More homebuyers back out of deals as mortgage rates hit 23-year high
Homebuyers are backing out of deals at the highest rate in nearly a year, a new study found. The culprit: higher mortgage rates.
Roughly 53,000 US home purchase agreements fell through in September, according to Redfin, equal to 16.3% of homes that went under contract that month. That’s the highest percentage of canceled contracts since October 2022 when mortgage rates surpassed 7% for the first time in two decades. The share is also up from 15.2% a month earlier and 15.8% a year earlier.
Pandemic boomtowns where home prices skyrocketed due to the influx of remote workers were hit the hardest with buyers with cold feet, Redfin noted, with some areas in Florida seeing contract cancellation rates over 20%.
The reaction from buyers comes as mortgage rates remained at 23-year highs between August and September, convincing rate-sensitive folks to call it quits on their home purchase plans. Even more cancellations may be on the horizon, as rates hover near 8%.
Read more: Mortgage rates at over 20-year high: Is 2023 a good time to buy a house?
"Buyers are extra cautious right now. They want to make sure they’re getting a good deal given how much mortgage payments have gone up, and when they don’t feel like they’re getting a good deal, they’re backing out," said Heather Kruayai, a Redfin premier agent in Jacksonville, Fla., in a statement.
Florida saw the highest cancellation rates
The Sun Belt region – which saw home prices jump by double digits during the pandemic – lost some of its heat as rates surged higher.
Among the 50 most populous metros analyzed by Redfin, Atlanta saw the most pending sales fall out of contract in September. Some 24.4% of contracts were canceled in the area that month, up from 23.6% in August – but slightly down from 27.1% a year earlier.
Metros in Florida rounded up the top five cities with the highest shares of cancellations, with Jacksonville seeing 24% of contracts fall through in September, followed by Orlando (23.6%), Tampa (22.7%), and Fort Lauderdale (22%).
The reason for the pullback by certain buyers isn’t a surprise, given how quickly house prices have outpaced salary growth. Add in this year’s high mortgage rates and payments become unaffordable for many.
For instance, those looking to purchase in Fort Lauderdale had to earn 22.2% more than they did a year ago to afford a median-priced home of $420,000 in August, a separate survey by Redfin found. That’s an average income of $114,549 – nearly $40,000 above the national US median income of $75,000.
"Affordability is a big issue," Jeffrey Ruben, president of WSFS Mortgage, told Yahoo Finance. "The interest rate environment is definitely creating constraints in our industry. It’s become a depressed kind of housing market."
'Buyers are frustrated'
Higher mortgage rates weren’t the only reason derailing home purchases.
"Transactions are also falling apart due to skyrocketing insurance premiums and disagreements between buyers and sellers over necessary repairs," Kruayai said in a statement. "Overall, buyers hold a lot of the cards right now, and sellers are having to give out more concessions to close a deal."
In Florida, so many insurers have pulled out of the state due to rising costs that it has gotten harder for homebuyers to secure a homeowner’s policy at a reasonable price. Homeowner’s insurance is a must-have to secure a mortgage, leaving buyers scrambling to find an insurer in the first place and at a cost that won’t leave them ineligible for a mortgage.
Builders, too, have seen cancellation rates spike as rates inched higher. According to LGI Homes latest earnings call, their cancellation rate during the third quarter was 27.9%, compared to 21.3% in the same period last year.
If there’s one silver lining for price-struck folks, it’s that homebuilders have taken notice of the shift in buyer sentiment and are offering more concessions to close deals.
Read more: Types of mortgage loans: Which is best for you?
Some 32% of builders said they cut prices in October, according to the National Association of Home Builders (NAHB), compared with 25% in August. That’s the highest rate since December 2022, when 35% of builders issued price reductions. The average price cut was 6%.
At the same time, 62% of builders said they offered sales incentives of all types in October, up from 59% the month prior and tied with the previous high for this cycle set in December 2022.
"The cost of a home through higher rates is becoming more expensive, and those on the hunt have no choice but to seek other financing such as adjustable-rate mortgages (ARMs) or new construction where there may be opportunities to get a lower rate," Ruben said. "Buyers today are growing frustrated."
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
