Home Buyers Backing Out of Deals at Alarming Rate
Not since the start of the pandemic has it been this high, as buyers adjust to higher mortgage rates.
More home buyers backed out of deals in June than in any single month since the start of the pandemic, according to a report this week from real estate brokerage Redfin.
The roughly 60,000 home-purchase agreements that fell through equal 14.9% of homes that went under contract last month.
A slowing housing market gives buyers more room to negotiate. Others are being forced to renege on contracts because higher mortgage rates mean some homes are no longer affordable, according to the report.
Buyers Concerned About Being ‘Caught at the Top’
Erin Sykes, chief economist and real estate wealth advisor at Nest Seekers International, tells GlobeSt.com that buyers are concerned about being caught at the top.
“Most buyers I know are sitting on their hands and waiting to see what the extent of the fallout will be,” Sykes said. “Everyone knows the market will soften, but the question is how much.
“To cancel a contract without penalty, you need to be in the diligence period which normally lasts about two weeks from signing. After this time, buyers would likely lose their earnest money deposit, thus post-diligence cancellations are the ones that are the most concerning.
“The power is shifting as the market rebalances and opportunities are emerging for buyers.”
Another change is that buyers are increasingly keeping rather than waiving inspection and appraisal contingencies, Redfin Deputy Chief Economist Taylor Marr said in prepared remarks. “That gives them the flexibility to call the deal off if issues arise during the homebuying process.”
Activity Correlates with Rising Rates
There are a variety of reasons that buyers are backing out of contracts, John Hunt, Senior Analyst, Founder & President, MarketNsight, tells GlobeSt.com.
“The amount of contract fall out can vary due to the time of year, local real estate market conditions, and especially economic volatility,” Hunt said.
“The fall out rate first diverged from 2021 in the month of March. This of course corresponds with the beginning of mortgage rate increases. The fall out rate for April 2022 closely followed the rate from April 2021 and then diverged again starting in May.”
The updated fall-out rate for the first week of June increased from 5% to 8% and is 6 percentage points above the same week in 2021.
“It is not a coincidence that this corresponds exactly with the interest rate sensitivity threshold in the first week of June,” Hunt said.
“When mortgage rates shot up to almost 6% in June, we saw a number of buyers back out of deals,” Lindsay Garcia, a Redfin real estate agent in Miami said in prepared remarks.
“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.”