Sellers, Don't Count Your Chickens Yet

Just in the last few days, we've started to see homes in Greater New Haven come back onto the market, after a sale fell through.  When we think about how many offers now are made without contingencies, in order to improve a buyer's chances of winning a multiple bid situation, the percentage of DFTs (deal fell through, as we call them in the trade) is actually higher than it appears.  People who made contingency-free offers did not always leave themselves wiggle room to get out of a contract, so that the sellers likewise couldn't get out.  Those contracts would therefore be sticking, meaning that the 80% or so of sales with contingencies are producing 100% of the DFTs.

Why would that be happening?  There is always some amount of buyer's remorse. That house you were bidding on the night before doesn't seem as great in the light of day.  However, it is likely that more homes are coming back onto the market because the buyers can't perform. Either they can't borrow enough money--maybe they bid too high in the last round of negotiations, or maybe they never had quite the credit they thought they did--or it's just coming at higher rates, as rates are inching up.  Sometimes it's fees, or flood insurance, or repairs that will cost more that ends the deal.  

In weaker markets, many of those contracts would be adjusted downward by both parties, especially if there are major defects that come to light, or if the home doesn't "appraise out" at the price being paid.  That can easily happen in a rising market, because appraisers can only use closed sales, so current contracts at higher amounts can't be counted.  In this time of short supply, the sellers are more likely to put the house back on the market, and try to resell it at a comparable price.  

When one house has this problem, it can also cause a domino effect, where several homes each depend upon the buyers selling their previous house.  One transaction can ripple through other sales. Even if a sale sticks, a lower price may lower the equity available for the next purchase.

What does all this mean?  It means that the market is beginning to show the downside of rising prices, where buyers face hard upper limits on what they can pay.  Sellers should remain flexible, roll with the punches, and not get greedy.  A deal that seems too good to be true may be just that.  If everyone works together, a good result may occur for all parties.

Sales Around the Country This Spring

It's always interesting for me to visit with my friends from other large independent companies around the country, especially when the market is changing rapidly.  I just got back last night from Charlotte, and the mood from other places is almost giddy.  The feeling nationally is that market activity will be back within 10% of normal levels by the end of this year.  That's a big improvement from the projections we heard only last fall, when most experts thought that historical norms of housing turnover would not return before 2015.

Now the commonly heard complaint is lack of inventory.  There simply aren't enough properties for sale to meet the demand. The average number of months of inventory seems to be about three.  Well-priced, well-maintained homes in many areas get multiple offers--sometimes dozens--within a few days or weeks of being listed.  Once they go under contract, the problem that arises is that appraisals have been lagging, as they always do, so there are issues with mortgages.  In some cases, sellers and their agents are going back to the highest bidder and telling them that they need to release all the contingencies, including mortgage, or they will proceed to the next offer. New construction is hot everywhere.

Here in Connecticut, we're recovering slowly.  (Maybe that's why they call us the Land of Steady Habits?)  We have just over eight months of inventory overall in our county, with some towns much higher than that.  Guilford, for example, has 17 months' supply.  Our supply of million dollar homes will last several years.  So, for us, the report from other places tells us what the future will be like.  And it will be great.  However, if you are a buyer, my advice is to buy right now!

Mortgage Changes

We've talked about mortgages before, but it's always worth pointing out when things change. The appraisal issues--time to get one and values obtained--were front and center near the end of last year. Now it's the paperwork and length of time involved in processing an approved loan. I'm not sure that most buyers realize how much documentation is involved in getting a loan from approval to closing. Almost all loans now come approved with contingencies--various types of proof that are needed to substantiate the loan or the loan amount. To many people who have been through the process in the past, what gets requested now can seem absurd. Even to those of us who have been steeped in the industry, the constant changes in RESPA requirements seem bewildering and onerous. There is even a three-day period now between the closing statement production and the closing.

For buyers in a hurry, these rules can be infuriating. Perhaps even more so, sellers--who may not have gotten a loan recently, and may vastly underestimate what's involved today--are often unsympathetic and extremely annoyed. Even attorneys weigh in on the difficulty of scheduling a closing these days.

A good analogy might be the security checkpoints now present at every airport. Comparing them to what was necessary 20 years ago is almost impossible--it would be like comparing a stagecoach journey to a space trip! In addition, many of us feel that we're just trying to avoid a repeat of the last disaster; in one case, 9/11, and, in the other case, the financial meltdown of 2008. Whatever the reason, and whatever you may privately believe about how much the new regulations will prevent similar problems, many of these procedures are here to stay. So pull up a chair, and wait patiently for the closing.

Tough to the Finish

We had a buyer panel a couple of weeks ago, with people who'd bought their houses from us recently. I was surprised at the number of problems that came up right before, or even during, the closing. Two of the three were packed and ready to move before they knew whether or not the other party would be able to perform.

While we in the business all know that the transaction doesn't end with the signing of the contract, even we didn't quite realize that the obstacles in a sale are moving farther and farther down the pipeline. It used to be that the big hurdle was getting the contract signed. Then it was the inspection, and renegotiations after that. Next came the appraisal. Now it's the financing, which is often so problematic that the contingencies last right up until the closing day.

The good news is that all the transactions went through, even though one poor buyer started with six weeks to move and ended with two days. It was also good news that no one thought that his or her Realtor was to blame. It shows, however, that moving (no matter what we tell you) is hard to make easy. Leave plenty of time; expect things to go wrong; don't sweat the small stuff; and keep a sense of humor!