Mortgages Are Getting More Expensive, Leading to Higher Cancellations
A new report from real estate firm Redfin shows 15% of homes under contract in June were eventually canceled, marking the highest level since early 2020. By comparison, cancellations were around 11% at this time last year.
Analysts say rising mortgage rates and soaring inflation are forcing people to rethink their home buying plans. After starting the year near 3%, the average rate on a 30-year fixed mortgage is now running up near 6%. Compounding the problem is the way lenders authorize loans based on a debt-to-income ratio, which is being thrown off by higher rates, leaving some would-be homebuyers no longer qualified for financing.
Following months of red-hot market conditions that made bidding wars routine, buyers may start to see more favorable conditions. Economists say cancellations are also on the rise because the market itself is cooling off, giving buyers more wiggle room. Contingencies that may have been waived such as inspection and appraisal are being kept more often. That gives buyers an opportunity to cancel.
It’s not just sellers of existing homes dealing with a rise in cancellations. Homebuilders saw cancellations rise 9.3% in May — an increase of 2.7% year-over-year.
Inflation and the potential for a recession are real economic factors that influence the housing market in various ways. They also play a psychological role. Some financial advisors say cancellations are increasing as would-be homebuyers worry about the economy as a whole. Some are also likely convinced prices will eventually fall, making it harder to pull the trigger on a purchase.
Market veterans say rising rates are sure to continue as long as the Fed remains committed to enacting hikes in order to fight inflation. Canceled real estate contracts are likely to uptick as well, making an impact on the broader housing market.
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