Rising Mortgage Rates Prompt More Homebuyers to Withdraw from Deals

A house under foreclosure. (Mark Ralston/AFP/Getty Images)

Redfin reports that over 53,000 US house purchase agreements fell through in September, or 16.3% of all properties that went under contract in that month. Since mortgage rates topped 7% for the first time in 20 years in October 2022, that represents the largest percentage of terminated contracts. Additionally, the share has increased from 15.8% a year ago and 15.2% a month ago.

According to Redfin, purchasers with cold feet were particularly badly impacted in coastal boomtowns, where property values surged owing to the inflow of remote workers. In certain parts of Florida, contract cancellation rates exceeded 20%.

Buyers’ reactions came as mortgage rates held steady at 23-year highs in August and September, persuading rate-conscious individuals to abandon their intentions to buy a home. Since rates are almost 8%, there could be even more cancellations in the near future.

“Considering how much mortgage payments have increased, buyers are very cautious right now. When they don’t feel like they’re getting a good deal, they’re backing out,” said Heather Kruayai, a Jacksonville, Florida-based Redfin prime agent.

Florida’s highest cancellation rate

With rates rising, the Sun Belt area, which saw double-digit increases in property prices during the epidemic, lost part of its appeal.

Atlanta saw the highest number of pending sales go out of contract in September out of the 50 most populated metro areas that Redfin examined. That month, there were about 24.4% of contract cancellations in the region, up from 23.6% in August but somewhat down from 27.1% a year earlier.

Florida metropolises completed the top five cities with the greatest percentages of contract cancellations: 24% of contracts in September fell through in Jacksonville, followed by Orlando (23.6%), Tampa (22.7%), and Fort Lauderdale (22%).

Given how rapidly home prices have surpassed wage growth, it is not surprising that some purchasers have pulled back. The high mortgage rates this year make many people’s payments unaffordable.

For example, according to a separate Redfin study, those who were seeking to buy in Fort Lauderdale had to make 22.2% more money than they did a year earlier in order to afford a $420,000 median-priced property in August. With an average salary of $114,549, it is about $40,000 more than the $75,000 national median income in the US.

According to WSFS Mortgage President Jeffrey Ruben, “affordability is a big issue,” as reported by Yahoo Finance. “The interest rate environment is definitely creating constraints in our industry. It’s become a depressed kind of housing market.”

Delays in house buying weren’t only caused by higher mortgage rates.

“Transactions are also falling apart due to skyrocketing insurance premiums and disagreements between buyers and sellers over necessary repairs,” Kruayai stated in a statement. “Overall, buyers hold a lot of the cards right now, and sellers are having to give out more concessions to close a deal.”

Builders and buyers are also frustrated

Due to increased insurance premiums, Florida has seen a significant exodus of insurers, making it more difficult for prospective homeowners to obtain a homeowner’s policy at a fair price. Mortgage applicants are forced to scramble to locate an insurer in the first place and at a price that won’t disqualify them from receiving a mortgage because homeowner’s insurance is a requirement in order to obtain one.

With rates gradually rising, cancellation rates have also increased for builders. In the third quarter, LGI Homes’ cancellation rate was 27.9%, up from 21.3% at the same time the previous year, according to the company’s most recent earnings call.

If there’s any good news for those who are price-sensitive, it’s that home builders are becoming more accommodating in order to seal sales after seeing a change in consumer opinion.

The National Association of Home Builders (NAHB) reports that 32% of builders stated they lowered pricing in October, up from 25% in August. Since December 2022, when 35% of builders offered price reductions, this rate is the highest. The typical price reduction was 6%.

In their statement, they said that builder confidence is suffering greatly as a result of persistently high mortgage rates, which have reached a 23-year high and have been above 7% for the last two months. Sentiment levels have fallen to their lowest level since January 2023.

Based on a downwardly revised September reading, builder confidence in the market for newly built single-family homes declined four points to 40 in October, as reported in today’s National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the builder confidence decline for the third consecutive month.

Simultaneously, 62% of builders said that they provided all kinds of sales incentives in October, up from 59% the month before and level with the cycle’s previous high, which was established in December 2022.

NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama, stated, “Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market due to higher interest rates. Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”

“The cost of a home at higher rates is becoming more expensive, and those on the hunt have no choice but to seek other financing, such as adjustable-rate mortgages (ARMs) or new construction, where there may be opportunities to get a lower rate,” Ruben stated. “Buyers today are growing frustrated.”