Reporting from Washington — Are home buyers 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 close escrow. According to the National Assn. of Realtors, 1 in 6 realty agents polled in June reported having signed contracts canceled before closing, up from just 1 in 25 the month before.
Lawrence Yun, chief economist of the realty association, says the sudden increase is surprising and worrisome, and 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 a series of interviews with realty brokers around the country suggests that there may be other, subtler forces at work that are busting up real estate deals.
Buyer confidence about the direction of the national economy has been badly rattled in the last six to eight weeks by the gridlock in Congress over raising the national debt ceiling and cutting the deficit. That is making buyers less willing to take a risk on a major purchase, brokers say. It's also making them pickier and more demanding when defects are found in home inspections and frequently is leading to contract cancellations for relatively minor reasons.
Jessika Mayer, manager of professional development at Coldwell Banker Plaza Real Estate in Wichita, Kan., says she is seeing more well-qualified buyers — who would have proceeded to closing in past months — suddenly "feeling very worried and uncertain because they don't know" if the country is headed for an economic disaster that would make their new purchase difficult to sustain.
Chad Ochsner, broker-owner of Re/Max Alliance, a 20-office firm 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 the remaining useful life of an air-conditioning system in a resale house to be two to three years. Or maybe a floor covering is worn and should eventually be replaced.
Whereas 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 repair or replacement made before closing. Some sellers are willing to negotiate, but others believe that 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 answers from the bank on their offer, triggering repeated time extensions on 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, Va., says that offices in Richmond, Va., and Annapolis, Md., report "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 condominium fell apart when an appraiser valued the condo far below the agreed-upon sale price. That price, Smith says, was well in line with recent sales of similar units.
A subsequent review of the appraisal report turned up numerous errors, but the buyers pulled out of the contract anyway.
Distributed by Washington Post Writers Group.