As a working real estate broker it is becoming difficult to tell my clients why the number of home listings going under contract are up 25% but closed sales are up less than 1%. Could it be the long arm of bureaucrats writing new rules daily to lenders from their new found authority in the Dodd Frank law causing delays in closing a home purchase, or worse, causing them to fail?
We’ll need a couple months to find the answer to that question, however one indicator that the new law is killing home sales is from a survey by the National Association of Realtors; one in three Realtors reports at least one failed contract over the preceding ninety days. This would indicate an acceleration in contract failures from industry norms.
What is the common denominator? Dodd Frank. Local appraisers say the rules under the new law not only added hours of work per appraisal, the new restrictive rules have contributed to more appraisals coming in below the agreed upon sale price. Arbitrary rules that limit what sales can be used for comparables, fewer closed sales, short sales, and foreclosures create an appraisal dilemma.
This results in the home seller either taking it on the chin, or going back onto the market hoping for a higher appraisal. If this happens to a home seller who’s buyer was using FHA for their mortgage, this presents a long term problem. The FHA appraisal stays in force for six months. The home seller’s option then becomes to sell to a buyer using a conventional loan, eliminating a third to half the buyers from purchasing the home.
Real estate is and always will be a supply and demand commodity. What happens to the price when you have fewer buyers? Prices fall. The home seller is now stuck in an untenable situation. If they must sell they either take the lower amount, or they are stuck owning the home for an indefinite amount of time.
Many agree in the real estate industry on several points, the loose lending guidelines brought to us compliments of Clinton amending the Community Reinvestment Act, needed changed to end the practice of making bad loans. The Dodd Frank solution goes too far by denying loans that would have been approved, rightfully and prudently so, before the CRA was put on steroids.
We also agree that the economy can’t recover until housing recovers. One in four jobs is related to housing.
New home builders too, suffer the fate of the omnipotent bureaucrat. EPA green building mandates, and erosion control rules, akin to EPA’s desire to regulate dust on farms, drives up the cost of a new home to the point they can’t compete with existing homes for sale. Add a plethora of new rules from OSHA increasing costs and many small builders survival is placed in jeopardy.