Homebuyers are freezing their purchasing plans at increasingly higher rates, according to Redfin’s latest market report.
Fifteen percent of contracts, or 56,000, were canceled in August, the highest level since Redfin began tracking the metric in 2017.
The report found that homebuyers cancelled contracts due to one of the following issues:
- the discovery of significant issues during an inspection (70.4 percent)
- failed financing (27.8 percent)
- problems with selling their existing home (21 percent)
- changes in their financial situation (14.9 percent)
And in rarer cases, contracts fell through because the seller backed out (11.5 percent).
Redfin said the majority of contract cancellations happen during the inspection period, as homebuyers and homesellers struggle to negotiate a solution. Sellers, the brokerage said, are still thinking of the early pandemic homebuying rush when buyers were more likely to waive inspections or overlook repair issues to lock in a historically low mortgage rate.
“Many sellers are still operating like it’s 2021, assuming their home will sell as-is for top dollar,” the report read.”Some are having a hard time adjusting to the reality that it’s no longer a seller’s market because it seems like just yesterday that homes were getting dozens of offers and fetching tens of thousands of dollars over the asking price.”
However, the game has changed, with homebuyers using their newfound leverage to be more stringent.
“Buyers are skittish and selective due to high prices, high mortgage rates, and economic uncertainty,” the report read. “They’re asking sellers for all sorts of repairs, price reductions, and other concessions because a) it’s expensive to buy a home and b) it’s a buyer’s market, meaning buyers hold the negotiating power.”
“There are roughly 500,000 more sellers than buyers in the market, which empowers buyers to negotiate because they have options,” it added.
Like most market metrics, contract cancellation trends are highly regional.
Homebuyers in the Southeast cancelled the greatest share of purchases in August, with Atlanta (21 percent), Jacksonville (20.5 percent), Orlando (20.2 percent) and Tampa (19.4 percent) leading the way. Las Vegas was an outlier in its region, with buyers canceling 19.4 percent of home-purchase agreements in August.
Redfin said there’s a slight correlation between housing starts and contract cancellations. Buyers in markets with more inventory are more likely to back out of a contract, since they’re confident they can find a better deal.
“I worked with one seller who received 78 repair requests from a buyer following the inspection, and that was after the seller had already agreed to lower their $375,000 asking price by $25,000 because the house needed some improvements,” Tampa-based Redfin agent Dawn Liedtke said in the report. “The buyer came back and said they would handle the cost of the repairs, but only if the seller was willing to lower the price by another $100,000. The deal didn’t work out.”
The report advised buyers and sellers to become more realistic about the negotiating process and understand the risks of cancelling a contract, such as the loss of earnest money.
“It is more challenging for sellers to back out because they often don’t have contingencies, though some include a contingency that allows them to cancel if they don’t find a suitable home to move to,” the report read. “Both parties should be aware that they are entering a legal contract when they agree to buy/sell a home; buyers may have to forfeit their earnest money if they back out without a contingency.”
