Homebuyers are canceling transactions at the highest rate since the start of Covid

A “for sale” sign hangs in front of a home on June 21, 2022 in Miami, Florida. According to the National Association of Realtors, existing home sales fell 3.4% to a seasonally adjusted annual 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 home sold in May was $407,600, an increase of 14.8% from to May 2021.

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Americans are rolling back deals to buy homes at the fastest rate since the start of the Covid pandemic.

According to a new report from Redfin, the share of canceled existing home sales deals in June was just under 15% of all homes under contract. This is the highest share since the start of 2020, when home buying stopped immediately, albeit briefly. Cancellations were around 11% a year ago.

Higher mortgage rates and rampant inflation are causing many potential buyers to reconsider their purchases.

The average rate for the 30-year fixed rate mortgage started this year around 3% and then began to rise steadily. It briefly topped 6% in mid-June before settling in a narrow range around 5.75% now, according to Mortgage News Daily.

Rising mortgage rates have also resulted in some borrowers no longer qualifying for the loans they want. Lenders typically use an initial debt-to-income ratio of around 28% as a ceiling for home loans. The costs of owning a median-priced home in the second quarter took up 31.5% of the average wage in the United States, according to a report by Attom, a real estate data provider. That’s the highest percentage since 2007 and up from 24% the previous year, marking the biggest jump in more than two decades.

Buyers are also seeing the once turbulent market recover quickly and dramatically. They may no longer see the urgency of bidding on a home that they believe may depreciate in value in the coming year.

“Slower competition in the housing market is giving buyers room to negotiate, which is one of the reasons more of them are pulling out of deals,” said Taylor Marr, an economics economist. deputy head of Redfin. “Buyers are increasingly retaining rather than foregoing inspection and appraisal contingencies. This gives them the option to cancel the transaction if issues arise during the home buying process.”

Home builders are also experiencing higher cancellation rates. Even before the biggest rate hike in June, cancellations in May jumped to 9.3% in a survey of builders by John Burns Real Estate Consulting. This compares to 6.6% in May 2021.

“Buyer’s remorse and cancellations soon after contract are on the rise. Builders say buyers are nervous about a potential recession, find it difficult to feel comfortable with higher payments or expect home prices to fall,” said Jody Kahn, senior vice president of JBREC. Kahn also noted that in her mid-June survey, she continued to see cancellations increase.

Lennar, one of the nation’s largest homebuilders, said in its latest quarterly earnings report that its cancellation rate rose sequentially to 11.8%, but was below its historical average at long term. It also said it has increased its incentives to compensate for lower demand, due to rising interest rates.

“It looks like these trends will harden as the Fed continues to tighten until inflation subsides. While we may choose to fight the trend, the reality is that the market has changed and we will. move ahead by making any necessary adjustments,” Lennar Chairman Stuart Miller said in the statement.

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