Residential Real Estate Markets: Current Challenges as Reported in the REALTORS® Confidence Index

The September REALTORS® Confidence Index, based on a monthly survey with information received from over 3,600 REALTORS®, provides insights on current residential real estate market conditions. REALTORS® reported in many cases that the bottom end of the market was relatively strong—possibly due to investor interest in bargain hunting. However, in terms of overall market conditions, many respondents noted that that current market is disappointing, largely due to economic concerns by potential buyers and limited credit availability due to unrealistic risk aversion by major financial institutions.

Many respondents indicated that potential buyers have lost confidence in the economic outlook. Some potential buyers have decided to defer purchases until the high level of economic uncertainty diminishes. The lack of jobs is seen as the major issue: REALTORS® reported that many potential buyers with jobs were afraid to buy a home due to fears of a future job loss, salary cut, layoff, or general economic uncertainty. In addition, the media are viewed as creating unrealistic buyer concerns through unrealistically negative portrayals of economic and market conditions. A steady drumbeat of negative news is reported as having an unfavorable impact on the housing markets.

Exceptional risk aversion by lending institutions was also reported as a major problem facing the housing markets, with short-sale and appraisal problems also providing major negative impacts. As a result of concerns over shadow inventories, expectations of continually declining prices, and general economic malaise, buyers are reported as demanding major and unrealistic discounts from listed home prices. At the same time, potential sellers are reported as expecting unrealistically higher prices. The result in many cases is a standoff.

Once a contract is signed, in the current market there seem to be a number of problems that cause additional delays or cancellations:

• Short sale approvals by financial institutions are reported as a major problem. Typically the primary lien holder hopes to get a better price and frequently winds up with the property going to foreclosure, eventually getting less than was possible from a short sale. Delays and frustrated buyers are typical. In a number of cases the second mortgage holder refuses to cooperate, indicating that they want additional compensation.
• REALTORS® comments noted problems with changing mortgage documentation and rating requirements, lost paperwork, last-minute turndowns, and an apparent lack of organization on the part of many lenders. Contract cancellations on the scheduled closing date were reported as financial institutions decided not to make the loan.
• Other reasons for contract cancellations and delays mentioned included job losses by potential buyers during the time period between loan application and scheduled settlement, problems with competence of the appraisers, failure of the house to pass inspection, and “cold feet” by the potential buyer.
• In the case of condos, all of the units in some projects ceased to qualify for financing in some cases due to an excessive number of rental units in the building or a homeowner association with major financial problems. Once these types of situations develop it is difficult for the properties to become again eligible for financing—resulting in perpetuating the problem.

In reviewing the hundreds of written responses to the survey it became clear that many of the mentioned problems—e.g., jobs, risk aversion, “cold fee”--would vanish quickly with a few quarters of significant economic growth. Regardless of the symptoms, the underlying cause of market problems appeared to be a lack of buyer confidence—in the banking system, the market place, and current economic policy. Accordingly, it would appear that a stronger economic recovery could have a major and relatively quick impact on the housing markets.