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Contracts Vs Settlements

November 7, 2013  |  by Chris Sicks

This year, more contracts have been written on Washington- and Baltimore-area homes than in any year since 2006. More than 72,000 sellers signed sales contracts with buyers during the first three quarters of 2013. That’s a 6-percent increase over 2012.

Back in 2006, the year that the real estate bubble had just begun to burst, we also saw 72,000 resale contracts signed from January through September. You might, therefore, think 2013 represents a return to the level of market activity we had back then.

That would be true—if a market is measured only by the number of signed sales contracts. Buyers are, in fact, as busy now as they were six years ago.

However, they are writing many contracts that never go to settlement.

Just 58,000 settlements were recorded from January through September this year. Settlement, also known as “closing,” is when the buyer and seller sign a big stack of papers and ownership of the property actually changes hands.

Thousands of sales contracts are falling through every year, and it’s happening at a higher rate than it did in 2006. More than 73,000 settlements were recorded during the first three quarters of 2006—even more than the number of contracts. (That’s possible because settlement occurs weeks or months after a contract is signed.)

Why would we have 15,000 fewer settlements this year than in 2006, if pending contracts were the same?
Here are just two of the reasons: short sales and stricter lending criteria.

Short sales were almost non-existent seven years ago. Now, thousands of homes are listed and sold for less than the owner owes the bank. But because it is a difficult process that hinges on the bank’s willingness to take a loss, many of the contracts written to buy a short sale never go to settlement.

Lending criteria has also become much more stringent than it was seven years ago. Lenders are scrutinizing loan applications and rejecting many of them. Those contracts never make it to settlement, either.

—Chris Sicks has written about the local real estate market for the past 20 years. Contact him by e-mail realestate@sicks.com

Contracts vs Settlements

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10 responses to “Contracts Vs Settlements”

  1. lalo says:

    You guys should also include info about what real estate companies are getting this contracts and
    what percentage of them are closing.

  2. Ellen Levy says:

    Percentage of contracts falling out appears to be increasing. Is that correct?

  3. Ellen Levy says:

    Ooops! I just looked at the chart, not just the post. I agree with Chris' reasoning. There is another possible cause. Many new agents came into the real estate business during the boom, and many experienced agents left the business in the bust. Experience does matter in getting to closing. The chart reflects that also.

  4. holly says:

    Your explanation is well known to agents- we’ve been there. It’s the lay public that takes the info wrong. I don’t see much sense in reporting on contracts written & wonder why it is reported?

  5. Bonnie says:

    It would be good to know why so many contracts are not making it to settlement. Why the high disconnect?

  6. Andres A Lievano says:

    Alfonso – Is there a hard data explanation for the gap? It seems the gap has been consistent since 2010. Thanks for the analysis, it is an approach to reality.

  7. Lenn Harley says:

    No news here. We do have fewer and fewer short sales in the MD and Northern VA market.
    Without any reliable reporting guidelines for Short Sales, the stats are meaningless.

    One thing for sure, they have totally wrecked markets across the country. Banks have no COE to even guide their personnel in these matters. The public and agents are at their mercy.

  8. I'm seeing more and more properties sold "as is" even if they are not foreclosures or short sales. Many times those properties will go under contract and then when the potential buyer has had a home inspection they come back on the market because there may be more wrong with the property than the potential buyer had anticipated. Also, short sales are still taking months and sometimes even more than a year to get approved. Often I see properties go back on the market after they have been under contract as a short sale either because it took too long to get an approval from lender(s) or the new price is higher than what the property had been listed.

  9. People are scared, and lenders are cautious. Lenders are asking themselves… "Will the buyer be able to meet the payments down the road?" …and buyer too have questions that include: inflation, unknown costs of healthcare, job security, continued bonuses, economy, will home prices continue to rise or fall, and yes even politics. Welcome to the new normal.

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