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In normal times, something like 9 in 10 buyers who enter a contract to build a new home will go through with the purchase.
But in some parts of the country – including Texas and the Southwest states – nearly half of them have been getting cold feet in recent months as affordability issues mount.
Contracts for homes under construction nationwide saw a 26 percent cancellation rate in October, according to builder survey data provided to finance publication Wolf Street by John Burns Real Estate Consulting. That’s the highest cancellation rate the survey has found in at least four years.
The year before the pandemic began, cancellations rates were closer to 10 percent, and dropped even lower in the years since as record-low mortgage rates lit a fire under the market.
In some parts of the country, buyers were backing out at even higher rates.
In the Southwest region, buyers exited contracts for new homes at a 45 percent clip, up from 9 percent the same time last year, according to the survey data. In Texas, that cancellation rate hit 39 percent, up from 12 percent the year before. In the Northwest, cancellations reached 30 percent, up from 7 percent last year.
The only U.S. region where cancellations remained somewhat normal was the Northeast, where a mere 11 percent backed out of contracts for a home under construction. In the Midwest and Southeast regions, cancellations were roughly double where they were a year ago, but not as high as in Western states.
Those numbers are based on a survey from two months ago. In November, builders were starting fewer projects as sales continued to suffer and construction costs remained sky-high.
“Housing starts fell off a cliff in November,” John Burns Director of Research Rick Palacios wrote on Twitter. “Many homebuilders in our monthly survey hitting the pause button until costs drop.”
By most accounts the housing slowdown has hit homebuilders harder than it has the market for existing homes. Newly built homes tend to sell at higher price points, which have been affected most by this year’s staggering rise in mortgage rates.
Complicating this further for buyers is the fact that building a home is an intensive months-long project. The home payment they might expect at the outset of the process might look very different from the one available when they’re almost ready to close.
After mortgage rates spent most of 2021 hovering near 3 percent, they’ve settled well above 6 percent as 2022 draws to a close. That particularly volatile runup threw many homes into a less affordable territory for buyers in need of financing.
