HomeBuyers Pulling Out of Deals

A new report from Redfin reveals homebuyers and builders are bailing out of purchase and construction agreements.

The recent decrease in home price growth in the US and big jumps in interest rates is sending a shockwave through the housing market. Will the shockwave hit the rental market too?

As the graphic below published by Redfin reveals, we haven’t see this kind of reaction since the beginning of the Covid pandemic.

Redfin’s June Report

Redfin reported that across the US, almost 60,000 home-purchase agreements were cancelled in June, equal to 14.9% of homes that went under contract that month. That volume of cancelled deals compares with a 12.7% rise in May and 11.2% rise 12 months ago. Rates were ultralow last year, so rate growth wasn’t an issue at that time.

Screenshot courtesy of Redfin.com

Rising Rates and Slowing Price Growth

The Bureau of Labor Services just published the June inflation numbers which hit a 24 years high at 9.1%. That number was not expected as experts felt we had already hit peak inflation. It further supports the belief that the Fed might ratchet up the bank rate again by .75% soon.

Taylor Marr, Redfin Deputy Chief Economist states: “The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals. 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.”

Marr added further, «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.”

A few cities saw much higher rates of buyers backing out including: Las Vegas (27.2%), Lakeland FL (26.7%), Orlando Florida (24.5%), Phoenix AZ (24.5%), Tampa (23%), Houston TX (22.9%), West Palm Beach FL (22.1%), and Miami at (21.5%). The south has been a hot market, but the economic trends and travel slow downs might be affecting homebuyers thoughts on buying in the sunny south.

Home Builders Too Look to be Withdrawing

“Scary times,” a home builder in Nashville, Tenn. told the company. “Hoard cash and hang on for the ride!” — from MSN news article.

And a new report from John Burns Real Estate Consulting shows builder’s sentiment is cooling. Sales of new homes fell 31% in June (year over year change). Cancelation rates jumped to 14.5% nationally, up from 6.5% a year ago.

Homebuilder confidence fell to 67, a two year low, a decline now of 6 consecutive months.

Ian Shepherdson, chief economist at Pantheon Macroeconomics believes mortgage demand is in free-fall, and the NAHB index will drop much further over the summer.”

Homebuyer demand is down 24% from last year. Applications to refinance has dropped 80% lower than the same week one year ago.

What are the Implications for the Rental Housing Market?

While the rate of growth in rent prices is receding, lower multifamily, apartment and single family home construction means the US won’t meet its required growth in homes.  The US housing market is millions short of demand.

Will rising rates and builder pullbacks contribute to higher rent prices?

Likely effects will be:

• upward pressure on rising rents while unemployment begins to climb
• lower supply may increase home prices or delay a reduction in prices
• pressure on governments to enact rent controls
• increased demand by investors for existing rental properties

Out of the calamity of interest rate rises and production pullbacks, rent prices have less likelihood of declining.  A lack of rental housing supply is the core issue and this signals that we’re falling further behind in new development.

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