Homebuyers are canceling deals at the fastest rate since the start of Covid

A “For Sale” sign hangs in front of a house on June 21, 2022 in Miami, Florida. Existing home sales fell 3.4% to a seasonally adjusted 5.41 million units, according to the National Association of Realtors. Sales were 8.6% lower than in May 2021. As existing home sales declined, the median price of a home sold in May was $407,600, up 14.8% from May 2021.

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Americans are canceling deals to buy houses at the highest price since the beginning of the Covid pandemic.

According to a new report from Redfin, the proportion of existing home sales contracts terminated in June was just under 15% of all contracted homes. This is the highest proportion since early 2020, when home buying was immediately put on hold, albeit not for long. Cancellations were about 11% a year ago.

Higher mortgage rates and soaring inflation are forcing many potential homebuyers to reconsider their purchases.

The average rate on 30-year fixed mortgages started around 3% this year and has since risen steadily. It briefly topped 6% in mid-June before settling in a tight range around 5.75%. Mortgage News Daily.

Higher mortgage rates have also meant that some borrowers are no longer eligible for the loans they want. Lenders typically use a debt-to-income ratio of around 28% as their ceiling for mortgage loans. According to a report by real estate data provider Attom, the cost of owning a home at an average price in the second quarter was 31.5% of the median wage in the US. This is the highest percentage since 2007 and up from 24% a year earlier, marking the biggest jump in more than two decades.

Buyers are also seeing how quickly and dramatically the once red-hot market is changing. They may no longer see the urgency in bidding for a house that they think might lose value next year.

“A slowdown in housing market competition is giving home buyers the opportunity to negotiate, which is one reason more of them are pulling out of deals,” said Taylor Marr, deputy chief economist at Redfin. “Buyers are increasingly retaining rather than abandoning the contingencies of inspection and evaluation. This gives them the opportunity to cancel the transaction if there are problems in the process of buying a home.”

Developers are also seeing higher cancellation rates. Even before the sharpest rate hike in June, cancellations jumped to 9.3% in May, according to a survey of property developers by John Burns Real Estate Consulting. This compares to 6.6% in May 2021.

“Buyers’ remorse and rejection shortly after a contract is made grows. Buyers of public developers are nervous about a potential recession, struggling to come to terms with higher payments, or expecting home prices to drop,” said Jody Kahn, senior vice president of JBREC. Kang also noted that in her poll in mid-June, she continued to see an increase in cancellations.

Lennar, one of the nation’s largest construction companies, said in its latest quarterly earnings report that the failure rate increased consistently to 11.8%, but was below the long-term historical average. He also announced an increase in his stimulus to offset the drop in demand due to rising interest rates.

“It looks like these trends are set to pick up as the Fed continues to tighten until inflation comes down. While we can fight the trend, the reality is that the market is changing and we are ahead of the curve by making any necessary adjustments.” “, Lennar chairman Stuart Miller said in a press release.

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