US homebuyers are backing out of deals at the highest rate since the start of the pandemic

As a well-known inflation-proof asset, real estate has been highly sought-after for most of the last two years. But things seem to be shifting.

According to a new report from real estate brokerage Redfin, around 60,000 home-purchase agreements in the U.S. fell through last month. That equates to 14.9% of all homes that went under contract in June.

To put things in perspective, cancellations were at 12.7% in May 2022 and 11.2% in June 2021.

In fact, 14.9% was the highest cancellation rate since early 2020, when the COVID-19 outbreak brought real estate transactions to a near dead stop.

What’s behind the sudden change in home buying behavior? Let’s take a look.

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Less competition

You’ve probably heard of some house in your neighborhood getting sold for well over its asking price because of multiple offers.

When there are competing offers, people don’t want their deals to slip away.

But when there’s no competition, things can work differently.

“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” says Taylor Marr, deputy chief economist at Redfin.

“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.”

Higher interest rates make housing less affordable

To tame spiking inflation, the Fed is tightening aggressively. Last month, it raised its benchmark interest rates by 75 basis points, marking the largest rate hike since 1994.

And now, with June’s headline inflation rate coming in above expectations at 9.1%, traders expect the Fed to make a full percentage move at its meeting later this month.

While it’s yet to be seen how effective rate hikes can cool down raging inflation, higher interest rates mean higher costs of borrowing – not good news if you have a mortgage. And that can change the decision of potential home buyers as well.

“Rising mortgage rates are also forcing some buyers to cancel home purchases. If rates were at 5% when you made an offer, but reached 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 a loan,” Marr explains.

Economy heading in the wrong direction?

Potential buyers could also be standing on the sidelines because of economic uncertainty.

Fannie Mae’s Home Purchase Sentiment Index registered a reading of 64.8 in June, marking its second-lowest reading in a decade. Notably, 68% of respondents believe it’s a good time to sell a home, while only 20% of respondents think it’s a good time to buy a home.

The U.S. economy has made a strong recovery after the pandemic-induced recession in Q2 2020. The labor market bounced back as well with the unemployment rate holding near a five-decade low.

But there are growing concerns among homebuyers.

“In June, a survey-record 81% of consumers reported that the economy is on the wrong track, suggesting to us – and corroborated by other recently released consumer confidence measures – that people appear to be growing increasingly frustrated with inflation and the slowing economy,” said Fannie Mae’s senior vice president and chief economist Doug Duncan.

“Moreover, 21% of respondents expressed job stability concerns, the highest percentage in 18 months.”

US homebuyers are backing out of deals at the highest rate since the start of the pandemic — here’s what that means for real estate

Don’t miss

Less competition

Higher interest rates make housing less affordable

Economy heading in the wrong direction?

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