Why Are So Many Homebuyers Canceling Contracts?

Home buyers are getting cold feet because of high home prices and mortgage rates. A new report from Redfin shows the number of buyers canceling deals is now the highest it’s been since the beginning of the pandemic. The pullback is also impacting builders. A report by John Burns Real Estate Consulting says they are lowering prices as they try to offload inventory. Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review. The Redfin report shows that homebuyers canceled 15% of the deals that went under contract in June. That’s about 60,000 deals and the highest percentage of cancellations since the early days of the pandemic. About a month ago, in May, 12.7% of the deals were canceled. And about a year ago, that figure was 11.2%. (1) More Homebuyers Canceling Deals Analysts say buyers may have different motives for canceling their purchases including the possibility that home prices might go lower in the coming months, and they might get a better deal if they wait. For those who don’t want to wait, there’s less competition and that’s giving them more negotiating power. Redfin’s deputy chief economist, Taylor Marr, says there are fewer buyers willing to waive inspections and appraisals, for example. By doing that, they have more time to weigh the pros and cons of a deal and get out if something turns up during the inspection, or the home doesn’t appraise. The Redfin report also says that some homebuyers simply don’t qualify with the higher mortgage payments. Marr says: “If rates were 5% when you made the offer, but hit 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for the loan.” Redfin says that Las Vegas has the highest percentage of cancellations in June at 27.2%. Several Florida cities that have seen strong home price growth are high on the list along with New Orleans, Phoenix, and Houston. It’s a long list that ranges from the Las Vegas high to a low of about 2.6% in Newark, New Jersey. Metros that had at least 1,000 pending home sales in June were included in this analysis. Home Builders Lowering Prices Home builders are also seeing higher cancellation rates. A report from John Burns Real Estate Consulting says 9.3% of new home deals were canceled in May. That’s almost three percent higher than May of last year. (2) John Burns’ senior vice president, Jody Kahn, says: “Buyer’s remorse and cancellations shortly after contract are increasing. Builders say that buyers are nervous about a potential recession, struggling to get comfortable with higher payments, or expecting home prices to decline.” The cancellation rate for homebuilders varied from region to region within each state. The John Burns research shows the highest cancellation rate at 27% in parts of Texas, and the lowest in some parts of the Southeast at 8%. That research shows that a quarter of the home builders are lowering their prices. A builder in Austin, Texas, told Realtor.com: “Sales have fallen off a cliff. We’re selling ⅓ of what we sold in March and April.” Housing Inventory Turn-Around One positive impact of this high-price environment is an increase in inventory. A TV station in Texas reports that: “Major housing markets in Texas are finally seeing the beginning of a housing inventory rebound.” (3) As you may know, six months of inventory is considered normal for a balanced housing market. We’re not seeing that yet, but this report says the numbers are rising in Houston, San Antonio, Dallas Fort Worth, and Austin. Many homebuyers are getting priced out of the market, but the need for housing will not go away. That creates an opportunity for investors, despite the high prices. A recent guest our other podcast, The Real Wealth Show, isn’t discouraged by the high prices. His strategy: “You don’t wait to buy real estate. You buy real estate and wait.” In other words, cash flow will come to those who wait for properties and rents to appreciate. The episode is called: “Invest Now or Wait?” with Jimmy Vreeland. You’ll find it under the “Learn” tab and “The Real Wealth Show.” And please remember to hit the subscribe button, and leave a review! Thanks for listening. I'm Kathy Fettke. Links: 1 -https://www.redfin.com/news/home-purchases-fall-through-2022/ 2 -https://www.realtor.com/news/trends/scary-times-builders-are-slashing-home-prices-and-slowing-construction-as-buyers-pull-back-survey-shows/ 3 -https://www.wfaa.com/article/money/business/right-on-the-money/major-housing-markets-finally-seeing-the-beginning-of-a-housing-inventory-rebound/287-346525d9-e3f1-4806-a2a9-121940badc45