Contract Cancellations Sour Home Sales

A new phenomenon has emerged that is depressing the sales of existing homes. Contract cancellations are surging, dashing hopes that the distressed housing market is showing signs of improvement.  According to the National Association of Realtors (NAR), sales fell 0.8 percent in June compared with May to an annual rate of just 4.77 million units, the lowest since November, and falling for the third consecutive month.  Economists had expected sales to climb to a 4.90 million-unit yearly pace.  “Buyers and sellers are increasingly running up against conservative appraisals, which often cause deals to fall through or be delayed,” said Mark Vitner, senior economist at Wells Fargo Securities.  In fact, the market is unlikely to improve in the near term, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

“A variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month,” NAR chief economist Lawrence Yun said.  Fully 16 percent of NAR members reported a sales contract was cancelled in June, up from four percent in May.  “The underlying reason for elevated cancellations is unclear,” Yun said, suggesting possible problems like tight credit for buyers and low home appraisals.

Writing for the Wall Street Pit, Dirk van Dijk says that “Regionally sales were down on the month in two of the four Census regions.  All four regions were down year over year.  The Northeast fared the worst, with sales down 5.2 percent for the month and down 17.0 percent from a year ago.  The West had a month to month decrease, with sales falling 1.7 percent, down 2.6 percent from a year ago.  In the Midwest, sales rose one percent for the month but are down 14.0 percent year over year.  The South, the largest of the four regions, saw a 0.5percent rise on the month, but a 5.6 percent year-over-year decline.  After all, it is better to simply sell the house and get something for it, rather than let the bank take it and get nothing for it.  The more people under water, and the deeper they are, the higher foreclosures and strategic defaults are going to be.  A strategic default is when someone has the cash flow available to continue to make his mortgage payment, but simply decides not to, since paying is a just plain stupid thing to do from a financial perspective.  If you have a house that could only sell for $150,000 in the current environment, and you owe $200,000 on the mortgage, in effect you have the option of ‘selling’ the house to the bank for $200,000 simply by not writing the checks.  Of course that will be a hit to your credit rating, but $50,000 is probably worth a bit of a tarnish on your Fico score.  If the difference is only $5000, then the hit to your credit score makes less sense, and there are lots of non economic factors (a house is after all a home, not just an investment) that come into play.”

Despite the disappointing existing house data, homebuilders appear to have more confidence than buyers, because May housing starts climbed to a five-month high, according to the Department of Commerce.  The month was the first time in five years that more homes were started than completed.  A majority of the buyers were investors, with 29 percent of the transactions being all cash.

Writing for The Hill, Vicki Needham says that “Distressed homes — foreclosures and short sales generally sold at deep discounts — accounted for 30 percent of sales in June, compared with 31 percent in May and 32 percent in June 2010.  Foreclosures have flooded the market, providing good deals for some potential homebuyers but hindering new construction.  Mortgage rates for a 30-year, conventional, fixed-rate mortgage were 4.51 percent in June, down from 4.64 percent in May.  The rate was 4.74 percent in June 2010, according to Freddie Mac.”

“With record high housing affordability conditions thus far in 2011, we’d normally expect to see stronger home sales,” said NAR President Ron Phipps.  “Even with job creation below expectations, excessively tight loan standards are keeping many buyers from completing deals.  Although proposals being considered in Washington could effectively put more restrictions on lending, some banking executives have hinted that credit may return to more normal, safe standards in the not-too-distant future, but the tardiness of this process is holding back the recovery.

Phipps noted that lower mortgage loan limits, which are scheduled to go into effect October 1, already are having an effect.  “Some lenders are placing lower loan limits on current contracts in anticipation they may not close before the end of September,” he said.  “As a result, some contracts may be getting canceled because certain buyers are unwilling or unable to obtain a more costly jumbo mortgage.”