Homebuyers canceling sales at rising rate, in Minnesota and nationally

Yet another sign that challenging market conditions and general consumer angst are putting potential homebuyers across the country on edge: Canceled purchase deals are at their highest rate in nearly a decade.

During July, 15.3% of all pending home sales in the U.S. fell apart, likely because the buyer had a change of heart or because there was a problem with an inspection or financing. That was a modest increase from last year at this time but the highest share for any July since at least 2017, according to a monthly report from Redfin.

The cancellation rate in the Twin Cities metro area, where about 10% of all signed deals were scrapped during July, was among the lowest in the nation. Even so, it was slightly higher than a year ago.

“We are seeing more of this with higher interest rates, especially in the more affordable [starter home] price ranges,” said Angela Richter, a sales agent with RE/MAX.

She recently listed a house in Columbia Heights for $329,900, and the seller soon accepted an offer, only to re-list it at a lower price after the initial buyer backed out when they couldn’t get financing.

Working-class buyers are far more sensitive to today’s record prices and elevated mortgage rates, placing their deals in a far more precarious position than buyers with bigger budgets and more cash.

That’s partly why houses priced at less than $350,000 are taking much longer to sell than those that are more expensive. Buyers in those upper brackets also have far more options than they did last year.

The cancellations reflect pending sales that fell out of contract during July but don’t necessarily include deals signed during the same month. And the increase in cancellations comes at an increasingly confounding time for many homebuyers.

Mortgage rates have been on a downward trajectory in recent months, helping slightly offset persistent increases in prices. And house listings have been on the rise, giving buyers more options.

At the same time, many buyers are worried about the economy, including the prospect of rising inflation or a job loss down the road. That changes the equation for buyers who aren’t feeling financially secure.

Nationwide, pending home sales in July were down 1.1% from the previous month, falling to the lowest seasonally adjusted level since November 2023, according to Redfin.

Jeremy Hallowanger, a broker at Oakdale-based Hallel Properties, said that as inventory increases in some areas, buyers now have more negotiating power. That includes the ability to ask for a discount or contributions to closing costs.

Often, that happens during the inspection period, which typically lasts seven to 10 days. If an independent home inspector reveals a problem or defect the buyers don’t want to deal with, they can nix the deal thanks to the inspection contingency. Same if a buyer’s financing fails.

”People can be more picky than they were last year,” Hallowanger said. “They have more to choose from and don’t have to rush into anything,”

Often, though, there are financial or complicated legal issues that can torpedo a deal.

Tim Collelo, a broker in Cloquet, said the buyer of a rambler with “limitless opportunity” he had listed for $250,000 in Fridley backed out after financing fell through. The property also had title issues that took more than a year to resolve. After canceling the deal and re-listing it, Collelo quickly garnered another offer.

“Sometimes this happens in real estate,” Collelo said. “But I don’t see a lot of buyers backing out of deals.”

Those seller cancellations, he said, aren’t necessarily driving recent increases in house listings.

“If these sellers would also be buyers [move-uppers or downsizers], then they neither list nor purchase, so that could be ‘inventory neutral,’” Arbit said.

Because a buyer cancellation is often the result of a troubling inspection report or failed attempt at securing a mortgage, cancellation rates are more likely to rise during times when contingent offers are more common.

During the early years of the pandemic, when mortgage rates were at record lows and sellers held all the cards, few buyers were able to make contingent offers, diminishing their ability to back out of a deal.

In January 2021, mortgage rates fell to a record low of 2.65%, according to Freddie Mac. Three months later, the cancellation rate in the Twin Cities metro area was slightly more than 5%, which is nearly half of today’s rate.

She said that in addition to not having as much buying power, home hunters today are much more reluctant to overpay for a house. That makes them more likely to back out if they think they’re not snagging a deal.

Today, however, there are still plenty of buyers waiting in the wings.

The buyer of the Columbia Heights house made the offer contingent upon landing a mortgage. Within three weeks, it was clear that wasn’t going to happen, so the buyer and seller agreed to cancel the purchase agreement. The house quickly came back on the market, but at a lower price.

“We had a ton of showings and not strong feedback at our original price,” Richter said.

After dropping the price $20,000 for a listing price of $309,900, Richter’s client quickly fielded another offer.