Many parties are forming real estate deals only to watch their transactions fall through before the closing date, Paul Diggle, a property economist with Capital Economics, said Thursday.
Diggle released a note saying "it's obviously not good that 15% or more of all contracted home sales aren't making it through to closing."
Using data from the National Association of Realtors, he found that pending home sales rose 6.9% from December to July while actual closings were up only 2.1%.
If both indexes had risen together, it would suggest a more seamless move through the entire real estate transaction.
Part of the difference may be attributed to NAR's existing home sales index using a larger survey sample than the pending home sales index, Capital Economics said.
"But we suspect that the bulk of the divergence reflects the fact that cancellation rates have increased," Diggle wrote. "And this divergence creates problems in a market that is struggling to recover."
Diggle says the escrow period has become more challenging for buyers and sellers who find themselves wrangling with financing, home inspections and title report issues.
"Escrow allows buyers or sellers who run into problems with any of these steps to withdraw from a sale at a relatively low cost," he explained.
Diggle says rising cancellation rates are likely to keep the housing recovery "relatively muted." The good news is more buyers are considering sales, but the divergence between initial contracts and closings could suggest falling home prices lie ahead.
"A widening gap between pending and existing home sales was a feature both of the short-lived housing upturn of 2009-10, and of the final months of the housing boom back in 2005. In both cases, the high cancellation rate proved to be a precursor to existing home sales falling," Diggle warned in his research note.