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More and More Homes Are Falling Out of Escrow

in escrow

A new report from Trulia reveals that homes are falling out of escrow at a much higher rate than normal, a sign that the real estate market might be showing signs of cracking.

I warned in my 2017 prediction post that housing inventory wasn’t going to be very good this year, with a lot of older properties finally making their way to market after some 30, 40, or 50 years.

This is partially a demographic shift, and somewhat related to the enormous home price gains realized over the past four or five years. In short, sellers are seeing a good opportunity to unload, with frenzied buyers perhaps not as picky as they should be.

The quality of homes for sale could be one of the reasons why homes are going pending, and then back to active, at a much higher rate.

Trulia found that so called “sale fails” of all listed properties nationwide increased to 4.3% in the fourth quarter of 2016 from just 1.4% two years earlier.

That means more than four out of 100 sales look as if they’re going to close, and then fall out of escrow for one reason or another.

It might not seem like a lot, but when you compare it to recent numbers, it’s a problem that is trending markedly higher, and could signal distress in the real estate market.

The failure rate also nearly doubled in 2016 to 3.9%, up from 2.1% in 2015.

Old Homes Are Failing Buyers

As I pointed out, a lot of these older homes seem to be the problem. My best guess is that home inspections (get one!) are revealing some major issues with homes built 40 or 50 years ago.

And the data backs it up. Homes built from 1959 through 1969 had the highest sale fail rate at 5.2%, compared to homes built in 2016, with a dropout rate of only 2.6%, which is among the lowest proportion of failed sale bands.

The rate of fails for very old homes, those built between 1900 and 1920, is actually a bit better, just 3.5%, likely because such homes are valued for their history, unique design, location, etc.

The fail rate also seems to be more prevalent among starter homes, which again makes sense because these types of properties go to first-time home buyers.

It’s common to not be so prepared as a first-timer, and also to get cold feet. Buying a home is a big deal, so backing out is probably more common.

Mortgage fallout is likely more of an issue too because someone buying their first home doesn’t have any experience with the loan process, and may not be properly qualified. Or they might make common missteps that eventually lead to a declined mortgage application.

In any case, of all listings in the largest 100 metros, 7.1% of starter homes failed in the fourth quarter, compared with 6.7% of trade-up homes and 3.8% of premium homes. The lower rate on premium homes could be attributed to more buyers paying with cash and foregoing the bank entirely.

Somewhat shockingly, starter homes only fell out of escrow at a rate of 2.4% two years ago, so we’re looking at a near 300% increase in fails at that bottom third of the market price point.

Ventura, CA Is the Capital of Sale Fails

sale fail

Last year, the Los Angeles-adjacent beach town of Ventura, California was home to the most properties falling out of escrow, with 11.6% retrogressing from pending to active.

It’s unclear why – could be that appraisals are falling short, or it could have something to do with the type of buyer in the area.

During the fourth quarter of 2016, Tucson, Arizona saw 13.9% of unique listings put real estate agents in a bad mood. For the full year, Tucson was number two on the list with a 10.8% fallout rate.

Rounding out the top five were Atlanta, Fort Worth, and Los Angeles.

This trend is yet another reason to get all your ducks in a row before making an offer on a home, and exemplifies the importance of keeping contingencies in place so you don’t get burned!

Of course, it also means you might get a second shot at a house that went pending, just be sure to know why the prior buyer walked away.

4 thoughts on “More and More Homes Are Falling Out of Escrow”

  1. Colin, I enjoy getting your emails and reading most of your blogs. But this one is nearly all guessing and speculation on your part. There are so many reasons an escrow can fall out – buyer loses a job, they make a big purchase on credit while they are in escrow, even an unpaid traffic violation can hurt when it comes to getting the final loan approval. A bigger issue is the difficulty of getting a loan. Underwriters have been paranoid for the last several years due to the recent real estate collapse. I’ve had experienced buyers with excellent credit and over 50% down payment and yet the underwriters scrutinize everything. Lending has just tightened up so much. Probably another reason so many people are buyer with cash. I wouldn’t call what’s happening with escrow failure a trend or a sign but rather a part of a large issue with getting the deal done.

  2. Gary,

    I had to speculate to some degree because Trulia didn’t provide the reasons, perhaps they are quantifiable? I agree there are a large number of reasons for escrow fallout, but one thing is clear, fallout is up a ton. A historical reference might sharpen the picture so we can see a trend over decades, not just a few years.

  3. many older homes need upgrading and most buyers are not aware of renovation loans and neither are realtors. I suspect many fall out because home requires some work.
    When I talk to clients I always mention this product. the reaction is “I didn’t know they existed”!

  4. Homes in this age range which may be perceived as starter homes or downsize homes, are generally going to those with fewer resources or whose intention is to reduce expenses. With prices escalating in many areas, these “lower priced” homes are fairly pricey. Add to this the potential need for whole house re-plumbing or electrical, environmental hazards like asbestos and lead paint and/or pipes (or polybutelyne pipes), aging systems like boilers (which last a really long time but not forever) and you have a myriad of potential issues which result in a failed contract.
    Sure, some homeowners update through the years and they are in a strong position able to take advantage of increased property values but many have just gotten by and decided to move because a. things are starting to fall apart b. they cannot afford to fix things or don’t want to c. looks like prices are up.
    Maintenance of a home is always a factor in how quickly it sells or not. This is exacerbated in the older home, lower priced segment.

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