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Charting the market: Like 2006 again — but different

- - Thursday, November 8, 2012

So far this year, more resale contracts on Washington-area homes have been written than in any year since 2005. Nearly 72,000 sellers signed sales contracts with buyers during the first three quarters of 2012. That's a 6 percent increase over 2011.

Looking back to 2006, the year the real estate bubble had just begun to burst, we find that 71,500 resale contracts were signed from January through September. You might think, then, that this year represents a return to the level of market activity we had back then.

That would be true if a market was measured only by the number of signed sales contracts. Buyers are, in fact, as busy now as they were six years ago. However, they are writing many contracts that never go to settlement.

Just 53,500 settlements were recorded from January through September this year. Settlement, also known as "closing," is when the buyer and seller sign a big stack of papers and ownership of the property actually changes hands.

Thousands of sales contracts are falling through every year, and it's happening at a higher rate now than it did in 2006. More than 73,000 settlements were recorded during the first three quarters of 2006 -- even more than the number of contracts. That's possible because settlement occurs weeks or months after a contract is signed.

Why would we have 20,000 fewer settlements this year than in 2006, if the number of contracts is nearly the same?

Here are just two of the reasons: short sales and stricter lending criteria.

Short sales were almost nonexistent six years ago. Now, thousands of homes are listed and sold for less than the owner owes the bank. But because it is a difficult process that hinges on the bank's willingness to take a loss, many of the contracts written to buy a short sale never go to settlement.

Lending criteria also has become much more stringent than it was six years ago. Lenders are scrutinizing loan applications and rejecting many of them. Those contracts never make it to settlement, either.

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