- - Thursday, December 27, 2012

This year saw more sales contracts on Washington-area homes than we’ve seen in seven years.

Many of those contracts, however, fell through and never went to settlement. As a result, 2012 is not setting records for finalized home sales.

It has been a very good year nonetheless, for reasons I’ll explain in a moment. First, let’s look at those high contract figures.

Buyers have been busy in recent years signing contracts to buy homes. Their activity pushed sales contracts above 85,000 during the first 11 months of 2012. Many of those contracts, however, were for short sales that never received the required approval from the sellers’ banks. Those contracts were canceled. Other buyers couldn’t get financing to go to settlement. Those contracts also were canceled.

Such cancellations are happening at higher rates than they were several years ago, which is why the number of contracts has increased without a corresponding rise in the number of settlements.

Still, settlements were up this year by 8 percent over 2011. That is very good because the increase was accomplished without the federal tax credits that boosted settlements in 2009 and 2010. That temporary boost was good but also was responsible for the drop in sales in 2011.

It was similar to how the “cash for clunkers” program boosted new-car sales in July and August 2009. The program generated an additional 360,000 car purchases in the United States. In the following seven months, however, sales were 360,000 lower than they would have been if the program had never existed. The program boosted sales temporarily, without much benefit in the end.

Something similar happened with home sales. When the tax credits disappeared, sales plunged. Settlements dropped sharply in 2011.

With that in mind, the higher settlement figures for 2012 are encouraging because they were accomplished without any financial incentives.

Another encouraging development is the drop in unsold inventory in recent years. You can see this in the bottom chart. Inventory clearly has fallen, for two reasons. One is the drop in home listings, which also appears in the chart. The other is the increase in home sales.

Together, the drop in listings and the increase in sales have pushed inventory down so far that today’s buyers are competing with one another at a level we have not seen since 2005.

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