In early 2020, homebuying paused briefly as the Covid-19 pandemic took hold, with buyers canceling about 11% of purchase deals. In June, that rate jumped to 15%. So what happened? Here are the main contributing factors.
Higher Home Prices and Interest Rates
Rising home prices and interest rates combined to make purchasing unsettling if not impossible for many homeowners. Median home prices in Virginia surged from $360,000 at the start of the year to almost $450,000 in June.
According to property data provider ATTOM, the costs of owning a median-priced home in the second quarter of 2022 required 31.5% of the average U.S. wage. That’s the highest percentage since 2007 and up from 24% the year before, marking the biggest jump in more than two decades. Experts advise that housing costs should not exceed 30% of your income, and a rule of thumb long used by real estate agents and homebuyers is that you can afford a house if its price is equivalent to roughly 2.6 years of your household income. The 2022 20+% increase in home prices has made buyers skittish about becoming house poor in an economy where depreciation is a real possibility.
While housing costs rose so did mortgage rates. The average interest rate on the 30-year fixed mortgage started the year around 3% and then increased steadily. It briefly shot above 6% in mid-June before settling in at ±5.75% by July 1st.
This created a dilemma for many homebuyers. "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," says Redfin Deputy Chief Economist Taylor Marr.
Volatile Stock Market
According to U.S. Bank, “U.S. stocks, as measured by the benchmark S&P 500 index, officially fell into “bear market” territory in June 2022. This represents a decline that exceeds 20% of the peak value of the index.” Homebuyers relying on their investments for retirement and income were spooked by these losses and grew more hesitant to make large purchases before a possible recession.
Cooling Housing Market
Another reason buyers are backing out of contracts has to do with this cooling housing market. Many no longer see the urgency in bidding for a home that may depreciate in the coming year. Realtor Joanna Rose says, “In the early spring, every home was selling over its asking price with multiple bids — then the number of people attending open houses dropped, and now some homes are sitting on the market for over a month and selling for under asking price. Supply is starting to pile up.”
Changing Buying Process
The buying process that characterized the pandemic housing surge is changing too. Buyers are no longer waiving inspections and appraisal contingencies, giving them the flexibility to call off a deal if issues arise.
New Home Sales Are Not Immune
Inflation, supply challenges, and labor shortages are impacting new home sales as well. Builders are reporting that buyers are nervous about higher interest payments, higher building costs, labor shortages causing delays, and the potential for declining home prices as well. New home cancellations hovered around 6.5% in early 2020 and increased to 9% in June of 2022.
Predictions
The pros have differing opinions on how the housing market will play out for the remainder of 2022.
Economists with CoreLogic feel the market will continue to be strong despite the slowdown. An urgency to buy will be spurred by fears of further rising rates and an increase in the number of homes on the market.
Less bullish experts feel the market will transition away from sellers and favor buyers more with an increase in the number of first-time buyers.
Bankrates’ Greg McBride, chief financial analyst, anticipates demand dropping sharply for the same reasons. “Even homebuilding activity is slowing due to supply constraints and cooling demand,” he says. “But while the market is cooling, prices are not necessarily dropping. We will see home price levels that are 15-20 percent above what a home would’ve sold for six to twelve months ago.”
As Nadia Evangelou with NAR points out, “June is traditionally the busiest month for the real estate market.” With more homebuyers backing out of deals in June than since the start of the pandemic, perhaps a bearish approach to housing is in order.
Sources: Insider, Redfin, CNBC, Mortgage News Daily, U.S. Bank, Bloomberg, ATTOM Data Solutions, Bankrate, Business Report, The Street