Thebe Warren has received some interesting messages in her inbox of late.
“I have seen a lot of emails coming to me that say ‘back on the market,’” Warren, a Houston-based Compass agent, said. “I have not had anyone back out of a deal, but more and more buyers are clearly backing out now.”
Houston is one among many markets that has experienced an uptick in the number of pending home sales falling through, a consequence of skyrocketing mortgage rates and stubborn sellers who haven’t adjusted to a cooler market. In Houston, 20.6% of homes that went under contract in August had their contracts broken.
Nationwide, roughly 64,000 home-purchase agreements fell through in August, the equivalent of 15.2% of homes that went under contract that month, according to Redfin. By comparison, the rate was 12.1% a year ago. Redfin notes that the percentage of deals that have fallen through has hovered around 15% for the past three months, the highest level on record with the exception of March and April 2020 at the onset of the COVID-19 pandemic.
Jacksonville, Florida had the largest share of deals fall through with roughly 800 contracts called off, the equivalent of 26.1% of homes that went under agreement that month. The top 10 was rounded out by Las Vegas (23%), Atlanta (22.6%), Orlando (21.9%), Fort Lauderdale, Florida (21.7%), Phoenix (21.6%), Tampa, Florida (21.5%), Fort Worth, Texas (21.5%), San Antonio (21.1%), and Houston.
In Houston, Warren attributes the increase in cancellations to buyers’ concerns over the volatile mortgage rate environment, with many lenders quoting borrowers over 7% for conventional 30-year mortgages of late.
“It is kind of like what happened at the beginning of the pandemic,” Warren said. “People just got afraid with the virus — they don’t like uncertainty. And now we have had this huge shift in the market, and it has happened so quickly and again people were perhaps caught off guard.”
In Orlando, Florida, Anne-Marie Wurzel of Mainframe Real Estate said buyers are increasingly backing out of deals. In deals she’s involved in, it’s been due to the condition of the property, she said.
“With the rate environment we are in, I make sure people are super informed and when the rates started going up I made sure to add that in my buyer contracts,” Wurzel said. “Recently, I have only had one cancellation by a buyer and that was because during the inspection, things were revealed that were not visible on the surface and the buyer walked away because she didn’t want to spend the time or the money to correct all of the issues.”
In most instances, if a buyer backs out of a deal due to something on the inspection or for any reasons within the option period, they won’t lose their earnest money deposit. However, Wurzel noted that a buyer could also pull their contract simply due to cold feet and most likely get their deposit back, if they can get their lender to write a letter of denial on the mortgage.
“That is definitely skirting a gray area and I would never advise someone to do that, but you see it from time to time,” she said.
Down in the Dallas-Fort Worth metro area, Brixtone Real Estate agent Mandy Nichols said it is not buyers canceling deals. It’s the sellers.
“Some sellers are still unrealistic, and they don’t understand that the market has changed and people are not going to pay what they would have three or four months ago for their property,” Nichols said. “Interest rates have cut buyers’ purchasing power and they can’t afford what they could a few months ago. And if you want to sell, you need to understand that.”
Nichols said she worked with one seller who, despite receiving multiple offers, ultimately decided to lease the property because a bidding war didn’t develop. In addition, her broker recently worked with a seller who pulled the listing after only two weeks on the market because she was not receiving offers she was happy with.
“Unless you have a gem and it’s perfect and priced right, you aren’t going to get a bidding war now,” Nichols said. “And if you do get multiple offers it is not going to be 20 offers and $50,000 over asking, it is going to be a couple of offers and you will be lucky to get $10,000 over.”
Due to these circumstances, Wurzel said she is encouraging her clients to work with the offer they have under contract if their requests are at least somewhat reasonable.”
“There is more inventory to choose from now so if you aren’t willing to work with a buyer someone else probably will be,” Wurzel said.
With experts predicting mortgage rates to rise even higher in the coming months, Warren recommends buyers work with their lender and agent to lock in their mortgage rate so they have a sense of stability in their budget and that if they find a property they like and can afford, they go for it.
“Back at the start of COVID when everyone was canceling and staying home, the people who stayed in the market were glad they did,” she said. “They may have had a higher interest rate than if they waited, but they got a lower price and a home they are happy with, and they can always refinance. You are married to your house, but you are only dating your mortgage.”