The housing market is in an unusual period. The market faces one of the most significant corrections in a decade, with new and existing home sales up against high cancellation rates. At the same time, some pockets of the country are seeing strength in the real estate market, even amid rising interest rates and economic turbulence.
As of the start of the year, the cancellation rate on new and existing homes was around 20%.
The rate has gone down since late 2022, but still, for new homes under construction alone, it’s at 9%.
So why do contracts for new or existing properties fall through?
There are a lot of reasons that would-be buyers cancel a deal.
One is, of course, the interest rates. As it seems like rates are going up every few weeks, with rates for a 30-year mortgage around 7%, if a buyer didn’t lock in a rate, they might not be able to afford as much home anymore. If a buyer has cash and wants to avoid a cancellation, they can buy down points on the mortgage, reducing the interest rate. Another option is increasing your down payment or shopping for another lender.
Another reason for cancellations is more houses coming onto the market, providing more choices to buyers. If someone was ready to buy a home that they felt like they’d settled for before, they might be able to find one that better suits their needs now for less money, even compared to a few months ago.
There’s a third reason cancellation rates remain stubbornly high—problems found during appraisals or inspections. Over the past few years, the low inventory of homes and the red-hot market from the pandemic left buyers making a lot of concessions. They were opting to waive inspections and appraisals, and buyers were also willing to skip negotiations on needed repairs in an effort to get sellers to accept their offer.
Now, with inventory loosening up so much and the higher mortgage rates, buyers are back to canceling deals when the inspection or appraisal doesn’t meet the expectations they had for it.
A seller who finds that their buyer is thinking about backing out might have to make some repairs or concessions or lower their selling price to complete the deal.
Homeowners and buyers in the Southern part of the country have been dealing with cancellations on their home insurance, sometimes even before closing. There are rising homeowners insurance rates and mortgage rates, so it’s harder for buyers to afford what they could have just a year ago.
What should you know if you’re a buyer thinking of walking away from a home purchase?
First, you could lose your deposit. When they submit an offer, most buyers provide a good faith deposit, or earnest money. The specifics depend on the state, but it’s usually an amount ranging from 1-5% of the purchase price, and it can be as high as 10%, depending on the local market. The money stays in an escrow account and is put towards the down payment or closing costs when the purchase is finalized.
If a seller accepts an offer and the buyer signs a purchase agreement, they might lose their deposit if they cancel the transaction.
While it was something that so many buyers were willing to skip over the past few years, it’s a good idea to make the final purchase of a home contingent on certain elements of the buying process. Contingencies include not only the appraisal and inspection but also buyer financing.
The market has rapidly shifted, and buyers and sellers are having to change their perspectives to make things work and avoid the potential of a cancellation.
