Around 60,000 purchase contracts fell through in June, which is around 15% of all homes that went under contract. The reason for this increasing number is hiding behind the economic cool-down and rising mortgage rates.
Homebuyers are canceling on regular sellers, but homebuilders are also reporting cancellation rates climbing pre-pandemic levels in the last quarter. One of the biggest homebuilders in the country reported cancellations rising above 11.5% in June, mostly due to homebuyers being unapproved by their lenders.
These numbers are one part of the wider picture - a shift in the market that’s coming slowly but surely. The balance between supply and demand will be achievable in some local markets.
Buyers’ remorse is increasing amid uncertainty in the market. Homebuyers are getting preapproved for the loan, but the rate climbs fast, and they get denied for the same loan a few weeks later. Others who get approved realize they are not ready for such a high monthly payment and give up the sale.
Some homebuyers are predicting a drop in prices soon, so they want to wait it out rather than buying something immediately. And those with cash to spare now have somewhat more options to choose from and don’t want to settle.
Additionally, the trend of waiving contingencies that took over the home purchase market is starting to die out as homebuyers realize they have a little more wiggle room for negotiation. Appraisal and inspection contingencies are a big reason for higher cancellation rates.
The big reason for the sudden increase in abandoned sales is the fact that at one point in mid-June, the mortgage rate jumped above 6%. That was a huge deal-breaker for homebuyers who couldn’t cope with such a high mortgage rate on top of the already pricey property.
Redfin reports 15% of sales that fell out of contract in June nationally. However, some of California’s local markets have a much larger percentage of cancellations. For example, Riverside has the highest call-off rate - with 20.9% of all sales in June being canceled by the buyer.
Behind Riverside, there are metro areas such as Sacramento and San Diego, with 19.8% and 19.5% cancellation rates. These metropolitan areas are subsequently the most popular migration destinations for in-state relocations, so many San Franciscans and Los Angelenos try to find a home there.
Anaheim is another Californian city on the list of places with a high sales cancellation rate, having more than 18% of all sales in June being abandoned. Even LA, one of the most expensive cities in the country with a serious lack of supply, has a 17.7% cancelation rate
The drops in sales will create more motivation for sellers to offer incentives, drop prices, and eventually even out the supply-demand gap that’s been lingering for a long time. Some of these aftermaths are already visible in the US real estate market.
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