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Cover story: Failed contracts distort statistics on home sales

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Home sales in the Washington metro area were up 14 percent in 2011. They were also down by 8 percent.

How could that be? Well, that's because there are two ways to count home sales. Counting contracts would tell you sales rose last year, but counting settlements would tell you they fell.

There's a reason the results are so different, and that reason also reveals something interesting about how radically the dynamics of our real estate market have changed.

"Realtors are working twice as hard to get homes to settlement these days," said Holly Worthington, managing broker of Long & Foster's Chevy Chase and Woodley Park offices.

"Financing is difficult, and the confidence level of the buyers is a big problem. Many buyers ask for everything to be fixed and ask for money from the seller on top of it. If they don't get it, they want out of the contract, and it never goes to settlement."

When homes don't go to settlement, they usually go back on the market. Eventually, another buyer comes along, and that results in another ratified contract, further boosting the total contract count for the year.

"The market really is active; it's just that much of the activity is being spent on recontracting listings," said Margaret O'Sullivan, vice president of operations at Metropolitan Regional Information Systems, the company that maintains the database for area Realtors.

"Even if you look back at 2005, contracts have always fallen through. People were denied mortgages or the termite inspection found something," Ms. O'Sullivan said.

Those problems have become more numerous and diverse than they were a few years ago. Still, lots of people are putting contracts on homes, and buyers do seem eager to buy.

"The good side of it all is that tons of people are trying to buy and sell houses," she said. "But because of the contracts that are released, it's taking more time to actually get all those properties to settlement."

In 2005, about 11,000 contracts were released, or fell through, in the Washington area. That was 10 percent of all the contracts ratified that year.

That figure has grown each year as lending criteria has become more stringent, appraisals were scrutinized like never before and buyers grew more cautious. By 2008, nearly 16,000 contracts were released.

In 2010, more than 22,000 contracts fell through - a full 30 percent of the contracts ratified that year. Last year, the number of released contracts fell to 19,000, or 23 percent of total ratified contracts. It was a smaller problem than in 2010, but still a big one.

(To see this data in charts and learn more about released contracts and home sales, read Charting the Market.)

"This isn't a problem with investors," Ms. Worthington said. "Investor buyers don't usually drop out. It's many of the regular buyers who lack confidence right now.

"In a hot market, buyers will do anything to buy a home. They'll take a home on a busy street with a bad kitchen and purple shag carpet that smells like fish. But today's transactions are taking so much longer, and buyers are so skittish that sometimes they just lose interest and back out."

Because many homes are going under contract multiple times, there actually is a limited supply of available homes in popular communities these days.

"There is a lack of inventory in the District and close-in markets," Ms. Worthington said. "We have very little inventory, and we are seeing multiple offers - two to five multiple offers are common on homes that are priced correctly."

Fewer than 19,000 unsold homes were available to buyers at the end of last month. Because many of those are short sales and foreclosures, and many of them are properties that have been relisted one or more times, the number of "normal" homes for buyers to choose from is actually quite small these days.

And if buyers remain as active as they were last year, the shortage of inventory we have today could set the stage for a 2012 real estate market when home sales, and home prices, actually rise - no matter which data you look at.

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