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
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.