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A higher than normal rate of contract failures is stifling a recovery in home sales as home sellers and buyers are losing deals at an extraordinary rate.

Soaring Contract Failures Torpedo Sales

A higher than normal rate of contract failures is stifling a recovery in home sales as home sellers and buyers are losing deals at an extraordinary rate.

One out of every three purchase contracts (33 percent) washed out in October, according to the National association of Realtors, up from 18 percent in September. Contract failures were only 8 percent a year ago.

“Home sales have been stuck in a narrow range despite several improving factors that generally lead to higher home sales such as job creation, rising rents and high affordability conditions. Many people who are attempting to buy homes are thwarted in the process,” said NAR Chief Economist Lawrence Yun.

Contract failures are cancellations caused by declined mortgage applications, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems including home inspections and employment losses. “Other recent factors include disruption in the National Flood Insurance Program, and lower loan limits for conventional mortgages, which paradoxically force some of the most creditworthy consumers to pay unnecessarily higher interest rates,” Yun said.

Cancellations have increased steadily over the spring and summer. An August NAR survey of the group’s members found that 11 percent saw contracts collapse and an additional 13 percent saw prices negotiated downward because of low appraisals.

Distressed sales accounted only part of the blame for declining home values. Homeowners, buyers and real estate agents pointed an accusing finger at the 300 to 400 appraisal management companies (AMCs) that have sprung up in recent years. They hire contractors to provide appraisals at less cost than independent appraisal companies and to date account for some 70 percent of residential appraisals. However, their critics say AMCs often use less expensive appraisers who are not familiar with local markets, and are to blame in large part for the conservative estimates.

NAR also blames the rising percentage of failing deals on lenders for setting standards too high for many borrowers to qualify for a mortgage.

NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, said consumers can increase their odds of obtaining a mortgage by being aware of how credit scores are determined. “If you want to get a mortgage, don’t buy a car or take on new installment debt or credit cards,” he said.

“Pay all your bills on time, maintain old credit lines and don’t use more than 30 percent of your credit limit. Realtors® can help you understand the issues surrounding access to affordable credit, in addition to helping you find the right home and negotiate terms,” Veissi said.

3 comments

  1. Very nice article and straight to the point. I am not sure if this is actually the best place to ask but do you people have any thoughts on where to hire some professional writers? Thx :)

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