Real estate deals are falling through at record numbers. Here's why.

The housing market is experiencing a record high in contract cancellations, primarily due to a disconnect between buyers and sellers. Buyers are struggling with high interest rates, making affordability a significant concern, while sellers, benefiting from low pandemic-era mortgage rates, are reluctant to offer incentives for moving. This disparity often leads to deal collapses during escrow, particularly when inspection issues arise.

Competition among buyers is also diminishing, as evidenced by a falling sale-to-list ratio, indicating that more homes are selling below asking price. This suggests buyers are successfully negotiating lower prices, often because they are the sole interested party. Historically, fall signifies a slowdown in the housing market due to seasonal factors, but recent declines in mortgage rates are paradoxically bringing more sellers into the market, potentially leading to price moderation as buyer negotiating power increases.

While home prices are still seeing an upward trend, their growth is slower than inflation, meaning real values are declining. This suggests that a future drop in mortgage rates may not lead to a significant price surge due to a balanced market of both buyers and sellers. Regionally, the Midwest is an outlier with increasing home values, driven by growing economies, rising incomes, and still-affordable housing, coupled with limited supply. Conversely, areas like Texas and Florida, which have seen substantial new construction, are experiencing falling home prices, offering buyers more negotiating power, especially for condos.

• Record high contract cancellations are occurring because buyers cannot afford homes with high interest rates, while sellers with low pandemic-era rates need incentives to move, leading to deal failures during escrow.
• A falling sale-to-list ratio indicates fewer homes are selling at asking price, and buyers are successfully negotiating lower prices, suggesting reduced competition.
• The fall season typically sees a market slowdown, but recent drops in mortgage rates have increased seller participation, which could lead to price moderation.
• Home prices are increasing at a rate slower than inflation, causing real values to erode.
• The Midwest is experiencing rising home values due to growing economies, higher incomes, affordable housing, and limited supply, while Texas and Florida are seeing price drops due to increased new construction.

Record High Cancellations and Buyer-Seller Disconnect [00:10]

• Contract cancellation rates have reached a record high for this time of year.
• This is attributed to a misalignment between home buyers and sellers.
• Buyers are facing high interest rates, making homes unaffordable.
• Sellers have record low mortgage rates from the pandemic and require incentives to move.
• Disagreements during escrow, often over payments needed after inspections, lead to deals falling apart.
• Buyers expect sellers to cover costs, but sellers are unwilling to pay, causing transactions to fail.

The current housing market is seeing a significant increase in canceled contracts, largely stemming from a fundamental disagreement between what buyers can afford and what sellers are willing to accept. This impasse, driven by high interest rates for buyers and entrenched low rates for sellers, is causing deals to break down, especially when unexpected costs arise during the closing process.

Buyers expect money, sellers don't want to pay, and the deal just tends to fall apart.

Declining Competition and Shifting Negotiation Power [01:06]

• The sale-to-list ratio is falling, meaning more homes are selling below their asking price.
• This indicates that buyers are successfully making offers below the asking price.
• Typically, this occurs when a home has only one interested buyer.
• Sellers without multiple offers are compelled to lower their prices to secure a sale.

This trend suggests a shift in market dynamics, where buyers are gaining more leverage and sellers are having to adjust their expectations to move their properties. The lack of multiple bids means sellers have less room to negotiate and must reduce prices to attract any interest.

That usually only happens when they're the only buyer that's interested in the home.

The Impact of Seasonality and Mortgage Rate Fluctuations [01:32]

• The fall season is typically a slower period for the housing market, with activity decreasing after the active spring and summer months.
• Factors like back-to-school and upcoming holidays contribute to this slowdown.
• Recent declines in mortgage rates were expected to attract more buyers, but instead, they have brought more sellers to the market.
• An increase in sellers relative to buyers is a positive sign for price moderation, as it grants buyers more negotiating power.

The usual seasonal cooling of the housing market in the fall is being influenced by recent shifts in mortgage rates. While lower rates might be expected to boost buyer demand, they seem to have had the opposite effect, encouraging more sellers to list their properties, which could lead to a stabilization or even a decrease in prices.

if there are more home sellers relative to home buyers, that means that buyers have more negotiating power and prices will likely fall.

Real Home Value Erosion and Future Price Stability [02:10]

• Home prices are still increasing, but at a pace slower than inflation.
• In real terms, the value of homes is beginning to erode.
• When mortgage rates eventually fall, a significant acceleration in prices is not anticipated.
• Historically, falling mortgage rates bring many buyers back, increasing competition and prices.
• However, because sellers have also been constrained by mortgage rates, a more balanced market with more sellers and buyers is expected, keeping prices more stable even as rates decrease.

Despite ongoing price appreciation, the real value of homes is diminishing due to inflation outpacing price growth. This suggests that even with potential future drops in mortgage rates, the market is unlikely to experience a dramatic price surge due to a more balanced supply and demand dynamic.

Usually, when mortgage rates fall, a bunch of buyers come back, there's competition, prices go up.

Regional Market Trends: Midwest Growth and Sun Belt Price Drops [02:44]

• The Midwest is an outlier, with home values increasing, which is historically unusual.
• Rust belt cities, previously in decline, are now experiencing economic growth and rising incomes.
• Homes in these areas remain relatively affordable compared to the national average.
• Increased demand in the Midwest is meeting limited supply, driving up prices.
• Regions like Texas and Florida, which have seen significant new housing construction, are experiencing falling home prices.
• Texas, in particular, has a large amount of new inventory coming online, leading to price reductions.

Geographically, the housing market is showing diverse trends, with the Midwest bucking national patterns by experiencing price increases due to economic revitalization and affordability. In contrast, areas like Texas and Florida are seeing prices fall due to an oversupply of new homes.

The places that are getting more affordable are the places that have built a lot of housing.

New Construction's Role in Affordability and Buyer Power [03:45]

• New construction in some areas has slowed down, raising questions about the sustainability of current price trends.
• Continuous building is necessary to maintain affordable housing prices.
• Currently, in areas with new construction, buyers can find deals.
• Buyers have the most power and negotiation ability, particularly for condos, in these markets.

The availability of new housing is a key factor influencing affordability. While new construction has helped moderate prices in some regions, a sustained pace of building is crucial for long-term affordability and maintaining buyer leverage.

That's where we're seeing buyers having the most power and the most ability to negotiate down