People Are Backing Out of Home Purchases

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In its most recent quarter, the biggest U.S. home builder saw cancellations of orders for new homes climb to their highest level in three years. It’s the latest example of higher mortgage rates pushing home buyers to the sidelines.

D.R. Horton

(ticker: DHI) on Thursday said its cancellation rate in its most recent quarter was 24%, up from 17% during the same quarter last year. It was the company’s highest cancellation rate since the first quarter of its fiscal 2019. 

So far in July, the cancellation rate has remained elevated, said CFO Bill Wheat, who added that the company is “reselling our cancellations rather smoothly thus far.”

Higher mortgage rates and inflationary pressure is to blame, CEO David Auld said on a call with investors, noting later that “payment shock was part of it.” Daily mortgage rates reported by Mortgage News Daily rose as high as 6.28% in mid-June.

Mortgage rates have come down in recent weeks, but are still above last year’s levels. Thursday’s average mortgage rate of 5.69% was 2.42 percentage points higher than the final reading in 2021, according to Mortgage News Daily. On a $400,000 home purchase, that represents a $459 increase in the cost of a monthly payment.

Cancellations aren’t just a problem for D.R. Horton. The home builder’s increase in cancellations “is emblematic of what we’ve seen across the broader industry,” Wedbush analyst Jay McCanless said. “We do not believe the higher rates have reduced the demand for housing, but buyers may need to wait longer and/or bring larger down payments to the closing table,” he said.

People are walking away from sales of existing homes, too. Brokerage firm

Redfin

 reported last week that home sales in June were canceled at the highest rate since March and April 2020 when the pandemic halted activity in the housing market. 

“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” Redfin deputy chief economist Taylor Marr said last week. Others are canceling because of rising rates, the economist added. “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.”

Other builders have also mentioned the impact of rising rates on home cancellations.

Lennar

(LEN), the nation’s second-largest public builder, said last month that its cancellation rate during the quarter ending May 31 was 11.8% and that the spike in mortgage rates was contributing to worsening cancellations in many markets in June.

Tri Pointe Homes

(TPH), a smaller builder that operates in parts of the West, Central, and Eastern U.S., also reported an uptick in cancellations Thursday. The company’s cancellation rate last quarter was 16%, up from 7% one year prior, according to the company. Glenn Keeler, the company’s CFO, said on a call with investors that many cancellations were related to financing.

Prospective buyers are burdened with bad news about interest rates, recession, and potential job market changes, Tri Pointe CEO Douglas Bauer said on a call with investors. “That’s going to cause the consumer to pause, but we have all the right tools and mechanisms in place to continue to draw them across the finish line,” he said. “We’ve kind of gone from order takers to financial therapists as home builders.”

Write to Shaina Mishkin at [email protected]