As homebuyer contracts collapse, expectations tumble, too

The reasons run from high interest rates to cold feet and no insurance available.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | September 25, 2023

Article originally posted in Orange County Register on
September 21, 2023.

Escrows are canceling at an alarmingly high rate. I’m seeing it among my own clients.

Wholesale mortgage lenders (they make credit decisions on loan packages originated by mortgage brokers) are complaining about this trend, too. Plenty of real estate agents and brokers are griping about the spiking cancellations.

In August, 60,000 home purchase agreements, or 15.7% of homes under contract, were canceled, according to a Sept. 15 report by Redfin. 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.

From my front-row seat of home sale transactions, I’m seeing mostly buyers canceling their escrow, not sellers. And these buyers are almost never cash buyers.

So, what are some of the myriad reasons homebuyers are changing their minds and canceling? Here’s what I’ve heard:

—I’m waiting for a drop in mortgage rates as I can’t afford 7% rates.

—We don’t have the money to fix up this dump the way we want.

—After thinking about it, we got cold feet.

—The home is in a designated wildfire area making insurance unaffordable.

—The seller wouldn’t agree to pay for our home inspection repair list.

All of these are valid reasons to cancel a deal and walk away. It would be prudent to ask oneself if the next buying opportunity is going to be any different.

Do you really want to remain on the road to homeownership? If so, you are going to need to lower your expectations.

According to Reports on Housing, the dearth of homes for sale has been dropping like a lead balloon since the Great Recession. It’s not going to get any better anytime soon. Not here in Southern California and probably not in many other areas.

Using National Association of Realtor data, Reports on Housing said that 4 million homes were listed for sale across the U.S. during the Great Recession. As of January 2023, that number has fallen tumbled to 980,000. Today, the math says we’re looking at 75% fewer homes available to purchase than roughly 15 years ago.

Reports on Housing data offers the following Southern California home sales by county:

— Los Angeles County: January 2012, 16,000 vs. 7,664 in January 2023, a 52% inventory decline.

— Orange County: January 2012, 8,000 vs. 2,431 in January 2023, a 69.6% inventory decline.

— Riverside County January 2012, 9,000 vs. 5,420 in January 2023, a 39.8% inventory decline.

— San Bernardino County: January 2012, 6,000 vs. 3,966 in January 2023, a 33.9% inventory decline.

— San Diego County: January 2012, 8,000 vs. 2,779 in January 2023, a 65.3% inventory decline.

“Holding out and waiting for something to happen doesn’t make sense. It’s wasted time,” says Steven Thomas, the chief economist at Reports on Housing. “You are paying somebody else’s mortgage (as a renter).”

Besides “where’s the inventory,” here are some other reasons it’s unlikely more homes will come on the market:

More than 60% of all U.S. mortgage holders have a fixed rate below 4%. If and when mortgage rates drop in the next year or two, it’s doubtful rates will drop below 5.5%.

California has Proposition 13, which means your property tax rate can only go up 2% per year. Anybody who bought more than two years ago is unlikely to want to give up their comparably lower property taxes should they consider moving.

What about a hard recession? Won’t a lot of folks lose their jobs? Won’t a lot of self-employed borrowers suffer income reductions and business losses? Won’t a lot of homes come on the market because bank accounts are drying up and cash flow is too constrained?

If a recession hits, and some people can no longer afford their house payments, they are more likely to rent their homes out than to list them for sale.

It’s feasible they would downsize by renting a significantly less expensive property compared with their own house payment.

For example, say your total house payment and HOA is $5,000 per month. The home can fetch $7,000 in monthly rent. The homeowner downsizes, finding a place to rent for $3,000 per month. Shelter costs decrease by $2,000. The homeowner earns $2,000 per month in gross rent profit.

Excluding tax considerations, moving expenses and lease agent commissions, the homeowner reduces monthly overhead by $1,000, retains homeownership, protects their lower mortgage rate and Prop. 13 property tax protection.

 My advice: Think hard before signing the residential purchase agreement. Think harder before you decide to cancel.

Freddie Mac rate news: The 30-year fixed rate averaged 7.19%, 1 basis point higher than last week. The 15-year fixed rate averaged 6.54%, 3 basis points higher than last week.

The Mortgage Bankers Association reported a 5.4% mortgage application increase compared to last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $434 less than this week’s payment of $4,925.

Priced out? Zero-down loans, downpayment grants available

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6.5%, a 15-year conventional at 6.5%, a 30-year conventional at 6.99%, a 15-year conventional high balance at 7.125% ($726,201 to $1,089,300), a 30-year high balance conventional at 7.5% and a jumbo 30-year fixed at 7.375%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year, adjustable for the first five years, 7.25% interest-only with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.