Will Housing Recovery End Up a 'Failed Sale'?

NEW YORK ( BankingMyWay) -- One more data point showing that the housing recovery is gaining steam: Re/Max reports that U.S. home sales rose 10.3% from July 2011 to July 2012, with home prices up 3.7% over the same period.

"It's reassuring that both sales and prices continue to rise higher on a yearly basis, indicating that this housing recovery is real," notes Margaret Kelly, CEO of Re/Max. "Overall, the picture is getting brighter each month, but what we need for a sustainable recovery is a turnaround in unemployment and better availability of mortgages, especially for higher-priced homes."

So far, so good in 2012. It's not just the unemployment rate or luxury home mortgages, as the Re/Max CEO says, that could help the housing rebound continue its momentum. One under-reported fly in the ointment is the fact that the housing recovery would be greater but for one downbeat issue: Too many home sales fall through at the last minute.

The analytical firm Capital Economics placed a spotlight on the issue and found that 15% of all contracted homes sales fall through for various reasons at the last minute.

In a research note from economist Paul Diggle, Capital Economics says pending home sales were up 6.9% from December through July, yet actual home closing were only up 2.1%.

Some of the reason for the gap in closings compared with the pending sales number are just statistical noise. But Diggle does say the "failed sales" rate has spiked upward.

"We suspect that the bulk of the divergence reflects the fact that cancellation rates have increased," Diggle says. "And this divergence creates problems in a market that is struggling to recover."

Typically, the most common reasons home sales wither on the vine are lower-than-expected home appraisals, failed or troublesome home inspections, bank financing and home title issues.

While he doesn't say why failed sales in the current market are any different from failed sales in real estate markets five, 10 or 20 years ago, Diggle does say it is relatively easy for homebuyers to pull out of a deal these days because they can withdrawal at a "relatively low cost."

It could be simply a matter of a new homebuyer having cold feet finding a low appraisal or poor home inspection enough to sour the deal.

But even so, there is little doubt the U.S. housing market could be more vibrant if agents and homeowners weren't blindsided by so many canceled home sales.

More on real estate:

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--By Brian O'Connell

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