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North Texas homebuilders are seeing an alarming surge in cancelations of contracts on new homes, triggering a sharp drop in sales and pending sales last month, and a record rate of increase in new home listings in the Multiple Listing Service.
The three-month moving average of active listings in the North Texas Real Estate Information Systems jumped from 933 in April to 2,915 in June – an increase of more than 200% in 90 days, according to an analysis of NTREIS data by Dallas-based HomesUSA.com.
Builders are being “whiplashed” by buyer demand that soared in the early days of the pandemic then plunged with the onset of higher mortgage rates and other recent developments, said Ben Caballero, CEO of HomesUSA.
The numbers reflect a growing pattern of buyers backing out of contracts, he said.
“The whiplash began in March of last year when Dallas-area builders were caught flat-footed by the sudden and astonishing demand for new homes,” Caballero said in the HomesUSA report. “Then, while struggling with shortages and supply chain issues, builders pulled out all the stops to increase production, only to be whiplashed again by the sudden reduction in demand caused by cancelations due to rising mortgage rates.”
What is causing a surge of buyers to cancel contracts on new homes?
Mortgage rates rose from 3.76% in the first week of March to 5.81% by late June, according to Freddie Mac’s weekly mortgage market survey. According to the National Association of Realtors, mortgage costs are now 30% higher than a year ago for home buyers able to buy a median-priced home.
The rising rates make a big enough difference in mortgage payments on both new and resale houses to force many buyers to the sidelines, said Kent Lugrand, CEO of Plano-based InTouch Credit Union.
“With the average home prices in DFW, that could mean the difference of $500, plus or minus $100 or so, in a monthly mortgage payment,” Lugrand said.
The HomesUSA report shows an overall decline in new home sales statewide for the first time this year. The three-month moving average of Texas new home sales shows last month’s sales reported to Multiple Listing Services dropped to 4,098 from 4,300 in May. DFW new home sales in June were down month-over-month to 1,285 vs. 1,374 in May.
DFW pending sales dropped too, another indicator of buyer cancelations. In June, pending sales were 1,593 vs. 1,663 in May.
The other three major new home markets in Texas – Houston, Austin and San Antonio – also reported a drop in pending sales in June.
Within DFW, pending sales of all homes — existing and new — are down 14.2% in Dallas County, 24.6% in Collin County, 4.1% in Rockwall County and 8.1% in Kaufman County, said Danny Perez, managing director of Rockwall-based M&D Real Estate.
“We are in the busiest month of the year,” Perez said. “We should be seeing increasing sales.”
How is this impacting new construction of homes in Dallas-Fort Worth?
Perez said he’s seen cancelations climb. “We've had several deals fall apart, terminate, over mortgages,” he said. “Especially with new construction.”
Perez gave this example of how new-home deals crumble.
“They’re building their house. They went under contract nine months ago. They go to lock it in. There are ways to lock it in further ahead, but it’s hard. So now, their interest rates have doubled, so they literally can’t afford the house anymore. They can’t be approved for it.”
Nationwide, sales of new and existing homes are getting canceled at the highest rate since the start of the pandemic, according to a report from Redfin (Nasdaq: RDFN).
Roughly 60,000 home-purchase agreements nationwide fell through in June, equal to 14.9% of homes that went under contract that month. That’s the highest percentage on record with the exception of March and April 2020, when the housing market slowed dramatically with the onset of the pandemic. The June cancelation rate compares with 12.7% a month earlier and 11.2% a year earlier, according to the Redfin analysis of MLS data.
How does Dallas-Fort Worth compare to the rest of the nation?
In the Dallas metro area, the percentage of home sales that fell out of contract was 19.9% — a full 5% higher than the national average, according to Redfin. In the Fort Worth area, 18.9% of contracts fell through.
Las Vegas suffered the nation’s highest cancelation rate of 27.2%.
The Houston area had the most broken purchase contracts in Texas, with a 22.9% cancelation rate, followed by San Antonio, with a 20.3% rate. Austin’s cancelation rate was 17.9%.
The rate measures pending sales that fell out of contract as a percentage of overall pending sales.
New home prices in DFW increased last month, breaking $500,000 for the first time, according to the HomesUSA report. The three-month moving average of new home sale prices in June was a record $501,327 compared to $486,172 in May. The average new home price is up over $85,000 since June 2021, an increase of over 20% year-over-year.
Has there been any impact on homebuilding permits in the Dallas area?
Homebuilders are reacting to the diminished buyer demand by dialing back the number of homes they’re starting.
Single-family building permits issued from Jan. 1 through the end of June are down 40% in Frisco, 41% in Celina, 20% in Prosper and 23% in Princeton compared to the same period last year. Frisco has long been a leader in the state and nation for new home construction, and Prosper, Celina and Princeton have surged over the past couple of years.
In Frisco, 853 single-family home permits have been issued so far this year, compared to 1,412 permits at the halfway mark of 2021. Celina’s permits have sunk to 983 this year from 1,672 in the first half of 2021.
Permits in Prosper have fallen to 556 in the first half of this year, compared to 696 in the first half of 2021. Princeton has dropped to 651 permits this year from 843 in 2021.
A combination of supply-chain challenges for builders, higher mortgage rates, inflation, higher building materials costs and labor shortages, and general economic uncertainty are some of the reasons for the slowdown in construction.
What does this mean for home sales in Dallas-Fort Worth?
Sales of existing homes in the DFW market are down, too. Home sales dropped 4.2% from last year, according to the latest Re/Max National Housing Report, released Monday.
The median DFW home sales pricestands at $426,000, up 29.3% from $329,500 a year ago, the latest Re/Max report shows. Dallas-Fort Worth leads the U.S. for the largest percentage increase in the median home sale price.
The rapid escalation of home prices is putting home ownership out of reach for growing numbers of buyers.
For instance, prices of new and resale houses in Collin County are 27% higher than they were three years ago, and home costs as a percentage of income are 60%, according to an analysis by personal finance website MoneyGeek.
With a median home price of $403,500 and a median income of $50,681, homes in Collin County are, as a general rule, no longer affordable for people who live and work there (as opposed to newcomers to the market), the analysis concludes.
The supply of new and existing homes for sale is almost three times the number it was four months ago.
As of June 2022, there were 11,108 active listings on the DFW market. That’s been on a steady trend upward from a low of 4,154 in February. There were 4,524 active listings in DFW in March, 5,350 in April, and 7,976 in May, according to Federal Reserve Economic Data, which bases its report on property listings on the Realtor.com website.
A supply of about 8,000 homes for sale is considered a one-month supply in DFW. A balanced market should have a roughly six-month supply.
