For two years, home sellers have had all the leverage. Now, that may be changing, as more home buyers are canceling purchase contracts.
According to new data from Redfin, about 60,000 U.S. home sales fell through in June 2022. That’s about 15% of transactions that went into contract for the month, and it's the highest share of cancellations since April 2020.
Homebuyers who may have been issued preapprovals at lower interest rates are seeing their purchasing and negotiation power diminish.
“In an uncertain economic climate, even if there’s a home they really want, they are beginning to question whether they are risking putting themselves into a house-poor situation and if it’s the right financial decision,” Jose Morin, vice president of servicing at Brace in Virginia Beach, Va., told TheStreet.
“Buyers are canceling contracts because higher interest rates can be compared to a new pair of new Italian shoes,” said Sissy Lappin, co-founder of Listing Door, in Houston.
“They’re tight in the beginning, but you break them in, and they get comfortable. When you now pay a 6% interest rate, a few months ago when you could have done 4.5% it makes the home-buying process a little hard to swallow.”
A Pair of Cancellation Causes
Two things in May and June spurred an uptick in cancellations.
“First, inventory began to build up,” said Polina Ryshakov, lead economist at Sundae, a home-selling-services company in Mountain View, Calif. “That means home buyers under contract can see more choices than before being under contract for a home, mostly due to a lack of better options. A situation like that reinforces fears of buyer’s remorse. “
Second, mortgage-rate volatility is scaring some homebuyers away from the closing table.
“If, for example, a homebuyer had locked in their rate mid-May, at 5.35% for a 30-year, but saw that rate fall a quarter point a week later, they may scare easily,” Ryshakov told TheStreet.com. “In uncertain times, both buyers and sellers show fear easily, which has resulted in a record number of price reductions and cancellations.”
Still a Seller’s Market -- but Not for Long?
Though the real estate sector is experiencing a robust flow of home-purchase calculations, sellers remain in the driver’s seat -- for now.
“We are still in a seller's market,” Ryshakov said. "More than 55% of all properties sold in June sold above asking price, which means 55% of all properties had more than one offer.”
Before homebuyers can see a balanced market, they’ll need to see 2018/2019 inventory levels, along with the days-on-the-market figure moving to at least 30 from the current 18.
“We can get there in the next year, assuming mortgage rates hold strong and the Fed continues to increase rates,” Ryshakov noted.
In the meantime, buyers shouldn’t flee at the first sign of trouble with a home purchase.
“Don’t get caught up in the “Shiny Object Syndrome,” Listing Door's Lappin told TheStreet. “So many buyers buy a home because it looks like a “Pinterest Ready” home and when the furnishings are removed, they could have bought a comparable home for 10% to 15% less.
“After all, in any market right now, you’re overpaying,” she added.
