Friday, November 03, 2006

WSJ: The New Word in Home Sales: 'Canceled'

by Bill McBride on 11/03/2006 03:44:00 PM

From the WSJ: The New Word in Home Sales: 'Canceled' (update: for those without WSJ AZCentral has the story too).

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.
A few stats:
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.
And on existing homes:
Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2 percent range...

Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., says that roughly 22 percent of his sales have fallen apart before closing this year because the buyers backed out, up from 10 percent last year.
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...