More buyers backing out
Real estate deals are faltering as home sales volume continues its downward path.
In June 2022, roughly 60,000 home sales fell through nationwide, translating to 14.9% of homes under contract.
This is the most escrow cancellations seen since March and April 2020, when sales cancellations were heightened by the outset of the pandemic. At this peak, job losses were through the roof and consumer confidence was in the basement.
In comparison, just 11.2% of sales fell through a year earlier. Further, just a month earlier in May 2022, 12.7% of escrows were cancelled. The vast majority of these cancellations were initiated by homebuyers, according to Redfin.
Here in California, the share of home sales which fell through in June 2022 was:
- 21% in Riverside;
- 20% in Sacramento;
- 20% in San Diego;
- 18% in Anaheim;
- 18% in Los Angeles;
- 10% in San Jose; and
- 6% in San Francisco.
Most of these cancelled escrows were due to homebuyers failing to obtain mortgage approval. 2022’s rapidly rising mortgage interest rates are largely to thank for more homebuyers losing the ability to qualify midway through their home purchase.
With higher interest rates and downward-sloping home sales volume, home prices are poised to decrease heading into 2023.
As prices slide, buyers under contract will soon spot equivalent homes listed for less and realize they have overpaid. Their reaction will be to pull out and buy the less expensive house — or simply wait for the market to bottom.
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Buyer breach of contract in a decreasing price environment: Seller remedies
Sellers remedies for buyer breaches of contract
As buyers continue to back out of purchase agreements, real estate professionals need to review the liabilities born out of clients entering purchase agreements.
When a purchase agreement is breached, the implications can range from a mild hiccup to a huge slash in net proceeds. Naturally, the sellers may seek remedies when the buyer breaches the contract — especially when the breach causes a significant loss for the sellers.
In a falling price environment, a breached purchase agreement often translates to monetary losses for sellers. Upon a buyer breach of contract, the seller’s next steps include:
- enforcing the purchase agreement;
- re-marketing the property for sale; or
- retaining the property.
To recover funds, the seller needs to account for a money loss.
There are liability limitations in a purchase agreement, which include a:
- liquidated damages provision; and
- contract limitation on recovery.
Liquidated damage provisions set the cash deposit as the ceiling amount for recoverable money losses. The latter sets the limit for recovery and creates an agreed limit for this amount in the purchase agreement. [See RPI Form 150 §10.7]
Loss is recoverable by the seller, unless the property does end up being sold for the same price, or more — an impossible situation in the coming months as sales volume and prices fall back. Breaches in purchase agreements will only increase as we head further into 2022’s undeclared recession. Expect to see declining sales volumes from 2022-2024, with prices bottoming in 2025.
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Brokerage Reminder: Eliminating contingencies – reasonableness required
As escrow cancelations rise, watch for increased competition for rentals, in what is already a hot market. Here in California, buying is now significantly more costly than renting.
Real estate professionals who want to recession-proof their practice will consider adding property manager to their resume. Filling out your real estate practice with related work skills and experience will ensure a continued stream of income even when sales continue to slow in the months ahead.
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