One in Five Pending Sales Failed to Close in Q3

With Q3 + 1 month now behind us, it’s time to take another look at the relationship between pending and closed sales. Recall that in Q2, a record-setting 15.9% of pending sales had fallen through and never showed up as closed sales.

Here’s an update. The graph below shows quarterly King County SFH pending sales volume from the NWMLS, with closed sales offset by one month (since most closings theoretically take ~30 days). In other words, the pending sales data for Q3 includes July, August, and September, while the closed data is for August, September, and October. The blue and red lines represent pending and closed sales (left axis), while the green bars represent the percent difference between closed sales and pending sales (right axis).

Pending & Closed Sales - King Co. SFH

The 2000-2007 average difference between pending and closed sales for the third quarter was just 1.6% (3.7% if you disregard the strange data in 2000 when closed sales exceeded pendings somehow in Q3). In the third quarter 2008, the gap between the two widened to just over 20%.

This is a huge difference, and something I’m amazed the local media is not reporting on. It also makes the monthly report on year-over-year pending sales stats increasingly more useless as a measure of market health. So pending sales were up 15% year-over-year in September. Does that really mean much if 20% of those sales never actually close (vs. just 7% the year before)?

The long-term average for 2000-2007 was that only 5% of pending sales failed to show up as closed sales. We are now at four times that rate. This is not something we should be ignoring when attempting to determine the health of the local market.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

38 comments:

  1. 1
    Charles Dean says:

    It’s funny, because while this number sounds alarming, it’s actually what happened normally in real estate 15 years ago before easy credit. It used to be before easy credit that 1/3 of all signed around deals died, and the #1 reason was financing.

    I’m part of that statistic. One of my listings failed financing just last month. And it was primarily thanks to a loan officer who lied.

    The nice thing is that these people will be out of business soon. It’s frustrating, because he wasted everyone’s time and money and cost me quite a bit myself. But eventually, he won’t be able to afford to keep on doing it.

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  2. 2
    Kevin Lisota says:

    Tim,

    Can you clarify your analysis here? Are you looking at all pending categories, including “Pending Feasibility” and “Pending Inspection”? Or are you looking at those categorized as “Sale Fail Release”, indicating a pending transaction that went belly up. Also, how are you dealing with the change to MLS statuses from earlier this year. There used to be a category called “Subject to Inspection”, which was not considered to be Pending. Now with the new categories, that IS listed as pending.

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  3. 3
    deejayoh says:

    too funny. At first I read you post as it failed due to a loan officer who DIED and I couldn’t believe your comment that “these people will be out of business soon”

    I thought – of course he’s out of business – he’s dead.

    Rate this comment: Thumb up 0

  4. 4
    Dave0 says:

    “In the third quarter 2007, the gap between the two widened to just over 20%.”

    I think you mean 2008.

    Rate this comment: Thumb up 0

  5. 5
    The Tim says:

    Kevin @ 2,

    The analysis is very straightforward. I take the end-of-month reports from the NWMLS, add up the “Pending Sales” reported for each quarter, and compare that to the sum of the “Closed Sales” for the same quarter, offset one month into the future.

    I asked around about the change in STI listings when that happened, and the best information I got at the time was that this did not affect their end-of-month statistics, just what shows up on listing search sites. Also, there was no noticeable bump in end-of-month pending sales at that time, so I’m inclined to believe that the change did not affect these stats.

    Dave0 @ 4 – Thanks, I have changed the post.

    Rate this comment: Thumb up 0

  6. 6
    Magnolia44 says:

    I saw this with several homes in magnolia in sep and oct. The ? Is was it failure to qualify or buyers being wise and chosing to wait longer.

    Rate this comment: Thumb up 0

  7. 7
    David Losh says:

    You changed your hat, again.

    Yes I think the pending report includes the new Pending Inspection.

    I know the NWMLS told me it did not, but by my calculations it must.

    Rate this comment: Thumb up 0

  8. 8
    Charles Dean says:

    Freakin’ dead loan officers always killing my deals.

    Rate this comment: Thumb up 0

  9. 9
    Jillayne says:

    Hi Tim,

    Excellent analysis, as usual. I’m curious to know if the pendings are failing due to buyer unable to obtain financing or if it’s because of problems with the homeowner. Realtors on RCG and SREP are hounding my posts trying to convince me that the new distressed property law is a main cause of increased foreclosures.

    I’m wondering if these pendings that are failing are short sales.

    Without a true box to check on the MLS, I think it would be hard to know for sure. What do you think?

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  10. 10
    Marc says:

    You won’t hear me say it often, but I agree with Mr. Losh. My understanding is that under the old system when a home under contract but subject to inspection (i.e., Active STI) failed inspection and the contract was terminated, the listing never made it into Pending status. Now, as soon as the home goes under contract (whether there’s an inspection contingency or not) it automatically goes into one of the Pending status. Could a conspiracy to inflate pendings be underway? (Cue evil laugh)

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  11. 11
    David Losh says:

    I’m looking around your site here and don’t see radfun as a sponsor or advertiser.

    My comment to the Glen guy this morning was that in my opinion they should pay you up front $200K for giving them credibility.

    You have promoted them and given them very valuable leads.

    The difference here is that this comment may stay on your site, or not as you so choose.

    On the radfun blog site my comment along with about four other comments have been deleted and replaced with more positive spin for radfun.

    radfun is a con job, in my opinion, be careful, and get paid upfront.

    You’re giving them much more than they are giving you. As a matter of fact they are denegrating your reputation.

    Get paid, they owe you a lot.

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  12. 12
    Agent says:

    Tim,
    You are assuming the Pendings never closed, whereas at least in some of the cases the closings took longer than a month. Anecdotally speaking I know of several deals that took 2 or more months to close due to complications related to financing, or they were delayed closings for other reasons (sellers are obviously more flexible with terms).

    Simply skewing the data a month isn’t completely accurate…

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  13. 13
    Bryant says:

    @12, closings that take longer than 1 month will show up in the following month’s numbers, so last month’s numbers will include the longer closings from 2 months before that, etc, so it all evens out.

    Unless you’re saying the “longer closings” trend only just started NOW… in which case, we’d expect to see “Closed” exceed “Pendings” soon as it catches up. Is that your prediction?

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  14. 14
    deejayoh says:

    Tim,
    You are assuming the Pendings never closed, whereas at least in some of the cases the closings took longer than a month. Anecdotally speaking I know of several deals that took 2 or more months to close due to complications related to financing, or they were delayed closings for other reasons (sellers are obviously more flexible with terms).

    Simply skewing the data a month isn’t completely accurate…

    How is that skewing the data? he is showing monthly pendings vs. monthly closings. If closings are really taking longer, then it will even out over time and in some future month closings could exceed pendings. Perhaps he should have he titled it “One in Five Pending Sales Failed to Close in Q3 w/in 30 days” to be 100% perfectly accurate, but if you understand a little bit of algebra you can see it isn’t skewing the data.

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  15. 15
    Agent says:

    Shifting the data a month to align it so as to show what pending sales closed is not accurate. It does not mean the sales didn’t close as what is being implied i.e. the sale failed comletely, but rather it didn’t close. There is a clear difference.

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  16. 16
    deejayoh says:

    you’re right. It’s all fine. The market is good. And our economy is fundamentally sound too!

    Rate this comment: Thumb up 0

  17. 17
    Mike2 says:

    Sales are so brisk that people don’t have time to close on all the houses they purchased. Sometimes you have to let a few slide.

    Rate this comment: Thumb up 0

  18. 18
    Mike2 says:

    As a side note –

    Tim, when are you going to get your RE license and join the NWMLS so you have unbridled access to the data?

    Or have you?

    Rate this comment: Thumb up 0

  19. 19
    Ray Pepper says:

    Tim is getting his license? WOW! Our secretary on the homepage, who gives the tutorial, just today said he was rather handsome with the new hat and all. She desires Tim to be on the 500 team…..Hmmm…Maybe I can set something up.

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  20. 20
    James Lupori says:

    My focus is on the Kenmore market. In my last look at the numbers, almost 40% of the pending sales from October (only 18 by the way) were either bank-owned properties or short-sales. Tim’s data would seem to reflect the brutal fact that pending sales follow the old dictum: garbage in, garbage out.

    Face facts: the current economic climate is extremely difficult, lenders aren’t being generous, lots of properties are de facto “distressed,” and, I suspect, home values will continue to fall.

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  21. 21
    obelus says:

    So, bank sales and forclosures are skewing data to the positive? Sounds about right. Hey bubble-deniers, where are you with your stats? Yep, reality creeps in and is getting more real. Wait till next month. No denying that the market is non-existent.

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  22. 22
    BOY says:

    From my personal experience, Pendings are failing mostly due to lending problems frorm banks.

    From my personal experience, I recently went for a loan for a new home from Camwest in Redmond. Though I and my wife work for Microsoft and we have excellent credit will couldnt get a loan approval with 10% down payment.

    I guess its mostly stricter lending conditions/banks not having money to lend thats affecting the Redmond real estate market.

    Rate this comment: Thumb up 0

  23. 23
    Alan says:

    I think this data is skewed because the NWMLS data reports total current pendings instead of new pendings. I don’t know how to correct for it either without more data from the NWMLS.

    I also think the NWMLS pending numbers are skewed towards the high end since the effectively double count properties that are pending for more than one month.

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  24. 24
    what goes up must come down says:

    Ummm BOY I say BOY (Foghorn Leghorn impression) “I guess its mostly stricter lending conditions/banks not having money to lend thats affecting the Redmond real estate market”

    I think we could say this about every real estate market.

    The boy’s about as sharp as a bowling ball.

    Rate this comment: Thumb up 0

  25. 25
    SpongeBrad says:

    These data are a little weird. If it’s true that a pending can be counted for multiple months, but a closing can only be counted once, then the discrepancy could be attributed to properties spending a longer time in a pending status. I’ve been told by a local RE agent who recently gave up dealing with distressed properties that this is exactly what happens with those properties (and why they won’t deal with them any longer).

    On the other hand, this also means that we should be really careful in interpreting pending sales (which was maybe the point of the whole post).

    Rate this comment: Thumb up 0

  26. 26
    David Losh says:

    “I’m wondering if these pendings that are failing are short sales”

    #9 Excellent point.

    I have a short sale listing that has shown Pending for months. One buyer backed out after the thirty day lender approval period, it’s hard to get lender approval withing sixty days let alone thirty. The second offer was rejected after waiting around for forty five days.

    This last offer is now forty days out and is having a financing issue to get closed. They have 20% down, but only used the husbands income on a $312K purchase.

    The Broker’s Price Opinion came in between $320K to $360K with two exact homes selling and closing within a block on my listing for $340K and $351K.

    In my opinion the agents have been unrealistic in the way they have pursued my listing.

    I’m also more inclined not to list short sale properties. In my opinion many agents are unprepared for the process and many buyers are thinking they are going to steal something.

    In my office there are currently eight short sales in process that are, in some cases, six months as a Pending sale. My office does follow these properties to a successful closing because the broker has assigned an agent to deal with these short sale transactions almost exclusibvely.

    Most agents, or real estate offices, would simply let these transactions go away in favor of doing more profitable business.

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  27. 27

    YOU NEED TO WALK ON WATER TO GET APPROVED FOR A MORTGAGE NOW-A-DAYS

    See the proof from Kiplinger Report in part:

    “…..To reduce demand and risk in the face of the subprime mortgage meltdown, Fannie and Freddie (and the lenders whose loans they buy) had already made it harder to qualify for a mortgage. Subprime borrowers were affected first, but now even borrowers with the best credit are feeling the squeeze.

    To get a mortgage now, “you’d better walk on water,” says San Diego mortgage broker Victoria Johnson. And she’s only half kidding. Lenders acknowledge that their credit tightening is really a return to normal lending standards, last seen in about 2000….”

    The rest of the URL:

    http://www.kiplinger.com/magazine/archives/2008/08/how-to-qualify-for-a-mortgage-in-2008.html

    I predict its gonna get much worse as unemployment worsens too. Also, watch for big surges in mortgage interest rates too [we’ve already seen them the last month or two]. Its hit the fan folks.

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  28. 28
    deejayoh says:

    I think this data is skewed because the NWMLS data reports total current pendings instead of new pendings. I don’t know how to correct for it either without more data from the NWMLS.

    I also think the NWMLS pending numbers are skewed towards the high end since the effectively double count properties that are pending for more than one month.

    Alan – are you sure about this? What would change the picture quite a bit. In my comments, I was assuming it was new pendings only but you bring up a good point.

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  29. 29
    deejayoh says:

    Scratch my comments above. I am relatively certain that pending sales reported in a month are only NEW pendings, and the way Tim is treating this is correct (or at least consistent with NWMLS)

    See this annual report for 2006 — page10 – the NWMLS shows pendings for each month and they add them together to come up with a total pending listings for the year. The implication here is that each pending sale reported is a discrete event – otherwise adding them together would overstate pending sales for the year

    See also the monthly report for Feb 2006 here, and you will find the same total for pendings (2,999) as on the annual report. I confirmed January as well. The implication here is that there is that the NWMLS did not remove any pendings from the monthly totals when putting together the annual report

    So unless the NWMLS is treating this data incorrectly as well (admittedly a possibility) it appears that pending sales are NOT reported in multiple months – rather they are reported in the month they go pending and then not included again if the closing stretches into the next month.

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  30. 30
    The Tim says:

    People raise a lot of good questions about the validity of the pending sales statistics. I might try calling the NWMLS to get some clarity on these issues. If it is true that either 1) formerly STI listings are now counted in the end-of-month pending stats or 2) pending sales are counted more than once if they take longer than 30 days to close, then using the pending sales statistic is even more useless than I thought.

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  31. 31
    deejayoh says:

    per my comments above Tim, unless they changed their treatment since 2006 – I am pretty sure what you are doing makes sense.

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  32. 32
    David Losh says:

    Yes, in my transaction there were two pendings last month and the closing is this month. Actually there were three pendings because the sale that is closing was first Pending Inspection then Pending for when we got final loan approval.

    What do 2006 Pendings have to do with anything?

    Yes they changed Pendings in 2008.

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  33. 33
    mukoh says:

    Why not just use SOLD and closed sales to avoid confusion? There are pendings out there BTW that can go 90 days easy before closing.

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  34. 34
    deejayoh says:

    2006 was an example to show that the way NWMLS reports Pending Sales, they are shown only once, not in every month that they are pending. Because someone suggested they might be reported multiple times.

    The change in 2008 was to add three new statuses to “Pending” and throw out STI. It was not a change in the way that the math on pending is done, unless you have some evidence that contradicts the example above.

    Three more types of issues are going into Pending since June (STI, Feasibility, and BU requested). – and thus more possible reasons for failure. It stands to reason there would be an increasing rate of failure irrespective of the financing problems just due to this. The trouble in the mortgage market just compounds the trend

    But the widening appears to have nothing to do with closings taking more than 30 days as was suggested in posts 12, 23, and 25 – because closings appear to be only reported one time – no matter what the type. FWIW I have looked at 8 years worth of those monthly updates and NWMLS never changes the logic in those reports

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  35. 35
    vxxcvxxc says:

    i am still surprised that people are trying to get $280k or $299k for 850 sqft condos. If everything is deleveraging and if prices for everything is declining then why is housing still so high? 850 sqft could rent for max of $1200 and once you take out the $400 for dues and taxes you would see an actual return of $800 on rent and so with a multiple of 200 isn’t this condo woth $160k?
    Am i naive?

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  36. 36

    […] represents an MOS value at or close to 6.0. Also keep in mind that whatever the reason, pending sales have become increasingly disconnected from closed sales recently, which means that these statistics are likely understating the magnitude of the […]

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  37. 37

    […] at the relationship between pending and closed sales. In Q2, 15.9% of pending sales fell through. In Q3, it was […]

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  38. 38

    […] represents an MOS value at or close to 6.0. Also keep in mind that whatever the reason, pending sales have become increasingly disconnected from closed sales recently, which means that these statistics are likely understating the magnitude of the […]

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