The Deal Is Off: Home Sales Are Getting Canceled At The Highest Rate Since The Start Of The Pandemic

The Deal Is Off: Home Sales Are Getting Canceled At The Highest Rate Since The Start Of The Pandemic

Lily Katz and Ben Walzer

 

The Deal Is Off: Home Sales Are Getting Canceled At The Highest Rate Since The Start Of The Pandemic

Some homebuyers are backing out of deals as a slowing housing market gives them more room to negotiate. Others are being forced to renege on contracts because higher mortgage rates mean some homes are no longer affordable.

Nationwide, roughly 60,000 home-purchase agreements fell through in June, equal to 14.9% of homes that went under contract that month. That’s the highest percentage on record with the exception of March and April 2020, when the housing market all but ground to a halt due to the onset of the coronavirus pandemic. It compares with 12.7% a month earlier and 11.2% a year earlier.

This is according to a Redfin analysis of MLS data going back through 2017. Please note that homes that fell out of contract during a given month didn’t necessarily go under contract the same month. For example, a home that fell out of contract in June could have gone under contract in May.

“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” said Redfin Deputy Chief Economist Taylor Marr. “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.”

Marr continued: “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.”

The housing market has cooled in recent weeks as the Federal Reserve has boosted interest rates in an effort to quell inflation. That has given house hunters more freedom to seek concessions from sellers, but higher rates also make housing less affordable. Buyers did get a reprieve this past week, when the average 30-year fixed mortgage rate fell to 5.3% in the largest one-week drop since 2008.

“When mortgage rates shot up to almost 6% in June, we saw a number of buyers back out of deals,” said Lindsay Garcia, a Redfin real estate agent in Miami. “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.”

Metro-Level Summary: June 2022

The table below measures pending sales that fell out of contract as a percentage of overall pending sales, and is sorted from highest to lowest. A metro must have had at least 1,000 pending-home sales in June 2022 to be included.

Source: redfin.com

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Prices falling in expensive cities

In two-thirds of major regional housing markets — 98 out of 148 — prices continue to drop, especially in more expensive locations.

We may see expensive markets fall further, which if that happens sooner than later, would make it an excellent time to buy into an expensive market. This wouldn’t have registered as a possibility even a few months back.

It’s difficult to predict if this will happen. And if so, whether falling prices become offset by the federal interest rate hikes practically certain to arrive in the coming months.

The only way to know for sure is to wait until the latest rate hike sets in.

Meanwhile, keep in mind that — as with any investment — it’s best time to buy is usually when prices are low.

‘Deals to be had:’ Homebuyers Should Ask For These Incentives While They Have The Upper Hand

The days of waiving contingencies such as appraisals and forgoing inspections are fading into the rearview mirror. Still, contract activity remains slightly competitive depending on your location.

At least 24% of buyers waived the inspection contingency in December 2022, according to the National Association of Realtors confidence survey, up from 16% a month prior and 19% one year ago. An additional 24% of buyers waived an appraisal contingency in December, up slightly from 16% in November and 21% a year ago.

Home inspection contingencies are particularly important because it can let you know if there’s a deal-breaking issue with the property before a purchase occurs. It can also help you negotiate repairs with the seller, which is becoming increasingly common in today’s market.

“If buyers have this short window to buy where they can get incentives to purchase, [they] would rather buy where they have an opportunity to really think about it, get an inspection, a financing contingency and not feel rushed,” Jeff Reynolds, broker at Compass and founder of UrbanCondoSpaces.com, told Yahoo Finance.