Your REALTOR®:
Bill Arnott
September 2022
Real
Service Beyond The Expected


Buyers Increasingly Back Out of Deals

For the past two years, the demand for real estate has been enormous. Several factors converged for that to be the case. For example, the pandemic meant people could work remotely, so they could move anywhere in the country. Inflation led buyers to want a hard asset, like property, and there’s also a low inventory of homes, so buyers were clamoring and often engaged in bidding wars.

Now, after two years of a frenzied market, things might be changing.

According to a new report from Redfin, around 60,000 purchase agreements fell through in the U.S. in July, which was around 15% of all the homes that went under contract in June. This was the highest cancellation rate since early 2020 when the initial days of the pandemic led to an almost complete stop of the real estate market and associated transactions.

So why are people backing out of their deals?

One reason is that there’s less competition. When people are facing a lot of competition as buyers, they don’t want to miss opportunities. There’s a sense of urgency. Now, there’s less competition because the market appears to be slowing, so buyers have more room to negotiate, which can, in certain situations, lead them to back out of deals.

Buyers are keeping contingencies like inspections and appraisal contingencies, whereas even just a few months ago, they were waiving those to stay competitive. When the buyers have these contingencies in place, they have the flexibility to deal with issues that might come up as they’re in the buying process.

Another reason for people backing out of deals is the highest interest rates, which are making homes less affordable.

The Fed is working on pouring water on red hot inflation through tightening. In June, the Fed raised benchmark interest rates by 75 basis points. It was the largest hike in rates since 1994. Then, at the end of July, they announced another 75 basis point rate increase.

We don’t know yet if raising rates will help slow inflation, but it is making it more expensive to borrow money. That can significantly change the plans of would-be buyers.

If you made an offer when rates were 5%, but you didn’t lock it in, and the deal is going to close at nearly 6%, you may not be able to afford the same home, or you might not qualify for a loan anymore.

A third major factor is that there’s a general sense of uncertainty and unease about the economy.

According to Fannie Mae’s Home Purchase Sentiment Index, only 20% of respondents recently said they think it’s a good time to buy a home.

The labor market seems to be faring well after the recession induced by the pandemic, but regardless, consumers and homebuyers are growing increasingly concerned.

In June, 81% of consumers said the economy was on the wrong track. Fannie Mae’s senior vice president and chief economist said it shows that people are frustrated with inflation and the slowing economy. There were also more than 20% of respondents that said they had worries about their job stability.

It looks as if people’s concerns might not be abating anytime soon.

Mortgage rates are likely to continue to go up. They’ve already gone from just over 3% for the average 30-year fixed rate loan in January to around 6%. Until there’s strong evidence inflation has peaked, rates will likely stay on an upward trajectory.  

On the flip side, because there is still a housing shortage, prices are likely to keep going up in the coming months, although appreciation rates will probably slow. Inventory is improving but still tight because builders have slowed their production of single-family homes.

Finally, in very pricey markets where homes were already unaffordable, most will be more sensitive to rate changes for mortgages, so there may be opportunities for some buyers they wouldn’t have had otherwise.



Bill Arnott, Principal Broker, M.Ed. FFLDF
E-mail: RealEstate@barnott.com
Website: http://Newcenturyrealestate.org
Local: 603.313.6884
New Century Real Estate
Direct: 603.313.6884
44 East Surry Rd.
Keene, New Hampshire


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