Real estate

Home buyers are pulling out of more deals as recession fears linger

Contractors work on a home under construction in Antioch, California, on Tuesday, June 14, 2022.

Rising costs and declining confidence in the US economy are fast becoming a poisonous cocktail for the housing market. As a result, a growing number of buyers are withdrawing from deals they have made with home builders and sellers of existing homes.

According to studies by John Burns Real Estate Consulting, homebuilder cancellation rates have more than doubled since April. In July, 17.6% of construction contracts were canceled, compared to 8% in April and 7.5% in July 2021.

Texas and the wider Southwest are seeing the biggest jumps in builder cancellations, at 27% and 25%, respectively. Many Americans migrated to the Southwest during the early days of the pandemic. Cancellations are also higher than the national average in Northern California and the Northwest, at 23% and 19%, respectively.

The reasons for the cancellations are twofold: some buyers no longer qualify for their mortgage at today’s higher rates and therefore cannot close the homes once they are completed. (Mortgages for new housing contracts are often calculated before the home is built.)

And some buyers just walk away of their own accord, concerned about inflation and the potential for falling house prices. This may mean giving up expensive deposits, but state laws vary widely about the requirement for builders to repay cash deposits.

“California buyers can pretty much walk off the table and get their money back,” said Jody Kahn, senior vide president of research at JBREC. “In addition, builders have a lot of flexibility about what they need for cash deposits and can choose to be more or less lenient with repayments.”

The story is about the same with contracts on existing homes. Nationwide, about 63,000 of those deals fell through in July, or about 16% of the homes that went under contract that month, according to Redfin. Cancellations were 12.5% ​​in July 2021.

“Usually the sellers lose more than the buyers when the cancellations happen,” said Heather Kruayai, a Redfin agent. “The buyers cancel within their due diligence period and can keep the binder deposit. The sellers therefore lose time in the market as they have to change the status of their listing from active to conditionally accepting backups.”

Existing home cancellations are particularly high in Florida, which saw a massive influx of buyers in the first year of the pandemic and one of the steepest rises in home prices in the country during that time.

The city of Jacksonville saw the most contracts canceled in the state, about 800 deals in July, or 29.3% of homes going under contract. Orlando, Daytona, Palm Bay and Pensacola also saw some of the highest cancellations, alongside Las Vegas and San Antonio.

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