Got cold feet?
That’s what’s happening when it comes to actually closing on home deals. Residential real estate contracts are falling through at the highest rate in almost a year as high mortgage rates are giving homebuyers pause when they balance their budgets.
According to research by Redfin, a real estate firm and website, nearly 60,000 home-purchase agreements were canceled in August, or 15.7% of homes that went under contract that month. That’s up from 14.3% a year earlier and marks the highest percentage since October 2022, when mortgage rates surpassed 7% for the first time in two decades.
The average interest rate on a 30-year-fixed mortgage was 7.07% in August. It hit a high of 7.23% at one point — the highest since 2001 — with the typical homebuyer’s monthly payment up sharply compared to last year.
“A lot of people are having buyer’s remorse,” said John Marchioni, a real estate attorney in New York state.
Escalating interest rates along with higher home prices will be a red flag to buyers when re-examining their budgets, Marchioni said.
When it comes to backing out of a deal, the buyer usually loses their deposit. Rarely does anyone go to court to sue for damages due to the cost and time, Marchioni said. The seller then puts the home back on the market after a failed deal.
To avoid cold-feet scenarios, Marchioni suggests that sellers ask for a large deposit up front of 6% or more.
“Most people will close when there’s more money at stake,” he said.
With mortgage interest rates increasing in the last 18 months from the 4% range to 7% range, many buyers have either dropped from the market or reduced the price point for their search, said Patrick Cusato, real estate attorney and partner at Underberg & Kessler of Greater Western New York.
SEE MORE: Fed interest rate hike: What it means for real estate market
The interest rate increase is coupled with the general price increase of homes, Cusato said. There are mortgage contingencies that could be written into a contract to protect a buyer from an unexpected increase in interest rates, Cusato said. Generally, a capped rate is included in such a contract, such as a contingency that the interest should not exceed 7.25%.
If the rate exceeds the cap, the buyer has a right to cancel the contract, Cusato said. If the buyer did not place contingencies in the contract, the buyer is subject to losing their deposit and potentially being sued for breach of contract and subject to further liability.
Jaime Moore, a Redfin Premiere agent in Reno, Nevada, said in a statement that she has seen more homebuyers cancel deals in the last six months than at any point during her 24 years of working in real estate.
“Buyers get sticker shock when they see their high rate on paper alongside extra expenses for maintenance, repairs and closing costs. Many of them would rather back out, even if it means losing their earnest money,” Moore said.
While interest rates climb, home prices are also up due to low inventory. The median U.S. home sale price rose 3% year over year to $420,846 in August, the largest annual increase since October 2022, according to Redfin.
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