A ‘for sale’ sign hangs in front of a home on June 21, 2022 in Miami, Florida. According to the National Association of Realtors, sales of existing homes dropped 3.4% to a seasonally adjusted annualized rate of 5.41 million units. Sales were 8.6% lower than in May 2021. As existing-home sales declined, the median price of a house sold in May was $407,600, an increase of 14.8% from May 2021.
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The share of sale agreements on existing homes canceled in June was just under 15% of all homes that went under contract, according to a new report from Redfin. That is the highest share since early 2020, when homebuying paused immediately, albeit briefly. Cancelations were at about 11% one year ago.
Higher mortgage rates and surging inflation are causing many potential homebuyers to reconsider their purchases.
The average rate on the 30-year fixed mortgage started this year around 3% and then began rising steadily. It briefly shot above 6% in mid-June before settling in a narrow range around 5.75% now, according to Mortgage News Daily.
Higher mortgage rates have also caused some borrowers to no longer qualify for the loans they want. Lenders generally use a front-end debt-to-income ratio of about 28% as the ceiling for home loans. The costs of owning a median-priced home in the second quarter required 31.5% of the average U.S. wage, according to a report by Attom, a property data provider. That’s the highest percentage since 2007 and up from 24% the year before, marking the biggest jump in more than two decades.
Buyers are also seeing the once red-hot market turn around quickly and dramatically. They may no longer see the urgency in bidding for a home that they feel might depreciate in the coming year.
“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 Taylor Marr, Redfin’s deputy chief economist. “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.”
Homebuilders are also seeing higher cancelation rates. Even before the sharpest increase in rates in June, cancelations in May jumped to 9.3% in a survey of builders by John Burns Real Estate Consulting. That compares with 6.6% in May 2021.
“Buyer’s remorse and cancelations 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. Kahn also noted that in her mid-June survey she continued to see cancelations on the rise.
Lennar, one of the nation’s largest homebuilders, said in its most recent quarterly earnings report that its cancelation rate did increase sequentially to 11.8% but was below its long-term historical average. It also reported increasing its incentives to make up for falling demand, due to rising interest rates.
“It seems that these trends will harden as the Fed continues to tighten until inflation subsides. While we can choose to fight against the trend, the reality is that the market has been changing and we are getting ahead of it by making all necessary adjustments,” said Lennar Chairman Stuart Miller in the release.