Home Sales Contracts Rise, But Cancellations Run High
Last month, the National Association of Realtors reported a huge jump in cancellations of pending home sale contracts. 16 percent of contracts didn't make it to closing, up from a norm of about 4 percent.
The chief economist at the NAR said he was baffled by it, but ask any agent working the nation's neighborhoods, and they'll tell you it is all about confidence and financing—specifically, a lack of both.
"It seems like everybody's got home purchase 'cancel-itis,'" says David Fogg, a real estate agent in Burbank, Calif.
"Currently, we are seeing about 75 percent, when we close escrow, had been in escrow 2 or 3 times prior."
Fogg says the higher cancellations recently are most definitely tied to the turmoil in Washington, D.C. over the debt ceiling. Already nervous buyers are suddenly changing course, unsure how the debt crisis will affect the overall economy, and more importantly, their own employment.
More buyers did sign sales contracts in June than in May, though, according to a new report from the National Association of Realtors. Pending home sales rose 2.4 percent month-to-month and are nearly 20 percent* higher than June of 2010, the low point following the end of the home buyer tax credit.
“Though a higher than normal cancellation rate can hold back final closing figures, it could well be that some past cancellations are nothing more than delayed buying decisions, rather than outright cancellations,” says the Realtors' chief economist Lawrence Yun.
Financing and appraisals are taking far longer, with tighter underwriting restrictions amid the still-simmering foreclosure crisis. Another factor is short sales, which are increasingly popular at the big banks as an alternative to foreclosure. This is when the bank allows a troubled borrower to sell the home for less than the value of the mortgage. These can take far longer and run into more roadblocks that scuttle many deals.
"Three, four, five years ago we could close a home in 10 or 15 days, just approved before [it was] hardly even applied, but it's very different now," says Fogg. "It was very easy before, and as a result, a lot of the transactions closed very quickly before people could change their minds."
Buyers also have one more thing to worry about: more talk in Washington about a cut in the mortgage interest deduction. That directly affects purchasing power, as buyers factor that potential into their finances.
* A previous version of this story stated that pending home sales are nearly 30 percent higher than June of 2010.