Is the 2012 spring real estate price rally going to be cancelled?

Pending sales are up, and economists who use pending sales in their calculations are proclaiming a price rally is in the works. There is one inconvenient fact holding back the bulls: record cancellations. Borrowers are unable to close the deal, and properties are falling out of escrow at increasing rates.

Snags leading to more real estate contract cancellations

April 01, 2012|By Kenneth R. Harney

WASHINGTON — What’s behind the unusually high rate of contract cancellations and settlement delays in the real estate market? With signs of recovery emerging in many parts of the country, shouldn’t deals be zipping along with minimal complications?

Apparently not. Nearly one-third of realty agents in a new national survey reported experiencing contract cancellations — purchases crumbling before closing — in February. That’s up dramatically from a similar poll 12 months earlier, when just 9% of agents reported cancellations. An additional 18% reported delays in scheduled closings in the latest study, which involved about 3,000 agents surveyed by the National Assn. of realtors.

The rate of reported cancellations has tripled, and not because realtors are doing more deals. Would-be buyers are entering into contracts they cannot honor.

The high reported cancellation rate (31%) doesn’t mean that nearly 1 of every 3 escrows is falling apart, according to the association, but rather that more than triple the number of agents and their clients are running into deal-endangering problems compared with 2011. …

Tops on the list:

• Appraisals below contract. You may assume that the true market value of a house is what a seller and buyer agree to in a binding contract, but it’s not. The appraiser hired by the bank may come up with a different opinion of value, significantly below what was agreed on by the parties. This is occurring with far greater frequency today than in previous years. Part of the problem is the excessive use of price-depressed foreclosure sales chosen as “comparables” to value non-distressed houses under pending contracts. But some appraisers are inexperienced and unfamiliar with local pricing trends.

The idea that foreclosure sales are not “market” sales is bullshit propagated by the NAr. Think of what they are really saying, “sales prices would be going up if we didn’t have so many sales with prices going down.” No kidding. Whether the sale was distressed or not is irrelevant. It was a market sale, and these distressed sales will continue.

Housing markets always have distressed sellers. Most often this is from one of the three Ds: death, divorce, and drugs. Since these motivated sellers usually represent a small fraction of the housing market, their sales are written off as “good deals” and the non-distressed sellers dominate the market. Now, with about a third of all sales being bank-owned foreclosures, there are far more distressed sales than usual, and they are pushing prices lower. These distressed sales can’t be ignored as if they are somehow not part of the market. …

The reporter is missing the most obvious and most common reason appraisals are coming in below contract: the houses aren’t worth that much. The comps are the market, and if a buyer is cajoled into overpaying by bad representation from dodgy realtors, the appraisal saves them from grossly overpaying.

• Ultra-conservative underwriting and documentation requirements.

More bullshit. Requiring people to document their income and actually afford the payments may seem like ultra-conservative underwriting, but since a complete lack of underwriting standards was partially responsible for the housing bubble, and since the people who didn’t properly document their income usually lied, it is only prudent for lenders to be smart and safe. Of course, realtors don’t want to hear that. They have no stake in the ramifications of poor underwriting, but sound underwriting is killing their deals, so it shouldn’t be surprising to hear them whine about underwriting standards.

It’s no longer just towering credit score minimums,

FHA only requires a FICO score of 580 to put 3.5% down. That hardly seems a “towering” hurdle to overcome.

hefty down payments

3.5% down is “hefty”?

and mind-bending paperwork submissions

Tax returns, paystubs, and a few other documents are not “mind-bending.”

that get mortgage applicants turned down. “It’s a lot of other stuff too,” said Melissa Zavala, broker and owner of Broadpoint Properties in Escondido. Increasingly she’s been running into regulatory hoops and restrictive underwriting rules at the Federal Housing Administration, Fannie Mae and Freddie Mac that knock signed contracts off the tracks or at least delay them for months.

For instance, the FHA’s toughened rules on condominium associations — limits on the percentage of existing residents in the project who are delinquent on their condo dues, plus requirements for “recertifications” of condominium developments that many condo boards find costly and burdensome in terms of legal liability — are rendering individual units in those communities difficult to finance, no matter how well qualified the purchasers.

If the condo association is underfunded and facing insolvency, the FHA is protecting both the borrower and itself by killing those deals.

Little-publicized recent changes in FHA rules on loan applicants who have outstanding collection accounts buried away in their credit files can “take three to four months to clean up” through mandatory repayment plans, Zavala said. By that point the contract may well have gone bust.

So the FHA should be loaning people money who have outstanding collections due? That sounds more prudent than onerous to me.

• Poor service by lender staff. Agents in the survey identified “lack of customer service” and “generally bad attitudes” as contributing factors to delays and some contract failures. But Zavala said realty agents themselves need to be on the ball when loan processing deadlines begin to slip or communication breaks down with lenders. “Agents can be part of the problems” — and the solutions — when it comes to moving the financing along, she said.

realtors are usually the problem, not the solution. Most realtors don’t see following up with contract details as part of their job. They hire transaction coordinators to do this work for them, and they blame others for their own failure to manage when things go bad.

Bottom line: If you seriously want to close on a house you’re buying or selling, make sure you know all the key rules and requirements upfront, then stay on top of the lending, escrow, title and real estate professionals involved in your transaction. …

The realtor rah rah aside, there are a great many deals falling out of escrow. In this market, don’t hesitate to put in back-up offers on properties you want. There is a good chance the buyer in first position won’t close the deal.