The number of home sale cancellations soared in July to another two-year high as buyers retreated from the market amid rising mortgage rates and steep prices.
About 63,000 home purchase agreements were called off in July, equal to 16% of homes that went into contract that month, according to a new analysis by Redfin. That is up from 15% of deals that collapsed in June and is the highest rate in more than two years.
By comparison, just one year ago, the home cancellation level was around 12.5%.
There are two reasons for the increase in cancellations. Homes are sitting on the market longer, giving buyers more power to demand repairs, concessions and other contingencies. If sellers say no, buyers are more likely to back out and move on "because they're confident they can find something better," said Heather Kruayai, a Redfin real estate agent based in Jacksonville, Florida.
Homebuyers are also worried about the increasingly dark economic outlook as the Federal Reserve moves to tighten rates at the fastest pace in decades, risking a possible recession.
"Buyers are also skittish because they’re afraid a potential recession could cause home prices to drop," Kruayai said. "They don’t want to end up in a situation where they purchase a home, and it’s worth $200,000 less in two years, so some are opting to wait in hopes of buying when prices are lower."
Jacksonville, Florida, saw the highest percentage of home cancellations across the 93 metropolitan areas that Redfin analyzed, with 800 home-purchase agreements called off last month — or about 29.3% of homes that went under contract in the city. That was followed by Las Vegas and Lakeland, Florida, at 27% and 26%, respectively.
Six cities in Florida ranked among the cities with the highest rate of home-purchase cancellations. Florida exploded in popularity during the COVID-19 pandemic and has seen the highest price growth in the nation. That has caused competition to slow, meaning buyers are negotiating — and backing out if sellers don't give them what they want.
The data comes one day after the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, fell for the eighth consecutive month to 49, marking the worst stretch for the housing market since the 2008 financial crisis.
Any reading above 50 is considered positive; the gauge has not entered negative territory since a brief — but steep — drop in May 2020.
The interest rate-sensitive housing market has started to cool noticeably in recent months as the Fed moves to tighten policy at the fastest pace in three decades. Policymakers already approved a 75-basis-point rate increase in both June and July.
The average rate on a 30-year fixed mortgage climbed to 5.22% for the week ending Aug. 11, according to recent data from mortgage lender Freddie Mac. That is significantly higher than just one year ago when rates stood at 2.86%.