Buyers backing out of contracts
By JUNE FLETCHER and RUTH SIMON
Wall Street Journal Online
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 last week in Washington, D.C., 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.
Builders surveyed in September were offering these perks:
· "Buy down" interest rates: 20%
· Trade-in programs: 9%
· Delay monthly mortgage payments: 7%
· A free holiday trip: 5%
· Include a car with the house: 4%
· Match future price reductions: 4%
Source: National Association of Home Builders' monthly survey of 450 builders
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. The Irvine, Calif.-based developer built 11,400 homes across the country last year. Among its current projects: Glenmeadow, a gated community in Simi Valley, Calif., where three- and four-bedroom homes range from $1.1 million to $1.3 million.
Caught Between Two Mortgages
Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2 percent range, according to the National Association of Realtors. In September, however, nearly half of the 454 agents responding to an online NAR survey said they had recently experienced cancellation rates higher than that.
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