One in Four Pending Sales Failed to Close in Q4

Now that 2008 Q4 + 1 month is in the past, let’s have an updated look at the relationship between pending and closed sales. In Q2, 15.9% of pending sales fell through. In Q3, it was 20.7%.

Below is the updated chart including 2008 Q4. It 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 Q4 includes October, November, and December, while the closed data is for November, December, and January. 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 fourth quarter was just 5.0%. In the fourth quarter 2008, the gap between the two widened to 27.3%.

Yet again, the number continues to grow, and the local media continues to ignore the increasingly alarming discrepancy. Keep this widening gap in mind when agents quoted in the media refer to increasing pending sales as some sort of indication that the market is turning around. Pending sales may be increasing, but more and more of them are never turning into closed sales.

I realize that last quarter there were some who theorized that this discrepancy was the result of the NWMLS rule change in July that caused homes in “Subject to Inspection” status to be pulled from the publicly-viewable listings. However, I have spoken with numerous individuals that have asked various people at the NWMLS (including their “statistician”) directly about this change, and each one has been assured that the new rule did not affect the way that the end-of-month statistics are compiled (i.e. – the definition of “pending” in the monthly reports has remained consistent, despite the rule change).

Are buyers getting cold feet? Is financing falling through? What explanation is there for one in four pending sales to never reach closing?

  

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.

37 comments:

  1. 1
    Jon says:

    Pending Inspection – Easiest way for a buyer to get out of the contract. Most deals fail here, regardless of what the statistician said at the NWMLS. They’re idiots.

    Pending – Past most arbitrary items, though financing is still the biggest hurdle.

    Right now, many buyers are not closing, but not walking away from the contract due to the stimulus package and the potential for a $10k tax credit windfall. I know of 8 such contracts that should have closed by now.

    Financing is the #1 reason why buyers fail to close on time right now… mortgage broker’s say they can close the loan, and then they get down to the final few days and they can’t close the loan… The buyer then has to go to the seller and ask to change their mortgage companies and an extension in the closing date… of which the seller may or may not agree to do.

    The new OSS (on site sewer) law in King County also may be slowing some contracts down, though I am interested to hear if you have had any problems with that new law, Tim.

    Personally, I have seen no buyers with cold feet… once they make the offer, they are going through with the purchases, unless they can’t come to terms on the inspection, or they can’t obtain financing.

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  2. 2
    The Tim says:

    RE: Jon @ 1 – Jon I think maybe I wasn’t clear enough. The statistician at the NWMLS has said that “subject to inspection” homes are not being included in the “pending” number reported at the end of the month. So sure, lots of those fall through, but that wouldn’t show up as a “failed sale” in the stats I’m reporting here.

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  3. 3
    LeftOverpricedSeattle says:

    It’s the bottom, Ardell sez so!

    Rate this comment: Thumb up 0

  4. 4
    Hugh Dominic says:

    Seems like simple “cold feet” would be a logical cause for this – if you were watching the news in Oct/Nov/Dec it was pretty grim and even the most ardent Pink Pony admirer might have put the brakes on.

    Note, I think with the news from Boeing, Starbucks and MS we may see a similar gap this quarter.

    And I agree, it would be nice to see someone in the media pick up on the disparity between the two figures – especially since RE industry spokespeople are always quoting pending sales stats as “proof” the market is picking up….

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  5. 5
    Kary L. Krismer says:

    If I had to guess, it’s lenders getting tougher on the condition of the property, roofs especially. Combine that with the fact that it’s mainly lower priced properties selling, and getting a new roof might not be a realistic option.

    It could also be layoff notices.

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  6. 6
    Kary L. Krismer says:

    By Hugh Dominic @ 4:

    Seems like simple “cold feet” would be a logical cause for this – if you were watching the news in Oct/Nov/Dec it was pretty grim and even the most ardent Pink Pony admirer might have put the brakes on.

    Cold feet could likely result in the loss of earnest money, although many deals are written with incredibly small amounts . . . .

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  7. 7
    Hugh Dominic says:

    By Kary L. Krismer @ 6:

    Cold feet could likely result in the loss of earnest money, although many deals are written with incredibly small amounts . . . .

    Good point. Showing my ignorance…

    Question Kary – could buyers have cold feet ” but disguise it as something else?

    And what is a typical earnest % percentage these days?

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  8. 8
    Alan says:

    Maybe the same “buyers” make an offer on another house when the first one falls through.

    So new buyers are slowly trickling into the market, but many of them aren’t leaving.

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  9. 9
    Kary L. Krismer says:

    Hugh, once the inspection is passed, the only thing left is typically financing, and the buyer does have to make an effort there. The seller might not press it too much, however.

    As to amount, there is no standard percentage. I’ve seen them as low as $500 and as high as $100,000. Low is more common now than two years ago.

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  10. 10
    CostcoMike says:

    I know of 1 case of lay off’s being the case. My sister recently decided to buy a home and 30 minutes after she signed she was laid off. Her employer knew she was going to make the offer and then sign after it was accepted but they said nothing. She was lucky enough the builder was kind about the situation.

    I am curious how often this may be the case.

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  11. 11
    Kary L. Krismer says:

    Layoffs would typically result in the financing not going through, giving the buyer an out. I believe the banks ask about plans to layoff, not just the current status.

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  12. 12
    WestSideBilly says:

    Part of the increase is also statistical – 1000 sales falling through out of 10000 (10%) doesn’t lookt as bad as 800 falling through out of 4000 (20%).

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  13. 13
    tomtom says:

    What about short sales? Offer goes in and it takes months for the bank to accept or decline.

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  14. 14
    deejayoh says:

    By tomtom @ 13:

    What about short sales? Offer goes in and it takes months for the bank to accept or decline.

    I guess one piece of information that is missing in this analysis is the “inventory” of pending sales. If that is growing, then you probably have an issue of deferred closures rather than failures (e.g. now taking more than 30 days). I kind of doubt that is the case, but it could be.

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  15. 15
    Kary L. Krismer says:

    Short sales could be a large part of it. There seems to be some sort of an odd dispute over how short sales are reported (when they go STI/Pending), but a lot of them go to the bank and don’t get approved.

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  16. 16
    biodieselchris says:

    I really wish you had a link at the top that just went to a charts page. I love the charts (for example just now I wanted to see how 8,613 homes for sale compares to the last few years in graphical form).

    Anyways…..

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  17. 17
    The Tim says:

    RE: deejayoh @ 14 – Regarding short sales, or other sales that for some reason are taking longer than a month to close – Eventually these sales are closing though, right? When that happens, they will artificially inflate that month’s closed statistic.

    The only way that short sales or other long-pending sales could cause a continually-increasing discrepancy between pendings and closings like we’re seeing here is if the number of short sales is itself continually increasing. I concede that this is certainly a possibility.

    RE: biodieselchris @ 16 – That’s a good idea. I don’t currently have a single page that has all the latest charts, but I’ll think about making one and linking it somewhere prominent.

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  18. 18
    Kary L. Krismer says:

    I can’t give you any stats on it, but from talking with escrows, there’s a large percentage of short sales that don’t close (flip). For one thing, the buyer might just get tired of waiting for the bank to make a decision. The short sale addendum does have an optional clause that allows buyers to walk prior to lender approval, and I’d imagine most buyers select that option.

    Also, WR recommends that agents include form 22 NFW, which allows buyers to walk if the property ends up in foreclosure in certain instances. I’m not sure how many agents actually use that addendum, but that could be another reason for short sales not closing.

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  19. 19
    patient says:

    The Tim, with this in mind perhaps it could be worth considering calculating MOS from closed and not pending sales?

    Rate this comment: Thumb up 0

  20. 20
    mukoh says:

    I think it is also appraisals, which are getting hammered by banks to bring in the real number after compupraisals.

    Rate this comment: Thumb up 0

  21. 21
    geon says:

    One out of four seems about right, from the houses I’ve been following.

    Rate this comment: Thumb up 0

  22. 22
    EconE says:

    RE: Kary L. Krismer @ 5

    I agree with Kary here. When I look at many of the roofs up here in the PNW it seems as if they take the brunt of the “climate”…moss growing on the northern exposures, rotted wood shakes etc.

    It’s wet up here…hard on houses…period.

    Far too many homes I have seen need a new roof and about 30 gallons of methylene chloride to strip the weathered paint off in order to give the house a proper refinishing. Wood rot also seems to be an issue. Then there is the condensation problems I’ve seen in the older double pane windows. Cracked driveways seem pretty common also.

    Down in L.A. …I’ve heard from a well respected agent, that many deals fell through because of earthquake damage…primarily chimney and foundation damage.

    Don’t get me started on the interior factor. Most sellers seem to want “remodeled” prices for their “vintage” homes.

    Apparently most people just don’t realize how quickly you can burn through $$$’s (and time) restoring a home….even if you are able to do much of the work yourself.

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  23. 23
    Ray Pepper says:

    RE: LeftOverpricedSeattle @ 3

    Ardell says its the bottom? Well in that case I’m all in! Wait a minute…

    Who or what is an Ardell? Just in case before I buy buy buy!

    Rate this comment: Thumb up 0

  24. 24
    dancingeek says:

    RE: Ray Pepper @ 23
    She is a blogger on Rain City Guide.

    http://www.raincityguide.com/2009/02/09/sunday-night-stats-at-bottom/

    Rate this comment: Thumb up 0

  25. 25
    Ray Pepper says:

    Oh no……………..Not that outfit again………Ardell and The Mtg Porter (or something like that) . I remember them. They roughed me up when I began blogging. I was termed a troll. I thought it was toad until I looked it up. Then my blogs got deleted. Hmmmmmmmmmm.

    I bet they would have been nicer if I mailed them a 500 shirt.

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  26. 26
    Ray Pepper says:

    BTW any Bubble blogger Need Seattle Home Show tickets email me. We have a bunch extra in our booth pack. However, you must watch our video as you stroll by……………..Its 140 minutes………….no chairs please

    http://www.seattlehomeshow.com

    Rate this comment: Thumb up 0

  27. 27
    S-Crow says:

    Appraisals are making it very difficult for some to refinance. On the other hand, it’s not the appraisal so much as it is the lopsided amount of homes with 80/20 financing and/or generally high LTV’s.

    There are a lot of Subordinations going on.

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  28. 28
    Objectivity says:

    You have to love Ardell’s analysis. There are 5 stupid buyers out there, so the bottom must be in.

    Rate this comment: Thumb up 0

  29. 29
    Mike2 says:

    By Ray Pepper @ 23:

    RE: LeftOverpricedSeattle @ 3

    Who or what is an Ardell? Just in case before I buy buy buy!

    A google search confirms an “Ardell” is a false eyelash.

    Rate this comment: Thumb up 0

  30. 30
    Ray Pepper says:

    RE: Objectivity @ 28

    Well you have to think like an Agent. If she has 5 Buyers closing at 2 -3 % a clip thats definitely a bottom for her. See its all in your perspective of a bottom.

    Rate this comment: Thumb up 0

  31. 31
    patient says:

    One look at the volume chart is really all you need to know regarding the state of housing and where it’s headed. It looks like in an appreciation market King Co closes about 6000 units in a quarter, the last quarter we barely edge over 2000 units…a price bottom will for sure not occur until after the volume has recovered.

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  32. 32
    mukoh says:

    My favorite chart is compete.com
    raincityguide.com vs. seattlebuble.com vs. johnlscott.com

    Rate this comment: Thumb up 0

  33. 33

    Interesting post! We looked at the number of Seattle Redfin deals that were pending but failed to close. We’re below the NWMLS average but still see a significant number of deals fail.

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  34. 34
    Kary L. Krismer says:

    Matt, can assuming you do short sales on the buyers’ side, can you separate those out to see if they were higher than your average?

    Rate this comment: Thumb up 0

  35. 35
    Kary L. Krismer says:

    By Ray Pepper @ 25:

    Oh no……………..Not that outfit again………Ardell and The Mtg Porter (or something like that) . I remember them. t.

    Rhonda and Jillayne actually have some interesting posts, that are not just nonsense. For example, Rhonda raises a lot of interesting mortgage issues, like changing the conventional limit for investors from 4 to 10 houses, and Jillayne was very early bringing the short lived excise tax on short sales to peoples’ attention. Also Jillayne is willing to admit mistakes.

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  36. 36

    […] As recently as February of this year, I had received assurances that this change in pending statuses was not affecting the end-of-month statistics being reported by the NWMLS. We specifically asked their “statistician,” who assured us that the definition of “pending” used to calculate the end-of-month statistics had remained constant. […]

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  37. 37

    […] an MOS value at or close to 6.0. It is also important to remember that whatever the reason, over twenty-five percent of pending sales are not making it to closing, which means that these statistics are likely overstating the magnitude of the […]

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