Homebuyers are backing out of some real estate deals as negotiating power has reversed in their favor.
In July, there were 63,000 agreements for homes that were called off, about 16% of homes that were under contract, according to real estate company Redfin (RDFN). That’s an increase from a revised rate of 15% in June and 12.5% one year earlier.
The number of canceled sales is the highest rate on record if the first two months of the Covid-19 pandemic are excluded, Redfin said. During those months, March and April of 2020, many consumers were under state orders to stay at home and most housing activity was halted.
Higher mortgage rates have pushed some potential buyers to the sideline as inflation adds to the strains on their wallets, Redfin said in a report last month. That’s reduced the number of prospective homebuyers, giving shoppers more leverage and bargaining power with sellers, the report said.
This change is vastly different from only a year ago when competition was fierce and buyers were making all-cash offers, bidding over asking prices, and dropping so-called contingencies such as home inspections.
Homes in July sold at a slower pace compared to a year earlier, so more sellers are making concessions such as lowering asking prices, the report said.
“Homes are sitting on the market longer now, so buyers realize they have more options and more room to negotiate,” said Heather Kruayai, a Redfin real estate agent in Jacksonville, Florida. “They’re asking for repairs, concessions and contingencies, and if sellers say no, they’re backing out and moving on.
Buyers Have the Upper Hand
More buyers have an upper hand in negotiations and are including contingencies in their contracts that give them the ability to back out without losing money if something goes wrong, Kruayai said.
One of the most popular contingencies is a provision saying a prospective buyer is not liable if a mortgage application falls through. Other clauses give people the right to walk away from a deal if a home inspection or a pest review show deficiencies in the property.
If sellers are not willing to negotiate the selling prices or make repairs when problems emerge, some buyers are willing to walk away, said Kruayai.
Shoppers who are hopeful for a housing crash or prices to drop even lower may be in for a surprise, said Alexis Malin, another Redfin agent in Jacksonville.
While the housing market is demonstrating more signs of a slowdown, with annualized price growth slowing to 8% now from 17% in 2021, prices continue to increase, she said. No major housing forecaster is predicting the U.S.median home price, on a year-over-year basis, will decline.
“Some buyers who are backing out of deals have this mindset that the market is crashing and they’ll be able to get a home for $100,000 less in six months. That’s not necessarily the case,” Malin said. “Homes in many parts of Florida are still selling for a pretty penny, so I warn my buyers that the grass might not actually be greener on the other side.”
Consumers who started their house hunting earlier in the year when mortgage rates were closer to 3% may find themselves not able to qualify because of spikes in financing costs. The average U.S. rate for a 30-year fixed mortgage is 5.89% this week, compared with 2.88% a year earlier, according to Freddie Mac (FMCC).
Some buyers could be waiting for rates to decline or not qualifying because of the increase, said Taylor Marr, Redfin’s deputy chief economist.
Deal Cancellations May Taper Off
“Home-purchase cancellations may begin to taper off as sellers get used to a slower-paced market,” Marr said. “Sellers have already begun to lower their prices after putting their homes on the market. They’ll likely start pricing their properties lower from the get-go and become increasingly open to negotiations.”
The highest number of deal cancellations have occurred in Jacksonville and Las Vegas out of the 93 U.S. metropolitan areas Redfin analyzed, Marr said. In July, there were about 800 agreements that were called off, which is equal to 29.3% of homes that went under contract.
Las Vegas reported 27.4% cancellations while Lakeland, Florida, had 26.2%. New Orleans saw 25.9%, San Antonio was at 25%, Orlando, Florida, had 24.5% canceled agreements.
In Orlando, 37.4% of home offers written by Redfin agents faced competition in July, compared from 81.4% a year earlier, which is the largest year-over-year decline among metros analyzed by Redfin.
“The last four buyers I’ve worked with have all backed out of deals,” said Malin, the real estate agent. “One of my clients asked the seller for money to cover the home being repainted. The seller said no at first, so my buyer canceled the contract, but the seller then changed their mind and repainted the whole house. My buyer still walked away because he decided he didn’t love the home that much after all and he knew he had other options.”
The lowest number of canceled agreements occurred in Newark, New Jersey, with only 2.7% of home-purchase agreements derailed in July, according to Redfin data. The other low cancellation areas were 4.9% in Omaha, Nebraska, 5.9% in Nassau County, New York, 6.9% in Rochester, New York, and 7.1% in New York City.