw up their hands and say forget it.

Charlie Bengel Jr., chief executive of RE/MAX Allegiance in Fairfax, says offices in Richmond and Annapolis have reported “a significant increase” in short-sale-related cancellations, primarily because of buyer frustration with the “lengthy short-sale process” and “banks not approving short sales.”

Finally, appraisal problems in many parts of the country continue to bedevil real estate transactions, especially when inexperienced appraisers working for low fees overuse distressed-property sales as comparables for non-distressed listings. For example, Rod Smith, director of general brokerage at Coldwell Banker Chicora in Myrtle Beach, S.C., said a recent signed contract on a condo blew up when an appraiser valued it far below the agreed-upon sales price. That price, Smith says, was well in line with recent sales of similar units.

A review of the appraisal report turned up numerous errors, but the buyers chose not to appeal and pulled out of the contract after the lender urged them to refuse to pay the price they had agreed to.

“The Realtor is trying to sell you a property at 40 percent over what it’s worth!” the lender reportedly told the buyers. No wonder they walked.

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