Trulia, a real estate information site, reported that failed home purchases rose between 2015 and 2016 from 2.1% to 3.9%, nearly doubling the number of failed home sales. These numbers represented failed transactions from the top 100 largest metro areas in the U.S. in some markets, realtors have estimated failed home transactions at between 10 and 20 %, which can be an indicator of how realtors are feeling about their markets.
Why are real estate transactions failing at a higher number when the real estate market has steadily increased over the last few years, for the most part climbing out of its recession driven slump? While home prices continue to rise and interest rates remain stable, it appears to be a great time to buy and sell. Perhaps the increase in transactions that are started just by nature means that a greater percentage will not go through. If more people enter into a contract to buy then it stands to reason that there will also be more people who are, for one reason or another, unable to complete that particular transaction. These figures also do not indicate how many of these buyers go on to purchase a different property.
There are factors that are somewhat unique to the market we find ourselves in now that can have an impact on whether or not a sale will go through, and there are factors that have been consistent throughout the ups and downs of economic trends. Some of these factors overlap, making it difficult to say that one reason is more pronounced than another.
Since the real estate crisis of 2008, many first time buyers or buyers with less than ideal credit have been kept out of the market. Those people are now entering back into the market and trying to buy homes. First time home buyers are entering the market in increasing numbers making up 35% of all home sales, a number that is up by three percent in the last year. A large percentage of these buyers are young with a short credit history which makes it difficult at times to obtain a loan.
Starter homes, or homes that are listed in the bottom third of the market range, have a failure rate 6.3%, according to Trulia. This number could increase as more millennials enter the market as the share of starter homes which these new buyers might be eligible for is lower, making them harder to find and are subject to bidding wars.
Low inventory is also one of the causes of price inflation in the housing market. It is the law of supply and demand. When there are fewer homes to choose from it becomes a “seller's market”. Sellers know that they can ask more because the buyer’s options are more limited. Some of the hottest, most competitive markets have the highest rate of transaction failures. Because of the low inventory, buyers can find themselves in a bidding war, which can move the home price above what a lender might be willing to lend to a particular person, or it can move the price of the home to a higher level than an appraisal might support.
Other factors in the failure of a sale to go through can be that the buyer doesn’t know how much he can get a loan for before making an offer and therefore has to let the property go. This may be more common with first time homebuyers who may not know the value of getting pre-approved by their lender. This can be heartbreaking to a young buyer who has fallen in love with a particular home and then finds out that they don’t qualify. They then may find themselves comparing every other home to the one they lost making it hard to be happy with what they can afford.
Or the problem may come with the home inspection or even the appraisal. Sometimes a home that seems ideal when the buyer walks through it might have issues such as foundation problems or it may need a new roof. Other problems that the buyer might feel will be too expensive to fix, or just might make the buyer uncomfortable with the purchase is wiring and plumbing problems. Sometimes a buyer may have just had second thoughts about the house or may have found another that they like better and use conditions added to the contract such as inspection or financing to get out of the contract so that they are free to buy something else.
Banks are getting more thorough in their inspection of the buyer’s ability to pay for the home. They were burned pretty badly during the housing crisis when a record number of homeowners foreclosed on their property. They check and recheck your numbers and ask for more verification than ever before, often causing frustration for buyers- especially those who have gotten loans before the regulations changed. Sometimes it feels like they really truly are asking for your firstborn. If a buyer is not totally upfront with their lender they may find that they are denied a loan after they have gotten an acceptance on their offer.
Some things that a buyer might do to reduce the possibility of having a failed sale are first and foremost to know how much home they can buy. Don’t look at homes that are out of your price range. Be willing to buy a home that needs a little work but make sure that you have the funds to complete the work. It isn’t necessary, however, to only look at older homes. You will be less likely to have issues with an inspection as they have had to pass current permit checks, and new homes are being built in all economic ranges- from starter to multimillion dollar homes.