Sold -- or Not: When Home Buyers Walk
Some Will Give Up Thousands to Get Out of This Market

By Sandra Fleishman
Washington Post Staff Writer
Saturday, May 6, 2006

As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits.

Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship -- more than double last year's rate, according to one research firm, and perhaps as high as one in three new-home buyers in some places. And nationally, some big builders are beginning to report cancellation rates upward of 25 percent.

When a housing market is hot and prices increase, as they did dramatically over the past five years here, cancellations are rare and builders generally aren't concerned because they can typically sell the units at even higher prices. But if the market is slowing, as it has been this year, builders may need to add incentives such as upgrades and price cuts to move their product. That reduces profit but provides opportunities for people who couldn't afford to buy before.

Hanley Wood Market Intelligence, a home-building research firm, this week said that its latest survey of builders showed that the cancellation rate for the Washington area in March more than doubled from a year earlier, jumping to 12.7 percent from 5.1 percent.

"But 10 to 15 percent of people deciding to cancel is not going to be unusual most of the time," said Jonathan Dienhart, Hanley Wood's director of research. "It's just that in the last couple years when we had unusually high demand, where people could just buy a property and flip it, there were fewer cancellations. It's not a cakewalk anymore."

The survey shows the cancellation rate locally highest in Fairfax County, at 30.9 percent, compared with 0.8 percent a year ago. Half of condominium buyers there canceled, compared with no cancellations a year ago. When the statistics are looked at by a single county or type of housing for one month, however, the number of transactions is small.

People who are buying for investments rather than residences are the most likely to bail out, experts said. They reason that it would be better to lose a deposit than to go ahead with an investment that could lose value, particularly if builders are cutting prices in the same or nearby projects.

Typically, buyers of new homes pay upfront deposits calculated either as flat amounts as low as $1,000 or as a percentage of the price, generally about 5 percent of the home price. In recent years, some builders increased deposits to discourage speculators and get more upfront cash from desperate buyers. Some require deposits of 7.5 to 10 percent.

Despite the pain of giving up that much money, some buyers are canceling to cut their losses because builders are pricing the same houses for so much less, Alexandria lawyer James C. "Beau" Brincefield Jr. said.

"I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less," said Brincefield, who is preparing litigation for buyers who want to sue builders to get their deposits back.

And builders are trying to make it harder for people to split, lawyers and real estate agents said. While contracts "always favor the builder" and are always hard to contest, now that it is harder to resell, "builders are fighting attempts to get the deposit back tooth and nail," Washington lawyer John Gerardo said.

"It's getting really kind of scary right now because builders are waving their sabers," said Christine Cormack, owner of brokerage Keller Williams Realty in Ashburn and a real estate investor. "They're holding people to contracts." That can include going to court to force closings.

Gopal Ahluwalia, director of research for the National Association of Home Builders, said his group's surveys show cancellation rates increasing nationwide, but not as much as others have estimated.

His April survey of builders found that 5 percent reported a "substantially" higher cancellation rate in March than a year earlier and 14 percent a "somewhat higher" rate. Seven percent said they were seeing fewer cancellations. Twenty percent of those surveyed reported cancellation rates of more than 6 percent.

While some speculators have decided they won't get their return and are walking, other buyers are canceling because rising interest rates have made the purchase unaffordable, Ahluwalia said.

"Consumers are starting to get cold feet because they think prices are not going to go up, based on what they read in the papers and what they see in the media. But I think the biggest thing is probably the interest rate hikes and the fear that 'I can't afford this,' " he said.

Credit Suisse First Boston stock analyst Ivy Zelman this week said big builders nationally are reporting cancellation percentage rates in the mid- to high 20s, compared with the mid- to high teens of a year ago. Executives from Pulte Homes, for example, said in an April 27 conference call with analysts that cancellations reached 27 percent in the most recent quarter, vs. 18 percent a year ago.

Builders with high deposits, such as luxury developer Toll Brothers Inc., say their practices have discouraged speculation and have resulted in fewer cancellations -- about 8.5 percent nationally, company executives said in a conference call yesterday. Toll Brothers requires 7.5 percent in earnest money plus a deposit for upgrades.

While some deals may have turned sour for the original buyers, that can be heartening to those looking for bargains. Builders are offering more incentives to buy, including price cuts and free upgrades.

Zelman expressed confidence in the Washington market in the long term because of its job growth and limited availability of land but said: "It will take some time to blow out this inventory. . . . People have got to lower their prices."

Other analysts have also said the Washington market is in stronger shape than most urban centers because of low unemployment; strong job creation; and house prices that are low compared with California, New York and Boston.

"It is true that the resale market has softened and that the number of listings jumped to nearly triple what it was last year," said Kenneth Wenhold, director of Metrostudy's Virginia-Maryland division. "However, last year was an unusual situation, with very few units listed for sale, resulting in bidding wars on properties. Now sales are still strong, but buyers have more choices."

He said, "Metrostudy's most recent first quarter 2006 research indicates that the new housing market is still performing very well and is almost as healthy as spring of 2005."

His study found an 11.8-month supply of new-home inventory in the region, but he said the number is "misleading, since the vast majority of the supply consists of thousands of condominium units that are under development in Fairfax and Arlington counties in Virginia."

Remove condos from the picture, he said, and inventories drop to a more-normal 7.2-month supply.

Gregory H. Leisch, chief executive of condo research firm Delta Associates, said that Hanley Wood's 12.7 percent cancellation rate may be low because of how it is calculated and could be as high as 18 percent. "But that's not an alarming figure," he said.

In looking at 1976, 1983 and 1990, when the housing market experienced "its worst points, right after a go-go period, cancellations might be at 25 percent and we're nowhere near that today," Leisch said. "We've returned to the norm."

Hanley Wood's survey showed the Sacramento area with the highest cancellation rate, 28 percent, up from 2.6 percent in March 2005. Rates in Las Vegas, Denver, Phoenix and Orange County, Calif., also were higher than those in the Washington area.