Contractors work on a home under construction in Antioch, Calif., Tuesday, June 14, 2022.
David Paul Morris | Bloomberg | Getty Images
Rising costs and loss of confidence in the US economy are quickly becoming a toxic cocktail for the housing market. As a result, an increasing number of buyers are forgoing deals they have with home builders and sellers of existing homes.
Homebuilder cancellation rates have more than doubled since April, according to surveys by John Burns Real Estate Consulting. In July, 17.6% of builder contracts failed, compared to 8% in April and 7.5% in July 2021.
Texas and the wider Southwest are seeing the largest increases in builder cancellations, at 27% and 25%, respectively. Many Americans migrated to the Southwest at the start of the Covid pandemic. Cancellations are also higher than the national average in Northern California and the Northwest, at 23% and 19%, respectively.
The reasons for the cancellations are two-fold: Some buyers no longer qualify for their mortgages at today’s higher rates and therefore cannot close on homes once completed. (Mortgages for new real estate contracts are often calculated before the house is built.)
And some buyers simply walk away of their own volition, worried about inflation and the possibility of home values going down. This may mean forgoing expensive deposits, but state laws vary widely regarding whether builders are required to return cash deposits.
“California buyers can pretty much walk off the closing table and get a refund,” said Jody Kahn, senior vice president of research at JBREC. “Also, builders have a lot of flexibility on what they need for cash deposits and they can choose to be more or less forgiving when it comes to refunds.”
The story is much the same with contracts on existing homes. Nationally, about 63,000 of those deals failed in July, or about 16% of homes that were under contract that month, according to Redfin. Cancellations were 12.5% in July 2021.
“Most of the time, sellers lose more than buyers when cancellations happen,” said Heather Kruayai, an agent at Redfin. “Buyers cancel within their due diligence period and are able to keep the binder deposit. Sellers therefore waste time in the market as they have to change their listing status from active to contingent accepting backups.”
Cancellations of existing homes are particularly high in Florida, which saw a massive influx of buyers in the first year of the pandemic and also saw one of the strongest home price appreciations in the country during that time.
The city of Jacksonville saw the most canceled contracts in the state, about 800 deals in July, or 29.3% of homes under contract. Orlando, Daytona, Palm Bay and Pensacola also had some of the highest cancellations, in addition to Las Vegas and San Antonio.