When it comes to pending home sales, a loan that can’t be secured or an inspection that returns red flags could kill the whole deal.
The “home sale fail” rate is increasing at a fast clip, and that may be a big red flag for the housing market as a whole.
Trulia reports that sale fails jumped to 4.3 percent in Q4 2016, up from 1.4 percent of all listed properties during Q4 2014. On an annual basis, the failure rate has nearly doubled to 3.9 percent in 2016, up from 2.1 percent in 2015.
So-called starter homes, attracting many prospective first-time buyers, and trade-up homes are getting hit the hardest. Of all listings in the largest 100 metros, Trulia found that 7.1 percent of starter home listings failed in the most recent quarter, compared with 6.7 percent of trade-up homes and 3.8 percent of premium homes.
For all of 2016, the failure rate was 6.3 percent for both starter and trade-up homes and 3.6 percent for premium homes.
First-time homebuyers face unique hurdles, including weaker credit histories since they don’t have equity or a credit profile from a previous mortgage. Their finances face additional scrutiny. And for those seeking an Federal Housing Administration loan for the down payment, there are restrictions on types of home and amenities and the added cost of mortgage insurance to the monthly expenses.
First-time buyers made up 35 percent of completed sales in 2016, up from 32 percent in 2015, according to the National Association of Realtors.
Trulia’s advice to potential home buyers: “Make sure you’ve done everything you can in the way of mortgage approval/preapproval and know your financial limits. This will make it easier to recognize potential challenges and opportunities earlier in the search and transaction process. As a seller (or agent), it will serve you well to know your market and the home. Don’t be afraid to be forthcoming with problem areas that would likely come up in an inspection.” See Trulia’s graphic below of metro areas with the most home sale fails.