Existing Home Sales Underperforming with Low Appraisals Increasing Contract Cancellations

Existing homes sales have lost momentum in the past three months, with another soft result in April.  The National Association of Realtors (NAR) reported an easing of existing home sales in April, down 0.8% to a seasonally adjusted annual rate (SAAR) of 5.05 million units. This follows a substantial (8.9%) decline in February and a modest rise (3.5%) in March—which recovered only part of February’s loss.

Sales of single-family homes were down 0.5% to 4.42 million units, while condominium and coop sales fell 3.1% to 630,000 units. Across the regions, sales growth was mixed, with the Midwest advancing 5.7% to 1.12 million units, but the other regions were down—Northeast falling 7.5% to 740,000 units, the South down 4.1% to 1.95 million and the West slipping 1.6% to 1.24 million units.

Increasing caution by investors played a part in April’s decline. Investors’ share of home sales fell to 20% from 22% in March.  Purchases by investors have greatly influenced the level of existing home sales recently, with the decline in sales in February corresponding with a marked decline in investor share, falling to 19% from 23% in January 2011.  Similarly, an increase in investors share in March supported an improvement in existing home sales. 

The NAR suggest that “the market is underperforming, given the great affordability conditions, job creation and pent-up demand ….” and point to “…. unnecessarily tight credit … along with …. low appraisals that result in contract cancellations ….” as the main cause. 

Low appraisals are a significant problem in the current market.  The NAR practitioner survey indicated that 11% of realtors reported a contract cancelled as a result of appraisals coming in below the negotiated price between the buyer and the seller.  A further 10% had a contract delayed and 14% had a contract renegotiated to a lower price as a result of a low appraisal. Low appraisals are also affecting new home sales, with NAHB’s Builders Survey indicating that 34% of builders have lost sales in the past year because the appraisal was less than the contract sales price.



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