Why Are So Many Homebuyers Backing Out of Their Contracts?

Homebuilders Post Steepest Decline in Confidence Ever RecordedJust as the majority of Americans think the U.S. jobs market is improving, there’s a notion in the air that the U.S. housing market has rebounded and is healthy again. I don’t believe this to be true.

Just like the government’s official unemployment number is manipulated because it excludes people who have given up looking for work, when we took a closer look at the stats we hear about home prices, new home sales, and existing home sales, we didn’t like what we found in them.

Home prices increased to unprecedented levels in 2005. At social events back then, everyone talked about how much their home or vacation property had gone up in value and how they were getting deeper into the housing market. Few talked about the reckless lending activities of the banks that were the cause for the rise in home prices.

We now hear new homes are being sold at a new record pace. Buyers are apparently rushing to buy houses again, and the housing market is hot once more. Sadly, underlining the strong sales of homes, the number of cancelled sales orders compared to overall sales (commonly referred to as the cancellation rate) is going through the roof.


In 2013, D.R. Horton, Inc. (NYSE/DHI) had more cancelled orders than it did in 2012—7,751 cancelled contracts to buy homes compared to 6,657 in 2012. The cancellation rate for this homebuilder in 2013 was 24%. (Source: D.R Horton, Inc. web site, last accessed February 18, 2014.)

Other homebuilders are having the very same problem. KB Home (NYSE/KBH) reports its cancellation rate in 2013 reached 32%—that means one out of every three contracts to buy a home was cancelled. (Source: KB Homes web site, last accessed February 18, 2014.)

While this is happening, homebuilders’ confidence is going downhill.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) declined 10 points in February. The index tracking homebuilders’ confidence stood at 46 in February, compared to 56 in January. Any reading below 50 suggests homebuilders’ are seeing market conditions as being poorer than better. (Source: National Association of Home Builders, February 18, 2014.) This was the steepest decline in homebuilders’ confidence ever recorded.

That isn’t all. In late 2013, we actually saw homebuyers losing interest in the housing market.

Homebuyers aren’t filling out applications for mortgages like they used to. According to the Mortgage Banker’s Association, mortgage activity in the U.S. housing market has declined to the lowest level since December of 2000. (Source: Reuters, February 12, 2014.)

When you really look into the data being released about the U.S. housing market, the picture really isn’t that rosy. What’s really happened is that since early 2013, speculators have jumped into the housing market and bought homes to rent or flip. Real homebuyers are declining in numbers. Cash transactions to purchase homes have skyrocketed, as buyers can’t get financing. Long-time readers of Profit Confidential already know this.

Don’t listen to the politicians when they talk about the housing market. They say that since home prices are increasing, it means the housing market is getting healthy; just like they say a declining “official” unemployment rate means the jobs market is getting better. The numbers they are looking at, and pushing onto people, aren’t telling the true story.