In Los Angeles, the turbulence within the U.S. housing market has become increasingly apparent, particularly with a rise in the cancellation of home purchase agreements before they are finalized. Recent data from the National Association of Realtors indicates that roughly 6% of home purchase contracts were canceled in the month of May. While this is a slight decrease from 7% in April, it represents an increase from 5% in May of the previous year. This serves as the third month in a row to experience an annual uptick in the cancellation of pending home sales.
Adding further dimension, an analysis carried out by Redfin revealed that in May, 14.6% of pending sales did not reach completion, marking an increase from 14% in the same month last year. This percentage is the highest recorded for the month of May since at least 2017. Such figures highlight the challenges buyers face even after negotiating a deal with sellers. Issues such as unforeseen expenses, changes in financial circumstances like credit or employment status, or unfavorable appraisals are among reasons leading to contract cancellations.
According to Lawrence Yun, Chief Economist at the National Association of Realtors, several factors could be driving the increased cancellation rates. These include fluctuations in the stock market, reduced consumer confidence, as well as broader economic and geopolitical uncertainties.
Since 2022, the U.S. housing market has been embroiled in a sales downturn. Sky-high mortgage rates coupled with soaring home prices have made homeownership increasingly unattainable for many prospective buyers. May’s figures show that the pace of sales for previously owned U.S. homes was the lowest since 2009. However, pending home sales showed signs of improvement, with a 1.8% uptick from the previous month and a 1.1% increase from May of the prior year.
A purchase contract is deemed pending when it has been signed but not yet closed. Given the one-to-two-month gap between signing and finalization of sales, pending home sales serve as a preview for future home sale completions. In a snapshot by Redfin, for the four weeks ending June 22, pending home sales fell by 2.3% from the previous year, making it the largest decline in three months.
Responding to these trends, economists at mortgage firm Fannie Mae have adjusted their expectations for existing U.S. home sales. They now anticipate that the average rate on a 30-year mortgage will close out the year at 6.5%. The revised forecast projects a modest 2% increase in existing home sales for the year, totaling 4.14 million. This is a change from earlier predictions of 4.24 million houses being sold. However, they also foresee a more optimistic future, projecting a 9.5% rise in home sales by 2026, tied to an anticipated reduction in mortgage rates to 6.1%.