As a known anti-inflationary asset, real estate has been in high demand for most of the past two years. But things seem to be changing.
According to a new report from real estate brokerage Redfin, about 60,000 home purchase deals in the U.S. expired last month. That equates to 14.9% of all homes that went into contract in June.
To put things into perspective, cancellations were at 12.7% in May 2022 and 11.2% in June 2021.
In fact, 14.9% was the highest cancellation rate since early 2020, when the COVID-19 epidemic brought real estate transactions to a near standstill.
What’s Behind the Sudden Change in Home Buying Behavior? Let’s take a look.
You’ve probably heard of a home in your neighborhood selling for a much higher price due to multiple offers.
When there are competing offers, people don’t want to miss out on their offers.
But when there is no competition, things can work differently.
“Slowing competition in the housing market is giving homebuyers room to negotiate, which is one reason more of them are walking away from deals,” says Taylor Marr, deputy chief economist at Redfin.
“Buyers are increasingly complying rather than forgoing potential inspections and appraisals. This gives them the flexibility to cancel the deal if problems arise during the home buying process.”
Higher interest rates make housing less affordable
To tame rising inflation, the Fed is tightening aggressively. In June, it raised benchmark interest rates by 75 basis points, marking the biggest rate hike since 1994.
On Wednesday, the Fed announced another rate hike of 75 basis points, bringing the federal funds rate to a range of 2.25% to 2.5%.
While it is yet to be seen how effectively interest rate hikes can moderate raging inflation, higher interest rates mean higher borrowing costs – not good news if you have a mortgage. And this can change the decision of potential home buyers as well.
“Rising mortgage rates are also causing some buyers to cancel home purchases. If interest rates were at 5% when you made an offer, but they’re up to 5.8% by the time the deal closes, you may no longer be able to afford that home or you may not qualify for a loan,” Marr explains. .
Is the economy going in the wrong direction?
Potential buyers could also remain on the sidelines due to economic uncertainty.
Fannie Mae’s Home Market Sentiment Index read 64.8 in June, marking its second lowest reading in a decade. Specifically, 68% of respondents believe it is a good time to sell a home, while only 20% of respondents believe it is a good time to buy a home.
The US economy has rebounded strongly from the pandemic-induced recession in the second quarter of 2020. The labor market has also recovered with the unemployment rate holding near a five-decade low.
But there are growing concerns among homebuyers.
“In June, a record 81% of consumers said the economy is on the wrong track, suggesting to us – and confirmed by other recently released measures of consumer confidence – that people appear increasingly disillusioned with inflation and the slowdown of the economy. said Fannie Mae senior vice president and chief economist Doug Duncan.
“Additionally, 21% of respondents expressed concerns about job stability, the highest figure in 18 months.”
On Thursday, the Bureau of Economic Analysis reported that in the second quarter, real GDP in the US fell at an annual rate of 0.9%.
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This article provides information only and should not be construed as advice. Provided without warranty of any kind.