Homebuyers across the United States are increasingly backing out of home-purchase agreements due to high mortgage rates. According to a report by Redfin, nearly 60,000 home-purchase agreements were canceled nationwide in August, accounting for 15.7% of homes that went under contract in that month. This cancellation rate is the highest in almost a year, surpassing the figures from August 2022.
The rise in cancellations can be attributed to the average interest rate on a 30-year-fixed mortgage, which stood at 7.07% in August. Last month, rates surged to 7.23%, the highest since 2001. As a result, potential homebuyers are experiencing sticker shock when seeing their high rates on paper, coupled with additional expenses for maintenance, repairs, and closing costs. Many buyers prefer to back out of the deal, even if it means forfeiting their earnest money.
Jaime Moore, a Redfin Premier real estate agent in Reno, Nevada, commented that she has observed more homebuyers canceling deals in the past six months than at any point during her 24 years in the real estate industry. Buyers are getting cold feet due to the financial implications of high mortgage rates and the associated costs of homeownership. Additionally, sellers are often unwilling to accommodate repair requests, leading them to let buyers walk away.
However, despite buyers pulling out of home-purchase agreements, home prices remain high due to limited inventory in the market. The median U.S. home sale price rose by 3% year over year to $420,846 in August, marking the largest annual increase since October 2022. Although this price is still 2.8% below the May 2022 record, it is expected to remain elevated for the foreseeable future.
Chen Zhao, Redfin economics research lead, highlighted that the Federal Reserve’s ongoing battle against inflation means that mortgage rates are unlikely to decrease anytime soon. This situation, coupled with the lack of homes for sale, contributes to the high prices as buyers compete for limited housing supply.
Although buyer demand has declined from pre-pandemic levels, it is no longer plummeting. Pending sales decreased by 0.6% on a seasonally-adjusted basis to 381,192 in August, compared to the previous month. However, pending sales dropped by 18.1% year over year. This figure has remained below 400,000 since the end of 2022, whereas it neared 500,000 just before the pandemic. Redfin suggests that while pending sales have stabilized, high housing costs continue to deter many potential buyers.
In terms of housing supply, new listings experienced a marginal increase of 0.8% in August compared to July on a seasonally-adjusted basis. However, on a year-over-year basis, new listings dwindled by 14.4%. Redfin predicts that new listings may have reached their lowest point, as most homeowners who feel locked into low mortgage rates have already decided not to sell. However, the total number of homes for sale hit a record low of 1.3 million in August, representing a 1.1% month-over-month decline and a 20.8% year-over-year decrease, the largest annual decline since June 2021.
Redfin attributes this shortage of housing supply to homeowners fearing the prospect of higher monthly payments if they were to sell their current homes and purchase new ones. The record-low housing supply has created a challenging market for potential buyers, exacerbating the impact of high mortgage rates.
In conclusion, the high mortgage rates faced by buyers are leading to a significant increase in canceled home-purchase agreements. Despite this, home prices remain elevated due to limited inventory in the market. The Federal Reserve’s ongoing battle against inflation suggests that mortgage rates are unlikely to decrease soon. Although buyer demand has stabilized, high housing costs continue to discourage many potential buyers. While new listings have seen a small increase, the overall housing supply remains at a record low. Homeowners are hesitant to sell due to the fear of higher monthly payments associated with purchasing a new home.