Today's home prices and mortgage rates are just too high for many potential homebuyers to handle. In fact, the costs are so steep that tens of thousands of buyers with signed contracts are now getting cold feet and canceling their purchases.
New data from real estate company Redfin shows homebuyers are calling off their deals when the finish line is within view. In August, 15.7% of Americans with home-purchase agreements canceled their contracts before finalization, up from 14.3% a year ago. Prior to the pandemic, the home sale cancellation rate generally hovered at around 12% to 13%.
Home sales falling through
In total, some 60,000 home-purchase agreements were canceled in August, according to Redfin — roughly 1 in 7 pending sales for that month.
The frequency of cancellations has been growing through the year, coming close to the nearly 17% of cancellations seen in October 2022 (when mortgage rates were also around 7%). Real estate pros have noticed the change; one Redfin real estate agent quoted in the report said they had seen more cancellations in the last six months "than I’ve seen at any point during my 24 years of working in real estate."
What's to blame? According to Redfin, potential buyers are most likely backing out because they're realizing that they're signing themselves up for too expensive a commitment. When buyers see that last stack of papers, with their mortgage rate and monthly payments next to the home's sales price and all of the other house expenses they're signing up for, it's their last chance to bail. And apparently that's exactly what many would-be buyers are deciding to do.
Why there are still few homes for sale
Mortgage rates are trending at above 7% — a full 4 points higher than those in August 2020. That's what's largely being being pointed to as the reason for a low supply of homes for sale, and it's a big factor in the elevated state of home prices too.
Many homeowners who might be inclined to sell are instead staying out of the market because their current mortgage features low pandemic-era rates, and they know that buying a new home would likely involve a new mortgage with rates that are two or even three times higher. Thus, a standoff ensues: Plenty of potential sellers don't want to sell, and those who do choose to list their properties often have the leverage to hike their prices because there isn't much competition. (Whether or not homebuyers will actually pay up is, evidently, another matter entirely.)
Ultimately, pending home sales have decreased by over 18% year over year. While demand has stabilized, according to Redfin, it is now below pre-pandemic levels. Still, as the report shows, pending sales don't necessarily mean that sellers are closing deals.
The Redfin report says that last-minute "sticker shock" is making many buyers back out of their deals. For that trend to change, mortgage rates will need to fall, thus improving the situation for both buyers and sellers. Inventory will also need to increase — be that through existing home sales or an increase in new home construction — in order to make sellers more competitive (read: lower their list prices).
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