Homebuyers retake the upper hand
Elon Musk isn't alone in trying to back out of a deal. Nearly 15% of pending home sales failed to close in June, a new post-pandemic high according to an analysis of MLS data that Redfin released Monday.
Why it matters: This is a sign of how fast the housing market adjusted to the surge in mortgage rates that started in March — and it signals the beginning of a return to sanity from the boom, with the balance of power shifting back to homebuyers. Prices are likely to cool somewhat.
- Sharp rate increases didn't just pump the brakes on the housing market, they drove it into a wall, said Taylor Marr, an economist at Redfin. But he expects the number of cancellations to come down as sellers adjust pricing to the new reality.
Zoom out: Typically, the majority of homebuyers enter into pending sales agreements with a contingency that allows them to back out of the deal if, say, the inspection comes back with issues, or something is off in the appraisal.
- When the market was booming just a few months ago, a lot of buyers were waiving those contingencies. Those days are pretty much over — likely a cause for some of the uptick in cancellations.
- Deals failing to close in formerly hot metro areas in the Southwest are soaring. In Las Vegas, they were 27%. Several Florida cities are seeing cancellations near 25%, including Lakeland, Cape Coral, Jacksonville and Orlando.
Nerd out: That 14.9% national rate is perhaps even more striking because overall pending home sales fell in June — so we're looking at a bigger percentage of a smaller universe.
Meanwhile, other deals have failed because fast-moving mortgage rates mean the buyers can no longer afford the home they wanted — they either didn't lock in their rate when they went into contract or their rate lock expired.
- Those buyers are either walking away or, in some cases, loan underwriters will no longer approve the mortgage, Marr said.
The new home market is feeling this: Homebuilders are reporting a vastly different buying landscape, with big drops in sales and foot traffic to homes, and an increase in cancellations, according to a June survey of homebuilders from John Burns Real Estate Consulting.
- “Quite a dismal traffic and sales climate," says one Phoenix builder quoted in the report. "Cancellations are extremely high.”
A builder in Austin sums it up: “Sales have fallen off the cliff. We are selling 1/3 of what we sold in March and April. Buyers have no urgency and are nervous about interest rates and inflation. Constant negative outlooks being reported consistently on the news aren't helping."