The Homebuying World Is Changing, But Can Change Again As Quickly

The Homebuying World Is Changing, But Can Change Again As Quickly

Along with the rising tide of interest rates and home pricing that is not dropping fast enough, CNBC’s Sarah O’Brien reports that about 64,000 home-purchase agreements were canceled in August, according to a new report from Redfin.” That’s equal to 15.2% of home contracts initiated during the month and similar to the 15.5% canceled in July. A year ago, the share was 12.1%,” she says. “If you’re considering joining the ranks of those who walk away from a deal in progress, it’s important to know whether it will cost you to do so. Or, if you haven’t yet signed a contract but are nearing that point, it’s worth determining if you can cancel at some point in a way that doesn’t result in forfeited money.”

O’Brien goes on to say that buyers typically provide what is called earnest money or a “good faith” deposit when an offer is made on a home. Although the specifics vary from state to state, that amount is usually 1% to 5% of the purchase price but can run as high as 10% depending on the local market. “The deposit is kept in an escrow account and goes toward your down payment or other closing costs when you finalize the purchase at settlement.” It’s only kept if you manage to fail to meet the terms of the contract, but usually, safeguards are in place to avoid that – like contingencies. So let’s go there first.

“Given the financial risks of a broken contract, it makes sense to ensure the final purchase is contingent upon certain aspects of buying a house,” says O’Brien. “Common contingencies relate to home inspection, appraisal, and financing. For example, if the inspection were to reveal problems with the house that are unacceptable to you, a home inspection contingency generally would mean you can walk away and get your deposit back. Or, if the appraisal were to fall short of the agreed-upon sale price or you cannot secure a mortgage at a rate or terms specified in the contract, you could back out without losing your money.” She warns, however, that the process and conditions for being able to recoup your deposit differs from state to state, so check with your Realtor. For buyers, while it’s more expensive than ever to buy a home, the good news is that the softening market means entering into a contract with contingencies is more likely than it was just a few months ago. Several months back, many buyers were in bidding wars, committing to purchase a home “as is.” Not so much the rule now.

Affordability issues are also causing buyers to walk away, especially with new construction where the price is agreed upon, but the builder is experiencing supply chain issues affecting construction, meaning new houses are taking longer to complete. How does that translate? “This means that the current interest rate available to a buyer ahead of settlement may be higher now than it was before construction started,” says O’Brien. As a result, buyers may be willing to walk away even if they can qualify because the house payments have gone up. She offers an example: On a $300,000 mortgage at 6.7% over 30 years, monthly payments for principal and interest only would be $1,935. That same loan at 3.3% would result in a payment of $1,313 (savings of $622). Those amounts do not include other costs that often are wrapped into mortgage payments, including homeowners insurance, property taxes, or private mortgage insurance.

Long story short: It went from people offering tens of thousands of dollars above the asking price, waiving inspections, and promising the blood of their firstborn… to totally backing out of the deal even if it means losing their deposit. But stay tuned. Things change quickly in the real estate world.