Homebuyers Are Canceling Deals at the Highest Rate Since the Pandemic
July 13, 2022
In another sign that the housing market’s red hot streak is starting to cool, homebuyers are pulling out of deals at the highest rate since the beginning of the pandemic.
Nearly 15% of existing home sales that went under contract in June were canceled, according to a new report from real estate website Redfin. That is the highest percentage since early 2020, when homebuying came to an abrupt, but brief, pause when the pandemic began. It is also a significant increase from last June, when about 11% of deals were canceled.
More potential buyers are reconsidering their purchases in the face of surging inflation and higher interest rates.
At the start of the year, the average rate for a 30-year fixed mortgage was about 3%, but it has risen steadily throughout the year, hitting 6% in mid-June. Although mortgage rates have retreated somewhat in recent weeks to the 5.75% range, the higher cost of borrowing is causing many homebuyers to cancel purchases.
With higher mortgage rates, some buyers are no longer qualifying for the loans they want. Mortgage lenders generally set a debt-to-income ratio limit of about 28% when assessing potential loans. At current rates, the cost of mortgaging a median-priced home in the second quarter required 31.5% of the average U.S. wage, according to property data firm Attom. That’s up from 24% a year ago, and the jump is the largest in more than two decades.
It is not just contracts for existing homes that are being canceled. Homebuilders are also seeing higher cancelation rates for new construction. A recent survey from John Burns Real Estate Consulting found that cancelations in May jumped to 9.3%, compared with 6.6% in the same month a year prior.