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Are Contract Cancellations Another Sign of a Market Shift?

Home Agents
By Jordan Grice
August 15, 2022
Reading Time: 4 mins read
2
Are Contract Cancellations Another Sign of a Market Shift?

While early projections for this year’s housing market called for some changes, none of the forecasters seemed to predict a growing rate of buyers backing out of transactions, especially considering the past two years of frantic market behavior.

However, that was the case in recent months, and experts argue that it reflects the underlying market shift that has proven to be more favorable to buyers.

“The housing market today is experiencing a reset that is refreshing buyer negotiating power, putting buyers on much more even footing with sellers than they have been over the past couple of years,” says Danielle Hale, chief economist at realtor.com®.

That’s a significant deviation from the past two years, when intense marketing competition and razor-thin supply fueled a heated seller’s market. Hale says homebuyers likely felt more pressure to stick with a deal even if they weren’t comfortable out of fear of starting over in a market with few options.

The number of homes for sale climbed more than 30% from a year ago based on recent realtor.com® data opening the door for buyers to be more selective and calm in the market.

That was evident in recent months as Redfin data indicated that nearly 60,000 home-purchase agreements, or almost 15%, were canceled in June. While that was the highest percentage since the coronavirus pandemic—based on the report—it also points out that the previous month saw 12.7% of transactions fall through.

While Redfin’s report doesn’t delve too deep into the specific reasons for the cancellations, experts from the tech company indicated that a lull in the market competition had provided buyers with more room to negotiate—a luxury that has been missing in the past two years since the outbreak of the pandemic.

Industry experts tell RISMedia that several factors in today’s market have contributed to the spree of canceled deals.

“Some of it is completely voluntary on the buyer side, and some of it is more of a hardship,” says Erin Sykes, chief economist and real estate wealth advisor at Nest Seekers International, a full-service luxury residential and commercial brokerage firm.

Primarily, Sykes says that failed inspections or not meeting financing contingencies are primary factors for many buyers to opt out of a deal before getting to the closing table.

Another factor at play is record-high inflation, which Sykes thinks has taken a toll on consumers and made them nervous in recent months.

“I think that people in general over the last month have decided to sit on their hands and adopt a wait-and-see attitude about things, and as a result, there is a bit of fear out there about inflation,” Sykes says. “Whether or not that is a realistic fear going forward is the real question because typically, by the time this conversation hits Main Street, it is potentially peaked, and maybe it will linger for a while.”

Another contributor to higher contract cancellations is likely mortgage rate volatility.

According to recent Freddie Mac mortgage rate data, 30-year fixed mortgage rates have come in at 5.22%, down from what may have been their peak in June—just over 5.8%— but also up from 2.87% YoY.

“Rising mortgage rates are also forcing some buyers to cancel home purchases,” said Redfin Deputy Chief Economist Taylor Marr in Redfin’s report. “If rates were at 5% when you made an offer but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home, or you may no longer qualify for a loan.”

Hale echoed similar sentiments, adding that the surge and current volatility of mortgage rates could be causing buyers to walk away from deals out of necessity.

“Mortgage rates are likely to continue their recent ups and downs until the likely end of the Fed’s tightening cycle becomes clearer, which means both buyers and sellers need to consider the extra risk this adds to home financing,” Hale says.

With different factors at play, Paula Ostop, a Connecticut-based agent with William Raveis Real Estate, suggests that much of the buyer concern and fallout in recent months is due to nerves.

Like other parts of the U.S., Ostop notes that Connecticut faced significant inventory shortages that helped fuel the past couple of years of fierce market competition that drove home prices sky high and pressured consumers to waive contingencies to get into a home.

As mortgage rates and inventory started to increase in May and June, Ostop, representing clients on both sides of the closing table, indicates that buyers started becoming concerned that they were possibly overpaying.

” got nervous because while they were in their inspection contingency period, other homes came on the market, so they wanted to hang tight,” she says.

With the market correction underway, Ostop and other agents tell RISMedia that it’s essential for agents to level with clients and manage expectations.

For sellers, Ostop encourages agents to maintain transparency with clients by explaining everything that can go wrong.

“You can sometimes feel like a Debby Downer, but you want them to be prepared for the worst-case scenario because the reality is that if the buyer has any contingencies, they can turn and walk away,” Ostop says.

She adds that she tries to avoid that outcome by looking for solid and healthy deposits.

“What that is doing when you’re representing the seller is making sure that this buyer is serious,” she continues.

Chris Harden, broker/owner of RE/MAX Four Corners in McKinney, Texas, echoed similar sentiments.

“We try to set those expectations that it’s just a different market than it was,” Harden says. “People say that the market is shifting. No. The market shifted. It’s already a different market, so we set the expectation that these are the possibilities of what can happen.”

Harden still tries to attract additional buyers to his listings even if they’re under contract as a backup.

On the other side of the spectrum, Ostop advises her buyers to “be prepared to lose the deposit.”

“Realistically, they are not going to, but it’s my litmus test for how much they really love this home or are they getting wrapped up in the competition,” she says.

Tags: Erin Sykeshome buyersHousing MarketRE/MAXrealtor.com. Danielle HaleRedfinWilliam Raveis Real Estate
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Jordan Grice

Jordan Grice is a senior editor for RISMedia.

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Comments 2

  1. veronicarealtor86@gmail.com says:
    10 months ago

    It was really helpful information,thank you.

    Reply
  2. veronicarealtor86@gmail.com says:
    10 months ago

    It was helpful information,thank you.

    Reply

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