With real estate still recovering in many parts of the country, here’s a trend housing experts say bears watching: the rising rate of deal failures.
Home sale transactions have been failing at an increasing rate across the U.S., according to new data from real estate tracking service Trulia. In the fourth quarter, the failure rate on residential property sales rose to 4.3 percent, compared with 1.4 percent two years earlier. On an annual basis, the failure rate has almost doubled, rising from 2.1 percent in 2015 to 3.9 percent last year.
A failed deal is stressful for both sides in the transaction because both buyer and seller are better off when a sale is completed quickly. Failures can lead to higher costs, a lengthier time required to sell a property and personal anxiety for buyers and sellers.
While personally devastating, it may also signal a problem in the housing market and broader economy. Trulia found that first-time homebuyers are most likely to experience failed sales. The trend is notable given that millennials are now the largest segment of first-time home buyers, which is projected to fuel the property market.
Trulia housing data analyst Felipe Chacón said the rising failure rate could be tied to the nationwide phenomenon of lower inventory. With fewer houses available for sale, prices are rising in many regions, straining the finances of some first-time buyers.
Lower inventory and higher prices “put added pressure on the buyer,” he said. “It could be something that they are reaching for financially, but if during inspection it’s discovered it needs a new foundation, it fails.”
The rate of failed deals for so-called “starter homes,” or those homes that are in the bottom third of listing prices, has jumped to 7.1 percent in the fourth quarter compared with 2.4 percent at the end of 2014, Trulia found.
Homeownership rates among Americans below 35 years old is hardly as healthy as it was a decade ago. In 2004, about 43 percent of people below the age of 35 owned their own homes, but that has slipped to 35 percent today.
As a result, almost 40 percent of young adults lived with their parents, step-parents or other relatives in 2014, the highest point in 75 years, Trulia recently found. The only time in U.S. history when the share has been higher was in 1940, when the economy was recovering from the Great Depression and before the U.S. entered World War II.
Yet the real estate market and the broader economy relies on the phenomenon of “new household formation,” or when young adults break out on their own and rent or buy their own properties. With millennials hobbled by low wages, student debt and higher rents, they appear to be delaying that rite of adulthood until later in life than earlier generations.
Lending standards are also tighter than they were in the housing run-up before the recession, which adds to the hurdles facing some younger consumers.
Still, Chacón cautioned that while the higher rate of deal failures is worth watching, it may represent a return to the trends seen before the recession. He added that the company analyzed just two years of data, so the analysis doesn’t include prerecession failure rates.
“After the recession, first-time homebuyers dropped off the map, and recently they have started coming back into the home-buying market,” he said. “This steady increase of failed sales could be indicative of a more normal market, where first-time homebuyers are facing increased scrutiny.”
Here are the 10 metropolitan areas with the highest percentage of failed deals last year:
- Charleston, South Carolina: 16.5 percent
- Fort Worth, Texas: 15.3 percent
- Dallas, Texas: 15 percent
- Atlanta, Georgia: 13.8 percent
- Ventura County, California: 13.7 percent
- Portland, Oregon: 13.5 percent
- Houston, Texas: 12.8 percent
- Tucson, Arizona: 12.7 percent
- Orange County, California: 12.4 percent
- Los Angeles, California: 12.2 percent