Why is the Number of Pending Sales So Much Greater than Closed Escrows?
For months now, I’ve been stating in my weekly sales blogposts that many of the pending real estate listings reported are short sales and therefore take a long time to close. This keeps our listings that are pending under contract percentage up artificially high because those listings stay at the pending status month after month. And the number of listings that actually close escrow remains low in comparison.
There are several reasons the pending sales numbers are high but actual closed escrow numbers are not. This was pointed out to me by a southern California colleague, Michelle Silverman, a Realtor in La Jolla, California.
Michelle recently shared this Wall Street Journal blog post, Three Reasons Pending Sales Isn’t a Reliable Indicator. The article discusses three reasons homes on the real estate market don’t close escrow after getting into contract. One of the reasons is the one I state week after week, short sale pending contracts. While the buyer and the seller wait for the seller’s short sale lender to approve the offer, the home sits in pending status on the multiple listing service. Often the transaction falls through because the buyer gets frustrated with waiting for months and finds another home to purchase and sometimes the short sale lender does not approve the offer.
Another reason that homes under contract don’t close escrow is that mortgage rates have gone up, albeit a small amount. However this raise in rates can knock out buyers who qualified at a certain interest rate when they first began their home search. They aren’t able to go through with the purchase because now they don’t qualify for the higher monthly payment. Buyers may also choose not to purchase due to the higher interest rates.
And the third reason pending sales don’t close escrow as discussed in the WSJ blog has to do with the latest difficulty besetting the real estate market: appraisals. There is a new law, The Home Valuation Code of Conduct, or HVCC, adopted May 1, 2009. The law was formulated to elevate the independence and accuracy of the appraisal process. To keep influence low, lenders are now required to use appraisal management companies. In theory, this should be a positive move. In actuality, many of the appraisers hired by the appraisal management companies don’t come from the area where the property is located and sometimes don’t even have access to the local MLS. For example, I’ve heard of ill-informed appraisers using property sold in Gilroy as a comparable sale for property in Morgan Hill. Some sales are falling through at the last minute due to under-valued appraisals.
Lawrence Yun, NAR chief economist, cautions that there could be delays in the number of contracts that go to closing. “Closed existing-home sales have improved but are coming in lower than expected because some contracts are delayed or falling through from the application of new appraisal rules for many transactions,” he said. “Rises in contract activity show buyers are becoming more active even as they face much more stringent loan underwriting standards. Speedy clarification of the appraisal rules could smooth a housing market recovery and support the overall economy.”
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Gretchen Merrick
cell (408) 892 9015
