More buyers pull back

Real estate transactions are running out of steam as the volume of home sales continues its downward trend.

In June 2022, approximately 60,000 home sales fell nationwide, representing 14.9% of homes under contract.

This is the highest number of escrow cancellations seen since March and April 2020, when sales cancellations spiked at the start of the pandemic. At this peak, job losses were exploding and consumer confidence was at an all-time low.

In comparison, only 11.2% of sales fell a year earlier. Additionally, just a month earlier in May 2022, 12.7% of receiverships were voided. The vast majority of those cancellations were initiated by homebuyers, according to red fin.

Here in Californiathe share of home sales that fell in June 2022 was:

Most of these canceled receiverships were due to homebuyers not getting approved for a mortgage. The rapid rise in 2022 mortgage interest rates is largely to thank for more homebuyers losing the ability to qualify midway through their home purchase.

With higher interest rates and declining home sales volume, home prices are poised to decline by 2023.

As prices drop, contract buyers will soon spot cheaper equivalent homes and realize they have too much paid. Their reaction will be to pull out and buy the cheapest house – or just wait for the market to go down.

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Breach of contract by the buyer in a decreasing price environment: seller’s remedy

Remedies of sellers in the event of breach of contract by the buyer

As buyers continue to back out of purchase agreements, real estate professionals need to revisit the responsibilities that arise from clients who enter into purchase agreements.

When a purchase contract is violated, the implications can range from a slight hiccup to a huge reduction in net proceeds. Naturally, sellers can seek redress when the buyer breaches the contract, especially when the breach results in significant loss to the sellers.

In a fall price environment, a broken purchase contract often results in monetary losses for sellers. In the event of a breach of contract by the buyer, the seller’s next steps include:

  • execution of the purchase contract;
  • remarket the property for sale; Where
  • retaining ownership.

To recover the funds, the seller must account for a waste of money.

There are limitation of liability in a purchase contract, which include:

  • provision for damages; and
  • contractual limitation of recovery.

Provisions for damages set the cash deposit as a cap on recoverable cash losses. The latter sets the recovery limit and creates an agreed limit for this amount in the purchase contract. [See RPI Form 150 §10.7]

The loss is recoverable by the seller, unless the property ends up being sold for the same price, or more – a situation that will not be possible in the coming months as sales volume and prices plummet. Violations of purchase agreements will only increase as we head into 2022 undeclared recession. Expect lower sales volumes from 2022 to 2024, with prices bottoming out in 2025.

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Brokerage reminder: Elimination of contingencies – reasonableness required

As escrow cancellations increase, watch for increased competition for rentals, in what is already a booming market. Here in Californiabuying is now significantly more expensive than renting.

Real estate professionals who want to protect their practice against the recession will consider adding building manager to their resume. By supplementing your real estate practice with related professional skills and experience, you will ensure a continued stream of income even when sales continue to slow in the months ahead.

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Property Management 101