Home sales cancelled at record rate as buyers hold power

Buyers have significantly more negotiating power than sellers in the housing market today, resulting in a record amount of home-sale cancellations, a new industry report found.

More than 42,000, or 13.7%, of home-sale agreements in the United States fell through last month, according to a Redfin report. That's the highest February share in records dating back to 2017 and up from 12.8% of homes that went under contract a year ago. The latest number is on par with 13.7% recorded in January.

"Homes are falling out of contract left and right," said Juan Castro, a Redfin Premier agent in Orlando, Florida, in a press release. "Sometimes buyers make an offer but never send the deposit because they get nervous, sometimes they revisit numbers with lenders and don't feel comfortable with the monthly payments and other times they use a minor inspection issue as an excuse to back out." 

Buyers hold this power because sellers overwhelmingly outnumber them in the market. There were an estimated 630,000, or 46.3%, more home sellers than buyers in the United States last month, according to a different Redfin report. That was the largest gap in records dating back to 2013.

Buyers may back out of an agreement during the inspection period if they see a home they like better, an issue comes up that they don't want to repair or if they just get cold feet, the release said.

"I'm also seeing buyers negotiate aggressively; for instance, maybe they ask for a brand-new roof because three shingles are missing on an otherwise perfectly good roof, then cancel the deal if the seller says no," Castro said.

Contract cancellations were most common in the South, where sellers outnumber buyers the most, notably in Tampa, Florida, with an 18.1% rate, and San Antonio and Atlanta, both with shares of 17.9%, the report found.

Contract constellations were least common in California, where markets were most competitive. San Francisco led all metros with a 3.7% cancellation rate, followed by Nassau County, New York at 4.5% and San Jose, California at 5.4%. Nassau County was one of just five seller's markets in the United States, according to the report.

High prices and mortgage rates have largely kept buyers on the sidelines, as both rest at historically high levels. But home prices rose just 0.1% last month, the slowest growth in seven months, according to the Redfin Home Price Index. Prices also increased 1.9% year over year, continuing a downward trend.

"Mortgage rates have ticked up in the past few weeks following months of declines, but we still expect housing affordability to improve this year as income growth outpaces home price growth," Redfin principal economist Sheharyar Bokhari said in a press release Tuesday. 

"Homebuyers in many markets are having success asking for discounts and other concessions, and they have the luxury of time because they aren't facing much competition."

But not all homes are selling at a discount. Those with lifestyle-driven amenities and move-in-ready finishes sold for as much as 5.4% more than expected, or about $19,500 extra on an average-priced home, according to new Zillow research.

For example, homes with a dock sold for 5.4% more, while an outdoor kitchen and shower boosted sale prices by 4.4% and 4.3%, respectively.

While these features may not be suitable for all homes, homes with quartzite countertops sell for 5.3% more than expected, listings that highlight custom features sell for 3.2% more and turnkey homes 2.9% more, Zillow found.

"When affordability is tight, the last thing buyers want is another expensive project waiting for them," said Zillow senior economist Kara Ng. "Homes that are already updated and thoughtfully designed can command higher prices because buyers can roll those costs into their mortgage, rather than paying for expensive improvements after closing."