Homebuyers are regaining the upper hand in a cooling real estate market

Homebuyers are regaining the upper hand in a cooling real estate market
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Data: Redfin analysis of MLS data;  Chart: Axios Visuals
Data: Redfin analysis of MLS data; Chart: Axios Visuals

Elon Musk is not alone in trying to back out of the deal. About 15% of pending home sales failed to close in June, a new post-pandemic high, according to an analysis of MLS data released by Redfin on Monday..

Why it matters: This is a sign of how fast the housing market is adjusted for the increase in mortgage interest rates started in March – and it marks the beginning of a return to health from the boom, with the balance of power shifting back to home buyers. Prices are likely to cool down a bit.

  • Redfin economist Taylor Marr says sharp interest rate hikes haven’t just put the brakes on the housing market, they’ve slammed it into the wall. But he expects the number of cancellations to drop as sellers adjust prices to the new reality.

Minimize: Typically, most home buyers enter into pending sales contracts with a clause that allows them to back out of the contract if, for example, the inspection comes back with problems or something goes wrong with the appraisal.

  • When the market boomed just a few months ago, many buyers were shunning these odds. Those days are almost over May cause some increase in cancellations.
  • Unclosed deals are on the rise in previously hot metro areas in the Southwest. In Las Vegas, they were 27%. Several Florida cities are seeing cancellations close to 25%, including Lakeland, Cape Coral, Jacksonville and Orlando.

crazy: That 14.9% national rate is perhaps more surprising because overall pending home sales fell in June — so we’re looking at a larger percentage of a smaller universe.

In the meantime, other deals have fallen through because rapidly changing mortgage rates mean buyers can no longer afford the home they want—they either didn’t lock in their rates when they signed the contract, or the rate lock has expired.

  • Those buyers are either walking away or, in some cases, loan underwriters will no longer approve the mortgage, Marr said.

New home market It feels like it: According to a June survey of homebuilders from John Burns Real Estate Consulting, homebuilders are reporting a starkly different buying landscape, with large drops in sales and foot traffic to homes and an increase in cancellations.

  • One Phoenix developer quoted in the report said, “There’s been a pretty worrisome traffic and sales environment.” Cancellations are quite high.

An Austin builder sums it up this way: “Sales have fallen off a cliff. We sell 1/3 of what we sell in March and April. Buyers have no urgency and are concerned about interest rates and inflation. The constant negative forecasts in the news don’t help.”

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