Now is not the time to close the deal, many buyers are deciding
By June Fletcher and Ruth Simon
A little over a year ago, buyers couldn't wait to sign contracts to purchase homes. Now, many can't wait to get out of them.
With real-estate prices falling around the country and even pro-industry trade groups predicting further declines over the next year, buyers are backing away from deals in droves. At a semiannual housing forecast conference in Washington, D.C. recently, economists reported that contract-cancellation rates for big builders were running around 40 percent — about twice as high as last year's levels. Anecdotally, real-estate professionals say they are seeing a similar dynamic in existing-home sales.
Some of the cancellations are by people who signed new-home contracts at one price months ago, haven't yet closed, and are now stunned to see the builder drastically cutting prices on identical properties. Some are by speculators caught short by other investments they can't unload. And some are by people trapped in a chain reaction: They can't sell their old home — or the buyer has canceled the contract — so they are being forced to cancel the deal on a new house they are buying somewhere else.
"There are a whole lot of people running from contracts," says Alexandria, Va., real-estate attorney Beau Brincefield. He is currently representing more than 50 buyers who are seeking to get out of contracts on single-family homes, townhouses and condos, compared with none a year ago.
Even though it may mean losing a deposit that could run tens of thousands of dollars — deposits typically range from 1 percent to 5 percent of the purchase price — many buyers are deciding that is less onerous than the alternative. With median new-home prices already 9.7 percent below last year's levels, according to the U.S. Commerce Department, bailing out now may be less painful than committing to an expensive, and possibly depreciating, investment.
It's a far cry from the home-flipping exuberance of the past few years, when rising home values fueled a buy-and-sell mentality among millions of homeowners, and trading up became a staple of reality TV and home-improvement shows.
New-home builders are taking a big hit from record numbers of contract cancellations, or "kickouts." Fort Worth, Texas-based D.R. Horton Inc., the nation's biggest developer, says its cancellation rate is currently 40 percent, compared with 29 percent a year ago. Meritage Homes Corp., in Scottsdale, Ariz., is reporting a 37 percent kickout rate, compared with 21 percent a year ago. And Standard Pacific Corp. says that 50 percent of its contracts fell through in the third quarter of this year, compared with 18 percent for the same period last year. ...Caught Between Two Mortgages
Cancellations by buyers of existing homes are up as well....
With the market cooling, buyers have decided they can buy a similar property for less. For others, adjustable-rate mortgages have gotten more expensive, making a home purchase too costly,*Shallis says. ...
Rising Interest Rates
Kickouts were high nationwide in the late '80s, and in California and New England in the early '90s, spurred by massive job losses. But until now there's never been a period where cancellations have spiked in the absence of a recession, according to Amy Crews Cutts, deputy chief economist at Freddie Mac.*Cutts says the current jitters are largely a result of investors fleeing the housing market in the last few months, which "slammed [it] into reverse," and consumers' fears that the bubble had burst. Rising interest rates earlier this year also gave buyers who hadn't yet closed on their homes cold feet. The result: a huge backlog of unsold homes, which could further depress prices.
But mortgage rates have fallen recently, and if they stay below 6.5 percent,*Cutts expects that buyers will regain their confidence by late spring, causing cancellations to ease up. Vienna, Va., housing economist Thomas Lawler agrees, but says builders must continue to cut their production and sell off their inventory so supply and demand can get back in balance. "Builders need to take a bullet," he says.
... To keep deals from falling apart, builders are offering everything from free vacations and cars to help with closing costs and mortgage-rate buy-downs — and they are cutting prices, too. "They're hungry," says Gopal Ahluwalia, director of research at the National Association of Home Builders, the organization that sponsored last week's forecast conference.
Most of these incentives are dangled to attract new customers. ...Some are even offering to drop the selling price after contracts have been signed.
--Published Nov. 6, 2006
This article is reprinted by permission from RealEstateJournal.com