Homebuyers canceled a record 60,000 purchase contracts last month because they're waiting for mortgage rates and home prices to fall
- Nearly 18% of pending home sales nationwide were canceled in October, the most since 2013.
- High inflation and mortgage rates have kept buyers at bay, even as the market begins to cool.
Nearly 60,000 homebuyers walked away from deals in October as the average mortgage rate reached 7%, according to a report from Redfin, a Seattle-based real estate firm.
The dip in pending home sales was the largest drop since Redfin began tracking the data back in 2013, the report said. While pending home sales fell across the country, Allentown Pennsylvania led the nation with a 54.9% year-over-year decline. Greensboro, North Carolina had the second highest pending home sale cancellation rate with buyers walking away from half of homes that were under contract.
The high volume of canceled contracts is also a reminder of how far the real estate market has moved away from the early days of the pandemic when low interest rates and intense competition led to record-breaking home price gains in so-called "zoomtowns."
According to separate data from Zillow, it takes an average of 4.5 months for buyers to find a home, plus an additional four to six weeks to close on the deal once the purchase agreement is signed. So, buyers who walked away from their contracts in October seem to be betting that a better deal is on the horizon as inventory levels begin to return and mortgage rates continue to drop.
"If that progress continues, buyers who recently backed out of deals may return to the market and sellers may be less inclined to slash their prices," Zhao added in the report.
Rising home prices have been a chief scourge for homebuyers and homebuilders alike throughout the pandemic. Since March 2020, the median home price in the US has increased by more than 41%, according to the Federal Reserve Bank of St. Louis.
These advancing home prices have quelled homebuying demand, especially among first-time homebuyers. The National Association of Realtors estimates that home sales will decline from 5.2 million in 2022 to 4.8 million in 2023 because of high mortgage rates and inflation, which is putting additional pressure on homebuilders to offload newly built properties from their balance sheets.
One reason that homebuyers seem to be content waiting in the wings is that nearly one-in-four homes dropped their prices in October, which is a more than 100% increase over the last 12 months, according to Redfin. Markets as wide-ranging as San Francisco and Lake County, Illinois — located in the northwest suburbs of Chicago — saw the steepest annual home price declines in October at 4.5% and 3.5%, respectively.
In turn, homebuilders like D.R. Horton are cutting back on the number of houses they build while simultaneously offering incentives to would-be buyers to keep their contracts.
Some homebuilders have decided to develop build-to-rent communities that they can sell to investors like J.P. Morgan, pension funds, or other public companies. Build-to-rent refers to a process of developing a series of homes with the intent of selling them to an investor who will then rent the properties.
There may be efficiencies in the build-to-rent model, some academics argue, particularly in an instance where homebuilders already have these developments pipelines well underway and new supply is still needed.
"Professional rental companies in some ways bring more efficiency and they might help solve affordability problems because of very high mortgage rates right now," Tomasz Piskorski, a professor of real estate at Columbia Business School, told Insider in November. "A lot of people simply cannot afford to buy a home."
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