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More Home Sales are Failing to Close – Don’t Be Concerned YET

By Brian Kline | January 16, 2017

In late 2014, Trulia began measuring the number of home sales that failed to be completed. The measurement is calculated by counting the number of listings moving into a status of “active contingent” or “pending” and then being reclassified back to “for sale” or “for sale by owner”.  The numbers are compiled for the country's 100 largest metropolitan areas.

Based on this analysis, 3.9 percent of sales failed in 2016, up from 2.1 percent in 2015. That’s a relatively small number but it is increasing. Worth noting are the types of properties and buyers that make up the majority of the failed sales.

for sale sign

Segmenting the Market

For analysis purposes, houses priced in the bottom third of the market were considered starter homes. Of these, 7.1 percent of original purchase contracts failed to close in the fourth quarter of 2016. This is up from 2.4 percent in 2014.

The middle third, measured by price, was considered a buy-up market.  Buyers were considered to have equity in a previously owned home and a positive history for paying the mortgage. Of these, 6.7 percent had an original purchase offer but returned to the market when the first deal did not close.

The top third price range was deemed to be premium homes. Of these, 3.8 percent came back on the market after having an initial offer fail.

When home age was analyzed, the newest homes (those built in 2016) had only 2.6 returned to the market. Middle aged homes (built as far back as 1959) had the highest initial failure rate at 5.2 percent. Assumptions were made that at least some of these failed closings of older homes were due to modernizations not being made and more serious problems from inspection reports. Older homes (built as far back as 1900) returned to the market 3.5 percent of the time. The assumption here was that at least one major remodel had been done and that buyers were not expecting these homes to be in pristine condition.

Segmenting Buyers

According to the National Association of Realtors, first-time homebuyers accounted for 35% of completed sales in 2016, up from 32% in 2015. This modest increase and common characteristics of first time buyers could be behind the larger numbers of starter home deals going south. A fair number of these people are emerging from the seven year period that derogatory credit marks remain on file. Additionally, first time buyers are more likely to make mistakes within the unfamiliar process of making offers on the largest purchase of a lifetime. However, this is an important segment of the failed sale trend to keep an eye on because the first time buyer market is expected to grow during 2017.

In today’s sellers’ market, these numbers are not particularly alarming. However, with prices steadily increasing, even in the starter market, buyers are going to continue to be stretched to make purchase offers at the upper limit of what they can qualify for. This is a trend to keep in your peripheral vision during 2017.

Please leave a comment if this article was helpful or if you have a question.

PhotoAuthor bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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