Home Sales Up, but Financing Issues Block Bigger Growth

Existing home sales rose in October, but contract failures are holding back a real recovery.

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Existing home sales rose steadily in October, but contract failures stunted those numbers, underscoring continuing problems with mortgage applications and unemployment.

Sales increased 1.4 percent month over month, and 13.5 percent over last year's numbers, according to data released by the National Association of Realtors today, steady growth but not the kind of numbers economists hoped to see in light of the more positive economic news reported lately. It seems the bad economy isn't the primary hindrance to potential home buyers lately; it's red tape in the mortgage finance realm.

"Home sales have been stuck in a narrow range despite several improving factors that generally lead to higher home sales such as job creation, rising rents, and high affordability conditions," Lawrence Yun, chief economist at the National Association of Realtors, said in a news release. "Many people who are attempting to buy homes are thwarted in the process."

Yun cited contract failures, which are cancellations due to declined mortgage applications, discrepancies in appraisal values, and employment losses, as the primary culprit. Contract failures jumped to 33 percent in October from 18 percent in September, according to NAR numbers. That's up from just 8 percent a year ago. "We should be seeing stronger sales," Yun added, also crediting a disruption in the National Flood Insurance Program and lower loan limits for conventional mortgages as contributing factors to contract failures.

[Read: FHA Loan Limits Get a Boost, but Will It Help Housing Market?]

Lower loan limits paradoxically force some of the most creditworthy consumers to pay unnecessarily higher interest rates, Yun said, potentially keeping willing buyers on the sidelines.

But there is a silver lining. Despite ongoing contract difficulties, the nation's unsold inventory is on the decline. Total housing inventory fell more than 2 percent in October to 3.33 million homes for sale. While that still represents an eight-month supply at current prices, inventory has been on a downward trend since its record high of almost 4.6 million homes in July 2008.

In some areas, inventory is so low—especially foreclosures—realtors are reporting multiple bids on desirable properties. That's partly due to foreclosure procedures, which have been slowed down by myriad factors including state law and overwhelmed mortgage servicers.

"There's been a stall and a breakdown in the processes so the foreclosure process hasn't yet returned to a speed that it had been earlier," says Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. "The robo-signing situation slowed down procedures tremendously."

But if the housing market is going to work through the massive inventory—and shadow inventory of foreclosures yet to be put on the market—that process needs to be sped up so willing buyers can soak up the excess supply of homes, Yun said, especially in a national market that has been plagued by potential buyers sitting on the sidelines. "Realtors in such areas are calling for a faster process of getting foreclosure inventory into the market because they have ready buyers," he added.

[Read: Are Things Looking Up for the Housing Market?]

Some interest from lawmakers to expedite the foreclosure process has already appeared. Rep. Darrell Issa, a Republican from California and chairman of the House Committee on Oversight and Government Accountability, recently said he will begin working with the Federal Housing Finance Agency—Freddie Mac and Fannie Mae's regulator—to address hold-ups in the foreclosure process in states with the longest lag times. According to HousingWire, that could mean withholding funds from those states.