As mortgage rates rise, so does buyer’s remorse
Canceled deals impacted nearly 16% of homes under contract in August as elevated interest rates and home prices led to sticker shock for some buyers.
- A Redfin study found nearly 60,000 home-purchase agreements were canceled in August, up significantly from a year ago.
- Cancellations haven't been this high since last October, when mortgage rates jumped past 7% for the first time in decades.
- For agents, educating buyers about the consequences of backing out could help their clients avoid losing earnest money.
Higher mortgage rates are doing more than keeping buyers on the sidelines — they're also causing buyers to back out of deals.
Redfin found that nearly 60,000 home-purchase agreements were canceled in August, or about 15.7% of homes that went under contract. That's up from 14.3% a year earlier, and it's the highest level since October 2022 when mortgage rates hit 7% for the first time in more than two decades.
In contrast, when mortgage rates dropped to record lows in the spring of 2021, canceled contracts were around 10%.
Jaime Moore, a Redfin Premier real estate agent in Reno, Nevada, said buyers are getting sticker shock when they see how high mortgage rates translate to big monthly payments.
"Many of them would rather back out, even if it means losing their earnest money," Moore said, adding that a lot of sellers are willing to let those buyers go to avoid concessions like repair requests.
According to Redfin's data dating back to 2017, a similar spike in canceled home contracts hasn't occurred since March 2020, when pandemic lockdowns were first implemented across the U.S.
The rise in cancellations also comes at a time when home prices are at near-record highs. According to the Redfin report, the median U.S. home price rose 3% in August to $420,846, the largest annual increase since October 2022. The all-time high came in May 2022, when the median home price was $432,780.
The report noted that because inventory remains near all-time lows, sellers who lose a buyer can typically find another one quickly.
What should agents be doing?
If mortgage and home prices remain elevated, which could spur more cancellations, buyer agents need to make sure their clients understand the ramifications ahead of time.
Buyers can typically cancel a home sale agreement with few consequences before an offer is accepted by the seller, but once the deal is signed by both parties, it's more difficult for buyers to back out — without losing money — unless contingencies allow for it.
If no contingencies are involved and the buyer still wants to cancel the sale, they may have to forfeit their earnest money, which can be several thousand dollars. Sellers can potentially sue someone who backs out of a deal, but it's considered rare in most markets since a house tied up in a lawsuit usually can't be sold until it's settled.