In a sign that the housing market is slowing, homebuyers in June backed out of contracts at the fastest pace in more than two years, giving some more room to negotiate while others were forced to withdraw offers due to higher mortgage rates that made homes unaffordable.
About 60,000 home-purchase agreements fell through in June — 14.9 percent of homes under contract — according to the latest analysis from real estate brokerage Redfin. That’s the highest percentage since March and April of 2020, when the country went into lockdown and the housing market was practically paralyzed by the coronavirus outbreak. By comparison, 12.7 percent of housing contracts fell through in May 2022 and 11.2 fell through a year ago in June 2021, Redfin said in a press release.
By comparison, just 3.9 percent of real estate contracts fell through for any reason in 2016, up from 2.1 percent in 2015, according to real estate data site Trulia. Fail rates were as low as 0.1 percent in some places and no metro area had a rate above 10 percent, Forbes reported in 2017.
The interest on the average 30-year loan is now almost twice what it was at the beginning of 2022, making this the most unaffordable housing market in decades. Buyers have more reasons to back out of contracts.
Economic uncertainty is making homebuyers more skittish than usual, said Lindsay Garcia, a Redfin real estate agent in Miami.
Researchers at the Federal Reserve Bank of Dallas have pointed to a U.S. housing bubble — but not like the one from the early 2000s that preceded the Great Recession and 2007-2008 financial crisis.
“There is growing concern that U.S. house prices are again becoming unhinged from fundamentals,” Fed economists wrote in a March blog post.
They point to a different type of bubble — one that involves price-to-rent ratios and price-to-income ratios showing that 2021 housing prices were increasingly out of step with market fundamentals.
Rising mortgage rates are forcing some buyers to cancel home purchases, said Redfin Deputy Chief Economist Taylor Marr. “If rates were at 5 percent when you made an offer, but reached 5.8 percent 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 a loan.”
The slowdown in housing-market competition is another reason more homebuyers are backing out of deals, Marr said. “Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process.”
Image credit: iStock / wildpixel, https://www.istockphoto.com/portfolio/wildpixel?mediatype=photography