As Frank Sinatra once crooned: "Regrets. I've had a few…" Now that home prices are starting to decline across the US because of a souring economy, a growing number of recent buyers and sellers are feeling more than regret after exchanging keys and leaving the closing table.In the last year, there has been a steady rise in lawsuits being filed against agents, brokers, and other real estate professionals as home buyers and sellers both try to recoup their lost home value, Zach Vollmer, the senior vice president of real estate at Victor Insurance Managers Inc., a global underwriting firm, told Insider.Vollmer said that the number of lawsuits filed between 2021 and 2022 increased by 9%, although Vollmer declined to provide specific figures, citing proprietary information. "These cyclical increases are driven by the 'unhappy consumer' who is more likely to file a suit after having had a negative emotional experience during a real estate transaction," Vollmer said of the trend. Vollmer added that lawsuits targeting real estate professionals are common when home prices fall. Oftentimes they are filed by sellers who waited too long to list their home or buyers who might have overlooked a minor issue during the inspection process and now live in a home with a value below what they bought it for, Vollmer said. The increasing frequency of lawsuits coincides with a slew of predictions from real estate experts who expect home prices to continue to decrease in 2023.
For instance, Lawrence Yun, the chief economist at the National Association of Realtors, told Insider in December that half of the country could see home price declines of nearly 10%. Analysts at Moody's were more optimistic and said home prices could fall between 3% and 8% by the end of the year. In most cases, Vollmer said the lawsuits contain allegations that seek to trigger reimbursements under a real estate professional's liability insurance policy. Some of those claims include non-disclosure — meaning an agent or broker withheld material information from their client — or negligence and misrepresentation during the transaction. What makes this situation different is that inflation, supply chain disruptions, and rising material costs all helped to increase the average paid claim up to $39,000 in 2022, representing a 13% year-over-year climb, Vollmer explained. Looking ahead to 2023, Vollmer expects the number of lawsuits filed to increase, although it's impossible to project exactly how many will be filed by year's end.
He doesn't expect many lawsuits to be filed by borrowers who find themselves underwater — meaning their home value is less than what they paid for it — because of new laws implemented in the wake of the 2007 recession. An analysis of mortgage data by Black Knight found that more than 270,000 borrowers were underwater on their mortgage as of December 2022, representing approximately 8% of all homebuyers. However, Vollmer added lawsuits concerning wrongful evictions, property preservation, and short sale transactions when a large number of homes face foreclosure could cause that total to rise. "The dynamics of a down market are unique, but the consistent driver is a populace unhappy with the state of the housing market," Vollmer said.