Pending Homes Sales Edged Up in June, But Cancelled Contracts Soar

July 28, 2011— -- Although pending home sales edged up in June, a new report found that cancellations skyrocketed, with four times as many agents reporting that would-be buyers were unable to close.

"Home sales had been trending up without a tax stimulus, but a variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month," Lawrence Yun, a chief analyst for National Association of Realtors, said in a statement.

The reasons behind the spike in cancellations are unclear, but may include tight credit and low appraisals, the group said. It found that 16 percent of NAR members reported a sales contract was cancelled in June, up from 4 percent in May.

Overall, gains in the South and the West helped boost pending home sales by 2.4 percent in June, according to a report by the National Association of Realtors.

The uptick comes a year after the Pending Home Sales Index, a housing measurement tool, fell to low point following the expiration of the federal home buyer tax credit intended to stimulate the economy and shore up the housing market.

Still, the NAR's June PHSI of 90.9 for sales agreements for previously occupied homes is more than 9 points below a reading of 100, which is considered healthy by economists, according to the Associated Press.

Contract signings, which take between one to two months, are used as an indicator of the market direction.

The Realtors group says a growing number of buyers have cancelled contracts ahead of closings after appraisals showed the homes were worth less than they bid.

A spokesperson for the Appraisal Institute says banks may be growing even more cautious of the lending process.

"Banks have been hammered they have had bad loan after bad loan," says Ken Chitester, a spokesperson for the Appraisal Institute. "The bank doesn't want your house, they want your money. If they can't get your money, then they end up with your house. In order to prevent that, lenders have become more cautious in this distressed economy."

The procedure for snagging a home loan, however, hasn't changed. "Appraisers are doing the same thorough process that they have always done," says Chitester. "That doesn't change during an economic downturn. If there are a number of distressed sales, then adjustments must be made before including as comparable sales."

Another factor behind contract cancellations could be home buyers pushing back the closing date.

"Though a higher than normal cancellation rate can hold back final closing figures, it could well be that some past cancellations are nothing more than delayed buying decisions rather than outright cancellations," Yun said.

Since the start of the year, existing home sales appear to be underperforming.

"The current level of housing activity is below sustainable levels based on population and employment levels. While the market is trying to recover on its own, the main constriction is the credit issue, followed by slow job growth," says Walter Malony, a spokesperson for NAR. " We project home sales would be 15 to 20 percent higher if banks simply returned to the sound underwriting standards that were in place before the loose credit standards which led to the housing boom (and ultimately, the bust)."

The National Association of Realtors, which views existing home sales of 5.5 million homes as sustainable, says the U.S. is likely to tally 5 million this year, a slight increase from 2010.

"Sales of previously owned homes fell for a third straight month in June and are lagging behind last year's sales pace when 4.91 million homes were sold, the fewest since 1997," according to the AP.

But, some economists called the levels depressed. "In absolute terms this is a very depressed level, and with prices in most areas either still declining or flat, there is little incentive for buyers to be aggressive," Joshua Shapiro, chief U.S. economist at MFR Inc told the AP.

The best way to ensure a more solid recovery in housing is to simply return to normal, sound credit standards so more creditworthy home buyers can get a mortgage," Yun stated.

"Washington also should not rock the boat with policy changes that would negatively impact affordable credit or otherwise increase the cost of buying or owning a home."

The Associated Press contributed to this story.