Buyers Market : Pending Sales Down and Contract Cancellations Up

Expect a softer housing market this fall.

Pending Home Sales Slip

After 3 straight months of gains, the Pending Home Sales Index slipped 1 percent in July.

The monthly report is published by the National Association of REALTORS® and measures the number of home under contract to sell nationwide.

The Pending Home Sales Index is closely watched by Wall Street and analysts because it’s a forward-looking housing market indicator.

Different from most housing market data, though, Pending Home Sales forecasts a future housing market event. In this case, the Existing Home Sales report.

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16% Cancellation Rate In June

In its methodology, the Pending Home Sales Index states that 80% of homes under contract close within 2 months, with most of the remaining home going to closing within Months 3 and 4.

Therefore, based on July’s Pending Home Sales Report data, we would expect home sales data to taper into the fall buying season, but this year, they may taper more than normal.

This is because, in a separate report, the National Association of REALTORS® said that contract cancellation rates are running high. As compared to a 4 percent contract cancellation rate in May 2011, June and July both registered 16 percent.

This means that fewer homes tallied as part of July’s Pending Home Sales Index will show up as “closed sales” this fall.

Time To “Make A Deal”?

Contracts can be canceled for any number of reasons including more stringent mortgage guidelines, appraisals falling short of the purchase price, and changing mortgage loan limits.

For home buyers everywhere, the Pending Home Sales Index may represent an opportunity. Not only are fewer homes going under contract nationwide, but with cancellation rates spiking, sellers may be more willing to “make a deal”.

Like all real estate, though, we can’t forget that the pace at which homes go under contract is a “local” statistic; we can’t assume national data applies to all markets equally. Your home market, for example, may out-perform — or under-perform — the national average.

Home Affordability Peaking

With home prices low and mortgage rates down, buying a home has never been more affordable. In many cities, it’s ever cheaper than renting. If you’ve thought about homeownership or moving up to someplace bigger, now would be an opportune time to look.

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