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More buyers are backing out of housing contracts

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A large, white two-level home under construction, with a sold sign in front.

When buyers back out of contracts, that can slow down construction of new homes, said Clint Mitchell, CEO of Estridge Homes in Indianapolis. Jim Watson/AFP via Getty Images

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On Thursday, the U.S. Census Bureau and the Department of Housing and Urban Development reported that of sales of new houses picked up slightly in December for the third month in a row. Compared to year ago though, sales were down 26%.

One factor weighing on home sales? A lot of buyers are backing out of contracts.

Earlier this month KB Homes, one of the largest builders in the country, said that 68% of its orders for new homes last quarter were canceled. That’s more than two-thirds.

The national cancellation rate is now about 20%, according to Ali Wolf, who follows the market as chief economist at Zonda. That’s about twice the typical rate.

“Reason one comes down to affordability,” Wolf said.

Building a new home can takes months, even a year. A lot can change between the time a buyer puts down a deposit and locks in a mortgage rate to close the deal.

“If someone signed a contract early last year, they thought they were buying at a 3% interest rate,” Wolf explained. “Now, they’re buying at a 6% interest rate.”

They may no longer qualify for a mortgage, or they may have just decided they can no longer afford it.

Cancellations have been higher in places where prices really shot up during the pandemic, Wolf added. “Areas like Denver or Austin, where now affordability is really getting stretched.”

Buyers are also canceling because they’re struggling to sell their current house in a sluggish market or — especially in tech hubs — because they lost their jobs.

Home prices are growing more slowly and even falling in some markets, because buyers are getting cold feet, said Robert Frick, an economist at Navy Federal Credit Union.

“The idea of buying into a market that is falling and then immediately having negative equity in your home, that scares a lot of people,” he said.

For builders, canceled contracts can slow down construction, said Clint Mitchell, CEO of Estridge Homes in Indianapolis. During the market boom, it was easy to find another buyer.

“If the market has weakened, then it’s gonna be harder to get that that new buyer,” he said. “You may have to provide some incentives or discounting to do that.”

That’s happening, and some buyers are canceling because they can get a better deal from another builder. But as mortgage rates have come down a little recently, Mitchell said he’s seeing cancellations slow down too. 

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