Rising costs and falling confidence in the U.S. economy are fast becoming a toxic cocktail for the housing market. As a result, a growing number of buyers are backing out of deals they’ve made with homebuilders and sellers of existing homes.
Homebuilder cancellation rates have more than doubled since April, according to surveys by John Burns Real Estate Consulting. In July, 17.6% of builder contracts fell through, compared with 8% in April and 7.5% in July 2021.
Texas and the broader Southwest are seeing the biggest jumps in builder cancellations, at 27% and 25%, respectively. Many Americans migrated to the Southwest during the early days of the Covid pandemic. Cancellations are also higher than the national average in Northern California and the Northwest, at 23% and 19%, respectively.
The reasons for the cancellations are twofold: Some buyers are no longer qualifying for their mortgages at today’s higher rates and t.fore can’t close on the homes once completed. (Mortgages for new home contracts are often calculated before the home is built.)
And, some buyers are simply walking away of their own accord, concerned about inflation and the potential for home values to drop. This can mean giving up pricey deposits, but state laws vary widely on the requirement for builders to refund cash deposits.
“California buyers can pretty much walk from the closing table and get a refund,” said Jody Kahn, senior vice president of research at JBREC. “Also, builders have a lot of flexibility on what they require for cash deposits and they can choose to be more or less lenient in refunding.”
Contractors work on a home under construction in Antioch, California, on Tuesday, June 14, 2022.
David Paul Morris | Bloomberg | Getty Images
The story is much the same with contracts on existing homes. Nationwide, about 63,000 of those agreements fell through in July, or about 16% of homes that went under contract that month, according to Redfin. Cancellations were 12.5% in July 2021.
“The majority of the time the sellers are losing more than the buyers when the cancellations occur,” said Heather Kruayai, a Redfin agent. “The buyers are cancelling within their due diligence period and are able to retain the binder deposit. The sellers are t.fore losing time on the market as they have to change the status of their listing from active to contingent accepting backups.”
Cancellations on existing homes are particularly high in Florida, which saw a massive influx of buyers during the first year of the pandemic and also saw some of the strongest home price appreciation in the nation during that time.
The city of Jacksonville saw the most contracts canceled in the state, about 800 agreements in July, or 29.3% of homes that went under contract. Orlando, Daytona, Palm Bay and Pensacola also saw some of the highest cancellations, in addition to Las Vegas and San Antonio.