After two years of an incredibly hot sellers’ market, U.S. homebuyers are canceling contracts at the highest rate since the start of the COVID-19 pandemic, according to a new report from Redfin.
Experts say it’s a sign of a slowing housing market amid rising mortgage rates.
Until recently, the housing market has been defined by soaring home prices and incredibly low inventory. The record-breaking, ultra-hot housing market has left some prospective homebuyers frustrated as they struggle to buy a home. But now, as mortgage rates rise and the housing market cools, buyers might be regaining some leverage.
“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” Redfin Deputy Chief Economist Taylor Marr said in the report. “Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process.
“Rising mortgage rates are also forcing some buyers to cancel home purchases. If rates were at 5% when you made an offer, but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for a loan.”
Nearly 15% of Home Deals Fell Through in June, Report Says
In June 2022, about 60,000 home-purchase contracts fell through, according to the Redfin analysis. That’s 14.9% of the homes that went under contract that month, up from 12.7% a month earlier and 11.2% a year earlier.
It’s the highest rate of canceled contracts since Redfin began monitoring the data in 2017, with the exception of March and April 2020, when pandemic-induced lockdowns began in the United States. The rate of canceled contracts was 17.6% in March 2020 and 16.4% in April 2020. (The home deals that fell through in a given month didn’t necessarily go under contract the same month, Redfin notes.)
While some homebuyers are backing out of deals because they’ve realized that the slowing housing market could allow them to negotiate, others are being forced to cancel contracts because rising mortgage rates mean they can no longer afford the home, Redfin says.
“When mortgage rates shot up to almost 6% in June, we saw a number of buyers back out of deals,” Lindsay Garcia, a real estate agent in Miami, told Redfin. “Some had to bow out because they could no longer get a loan due to the jump in rates. Buyers are also more skittish than usual due to economic uncertainty.”
Home builders are seeing higher cancellation rates, too, CNBC reported. In May 2022, the cancellation rate was 9.3%, up from 6.6% a year earlier, according to a survey of builders by John Burns Real Estate Consulting.
“Buyer’s remorse and cancellations shortly after contract are increasing. Builders state buyers are nervous about a potential recession, struggling to get comfortable with higher payments, or expecting home prices to decline,” said Jody Kahn, senior vice president at JBREC, according to CNBC.
Some Metro Areas See Higher Rates of Canceled Contracts
The Redfin report also broke down the rate of home contract cancellations by metro area. Seven of the 10 metro areas with the highest cancellation rates were in Florida.
- Las Vegas Nevada: 27.2%
- Lakeland, Florida: 26.7%
- Cape Coral, Florida: 25.7%
- Port St. Lucie, Florida: 25.7%
- Jacksonville, Florida: 25.3%
- New Orleans, Louisiana: 25.3%
- Palm Bay, Florida: 24.9%
- Orlando, Florida: 24.5%
- Phoenix, Arizona: 24.5%
- Crestview, Florida: 23.5%
The lowest cancellation rate was in Newark, New Jersey, where only 2.6% of home deals fell through.
The housing market appears to be slowing, with buyers gaining some leverage for the first time in years. However, time will only tell what the second half of 2022 will look like.
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