As a well-known inflation-proof asset, real estate has been highly sought-after for most of the last two years. But things seem to be shifting.
According to a new report from real estate brokerage Redfin, around 63,000 home-purchase agreements in the U.S. fell through last month. That equates to 16.1% of all homes that went under contract in July.
To put things in perspective, cancellations were at 15% in June 2022 and 12.5% in July 2021.
In fact, 16.1% was the highest cancellation rate since early 2020, when the COVID-19 outbreak brought real estate transactions to a near dead stop.
What’s behind the sudden change in home buying behavior? Let’s take a look.
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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.
“Homes are sitting on the market longer now, so buyers realize they have more options and more room to negotiate,” says Heather Kruayai, a Redfin real estate agent in Jacksonville, Florida.
“They’re asking for repairs, concessions and contingencies, and if sellers say no, they’re backing out and moving on because they’re confident they can find something better.”
Higher interest rates make housing less affordable
To tame spiking inflation, the Fed is tightening aggressively. In June, it raised its benchmark interest rates by 75 basis points, marking the largest rate hike since 1994.
In July, the Fed announced another 75-basis point rate increase, bringing the federal funds rate to a range of 2.25% to 2.5%.
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. And that can change the decision of potential home buyers as well.
Redfin points out that a few months ago, mortgage rates were at around 3%. Today, the 30-year fixed-rate is at well over 5%. And that means someone who started shopping for a home several months ago may not be able to afford the same type of property they were looking at before.
Time to buy or sell?
Real estate moves in cycles. Given the recent developments, could this be an opportune time to take advantage of the market weakness?
A new survey suggests that sentiment is not exactly optimistic.
Fannie Mae’s Home Purchase Sentiment Index registered a reading of 62.8 in June, marking its lowest reading since 2011. Notably, 67% of respondents believe it’s a good time to sell a home, while only 17% of respondents think it’s a good time to buy a home.
Unsurprisingly, mortgage rates are a main concern.
“Unfavorable mortgage rates have been increasingly cited by consumers as a top reason behind the growing perception that it’s a bad time to buy, as well as sell, a home,” says Fannie Mae’s Senior Vice President and Chief Economist Doug Duncan.
“With home price growth slowing, and projected to slow further, we believe consumer reaction to current housing conditions is likely to be increasingly mixed: Some homeowners may opt to list their homes sooner to take advantage of perceived high prices, while some potential homebuyers may choose to postpone their purchase decision believing that home prices may drop.”
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Source: finance.yahoo.com