Trulia Notes Increasing Incidence of Failed Sales

News

It ain’t over ’til it’s over, and that seems to be
increasingly true of contacted home sales. Trulia reported on Wednesday that, “Deals to sell homes are falling
through at a faster rate
than they were a year ago and it’s agreements for
starter homes that are most at risk.”

The
company reviewed the daily status of
all listings for the first two months of each quarter from the fourth quarter
of 2014 through the fourth quarter of 2016, looking for properties that went
from a pending or active contingent status back to being for sale either by an
agent or an owner.  They sought to
determine where it was most common for properties to go from under contract
back to for sale status.  They call these
“sale fails.”

The analysis found that the
proportion of listings that fail at least once has been rising nationally at an
increasing rate, from 1.4 percent of all listed properties in the fourth
quarter of 2014 to 4.3 percent in the same quarter of 2016.  Most of this increase occurred after the
fourth quarter of 2015.  The failure rate
for all of 2016 was nearly double that of 2015 – 3.9 percent compared to 2.1
percent.

Sales of newly constructed homes
were least likely to fall apart and very old homes had the second lowest
failure rate.  As of the fourth quarter
of 2016 homes built in that year had a contract failure rate of 2.6 percent
while the rate for homes built between 1900 and 1920 was 3.5 percent.  The highest rate was for homes built from
1959 through 1969, 5.2 percent.

Starter home sales were also among
the most failure prone in the fourth quarter of 2016, accounting for an average
of 7.1 of all listings in the largest 100 metros, compared with 6.7% of
trade-up homes and 3.8% of premium homes. For all of 2016, the failure rate was
6.3% for both starter and trade-up homes and 3.6% for premium homes.

Trulia offers several explanations
for what they see as an increasing failure rate.  One is the experience of the buyer. The
National Association of Realtors® (NAR) reports that first-time homebuyers, who
had been missing in action for some years, accounted for 35 percent of sales in
2016, up from 32 percent in 2015.  Note,
that this is their share only of successful transactions.  Tulia says that, “Not only are first-time homebuyers
unfamiliar with the process, they face unique hurdles. They don’t bring equity
or a credit history from a previous home. Their finances face additional
scrutiny. And for those seeking an FHA loan for down payment, there are
restrictions on type of home and its amenities.”

First timers are, of course, likely
to be buying in the starter home category as are those so-called boomerang
buyers who have served their obligatory time-out after foreclosure and are now
able to move back into the market, but may still have damaged credit.

Trulia explains that there could
also be an interrelationship between
the age and the price tier
.  Premium
homes make up more than 70 percent of all listings built after 2000 and less
than 40 percent of those built before 1980. 
“Since premium homes have the lowest fail rate regardless of year
built, their dominance drives down the fail rate in more recently built homes,
and their smaller role pushes up the fail rate in older homes.”

Also, homes that are 20 to 40 years
old are more likely to be encountering their first round of expensive
maintenance
needs, increasing the likelihood of deals failing based on home
inspections.  Homes older than 40 years,
to remain livable, have probably already had some major problems
addressed.  There is also the possibility
that buyers seeking older homes may anticipate encountering needed repairs and
upgrades.

Looking at the geography of failed
sales, eight of the 10 metro areas with the highest percentage over the last
two years are clustered in the West and three are in California.  In the fourth quarter of 2016, seven are in
the West, four of which are in California. 

 

 

We asked NAR to comment on the Trulia report.  Their spokesperson, Adam DeSanctis, said that among the questions NAR asks its members in its monthly Realtors Confidence Index is if their most recent sales contract was either closed or terminated.  He supplied us with the three-month rolling averages for the last two years which, as he said, show settlements  and terminations remaining roughly the same.  During the first three months of 2015, the averages were at 9 or 10 percent.  Since then they have consistently ranged between 6 and 7 percent.

NAR adds, however, “There is another way of looking at
this that may confirm Trulia’s finding.
Because of constrained inventory data in much of the country, the percent share
of sales sold at or above list price has recently been convincingly higher than a year ago.  This would indicate an increase in
multiple offers on a home that’s for sale.”

Data they
supplied on this phenomenon, dating back to 2012, shows that while above
listing price sales have not increased at a steady rate, they have trended
upwards, starting at 28 percent in December 2012 and reaching as high as 40 to
43 percent through most of the second and third quarters of 2016.  In the fourth quarter the figure settled back
to 37 percent.

DeSanctis said that, “Especially
among first-time buyers, there could very well be cases where a contract is
delayed or terminated because the buyer couldn’t come up with the additional
cash or more financing to close the deal. “

 Trulia concludes by saying it
is important that a potential buyer do everything possible in the way of
mortgage approval and preapproval and to know his or her financial limits.  This will make it easier to recognize
potential challenges and opportunities earlier in home buying process.  Sellers and agents would be well serviced to
know about the market and the home and to confront any problems areas that
would be likely to come up in an inspection.

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