It is a well-known fact Asset that is inflation-proofFor the most part, real estate has been very sought-after over the last two year. However, the tide is changing.
Redfin’s latest report shows that approximately 60,000 U.S. home-purchase agreements failed last month. This is 14.9% of all homes which were under contract in June.
For perspective, cancellations were 12.7% in May 2022 and 11.2% June 2021.
In fact, 14.9% was actually the highest cancellation rate since the COVID-19 epidemic in early 2020. This brought an end to real estate transactions.
What’s behind the sudden change in Behaviours when buying a home? Let’s take a look.
There is less competition
You’ve probably heard of some house in your neighborhood getting sold for well over its asking price because of multiple offers.
When there are competing offers, people don’t want their deals to slip away.
But when there’s no competition, things can work differently.
“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” says Taylor Marr, deputy chief economist at Redfin.
“Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process.”
Higher interest rates make housing more costly
The Fed is increasing its tightening efforts to contain inflation. It raised its benchmark interest rates by 75bps last month, the largest rate hike since 1994.
And now, with June’s headline inflation rate coming in above expectations at 9.1%, traders expect the Fed to make a full percentage move at its meeting later this month.
While it’s yet to be seen how effective rate hikes can cool down raging inflation, higher interest rates mean higher costs of borrowing – not good news if you have a mortgage. Potential home buyers could also be affected by this.
“Rising mortgage rates are also forcing some buyers to cancel home purchases. If rates were at 5% when you made an offer, but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for a loan,” Marr explains.
Is the economy heading in the wrong direction
Potential buyers might also be watching from the sidelines. Economic uncertainty.
Fannie Mae’s Home Purchase Sentiment Index registered a reading of 64.8 in June, marking its second-lowest reading in a decade. Notably, 68% of respondents believe it’s a good time to sell a home, while only 20% of respondents think it’s a good time to buy a home.
After the pandemic-induced downturn in Q2 2020, the U.S. economy has seen a strong recovery. The labor market rebounded as well, with the unemployment rate at a low of five decades.
There are increasing concerns about homebuyers.
“In June, a survey-record 81% of consumers reported that the economy is on the wrong track, suggesting to us – and corroborated by other recently released consumer confidence measures – that people appear to be growing increasingly frustrated with inflation and the slowing economy,” said Fannie Mae’s senior vice president and chief economist Doug Duncan.
“Moreover, 21% of respondents expressed job stability concerns, the highest percentage in 18 months.”
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This article is for informational purposes only. It should not be considered as advice. It is not a warranty.