The Sutton Place one-bedroom was unusually large — really the size of most two-bedrooms — with a 22-foot-long living room and multiple walk-in closets. It was well-priced, too, at $649,000. And just as Brown Harris Stevens listing broker Amelia Gewirtz had expected, it generated a flurry of interest when it came on the market this spring. But five offers and five months later, the apartment has yet to go into contract. “I’ve had three contracts out in the last 45 days, but nothing signed,” Gewirtz laments. “They literally had pen to paper and freaked out at the 11th hour. They couldn’t do it.”
“It’s in this beautiful, serene neighborhood, an incredible value, and the buyers, they’re just, well, emotionally paralyzed is the lingo that’s been going around,” she adds. She has been commiserating with colleagues about the phenomenon of buyers balking and backing out of deals after contracts have been sent out or, in some cases, even after signing them.
While properties continue to sell, it’s clear the frenzied market of the past few years, with buyers making all-cash over-ask offers and waiving contingencies like home inspections, is over. Rising interest rates, stock-market volatility, and general unease have made more buyers wary, leading to an uptick in the number of deals falling through. Home-sale cancellations nationwide have been happening at the highest percentage on record with the exception of March and April 2020 (the first two months of the pandemic), with 63,000, or 16 percent of all sales, canceled in July, according to an analysis by Redfin. That’s slightly higher than in the previous month, though New York had one of the lower cancellation rates in the country — 7.1 percent, up from 6.8 percent in June — likely due to the fact that buying in the city is largely a wealthy person’s game and almost half of all Manhattan sales are all-cash purchases.
While most buyers back out of deals between an accepted offer and the contract signing — the buyer can keep the deposit if not, though usually some kind of compromise is worked out — one broker says she’s working with clients whose buyer had used the 30-day-closing clause in the contract as a pretext to get out of the deal. Never in her career had she seen a deal close in 30 days and the buyers call off the deal two days after the window passed and while the application was with the co-op board. (The clients had a different broker at the time and decided to let the buyers off the hook because they were concerned about litigation holding up the sale.)
“People are reticent. The current conditions have removed the sense of urgency,” says Frances Katzen, a broker at Douglas Elliman. She had a recent sale fall through after the would-be buyers had the buyers of their apartment back out because of the interest-rate hike.
“The contract was almost complete — they’d completed their due diligence, everyone was stoked, clapping and high-fiving,” says Katzen. “But they were making an upgrade, and they needed to sell their apartment to space the gap. It was the domino effect. Once their buyer fell through, it threw the whole thing off.”
Brokers say most buyers who have backed out of contracts were impacted by rising interest rates. A rate isn’t locked until the contract is signed, and it can be months between when an offer is made and the contract is complete; during that time, interest rates can fluctuate considerably. In recent months, they did: The interest rate for an average 30-year fixed-rate mortgage was 3.79 percent in January, but as of the end of August, it has climbed to 5.88 percent. “Where I’ve been seeing this happen is with first-time homebuyers who need a mortgage and their job to pay their bills. A lot of buyers in the under $700,000 price range are already stretching,” says Gewirtz. Most New York buyers in that range are buying in co-ops, which have more stringent requirements than banks, making the interest-rate hike even more consequential. Co-op boards generally don’t want buyers to have debt-to-income ratios over 30 percent; some set the number even lower.
Michael Holt, a Compass agent, was working with first-time buyers who, after losing multiple bidding wars, were thrilled to have their offer accepted for a $1.5 million two-bedroom co-op on the Upper East Side. “When they started looking at apartments, interest rates were at 3 percent. The numbers were tight, but it was going to work. The apartment was a good deal, we negotiated well, and the board was okay with it,” says Holt. “But then interest rates shot up and so did their debt-to-income ratio and the monthly carrying costs; the buyers simply couldn’t afford the apartment anymore.”
“They’re taking a pause. A lot of buyers want to see how their buying power is impacted,” he adds. And “a one percent interest-rate change can mean a different category of apartment” — whether the buyer can afford a one-bedroom versus a studio, or a renovated place versus an unrenovated one — says Gewirtz, who nonetheless recommends buyers get into the market as soon as they can, instead of getting hung up on “what their friends got last year.”
Even some cash buyers have been spooked by the cooling market. Kimberly Jay, a Compass broker, was working with all-cash buyers looking for an apartment in the $5 million range. They fell in love with a prewar apartment in the Village and ended up in a bidding war. “I wasn’t surprised. It was a beautiful apartment — a three-bed plus an office, prewar, totally gut renovated but not in an Über-contemporary way. We hadn’t seen anything like it.”
Jay’s clients put in an offer $300,000 over the asking price, won the bidding war, and negotiated a deal to buy some of the furnishings along with the apartment. They had already lined up their real-estate lawyer when Jay received an unexpected call: “They said, ‘Now is not the time for us. We’ve been going through this in our minds and feel that now is just not the time to buy.’”
“Sometimes you can feel it, but I didn’t feel it,” Jay says. The buyers cited global uncertainty, the war in Ukraine, inflation, lower Wall Street bonuses, upcoming layoffs, and rising interest rates. Even though they wouldn’t be borrowing money, they felt prices wouldn’t go up for some time. “Just because you have a lot of money doesn’t mean you want to pay top dollar,” Jay explains.
Of course, this isn’t the first time buyers have been skittish. In the first two months of the pandemic, Katzen says she saw buyers backing out of contracts, during the mortgage crisis, “and then again after the sugar high of 2015” when prices topped out and sales cooled. It’s only a matter of time, she thinks, before the brutality of the rental market drives people back into buying: “It seems like doom and gloom now, but there’s going to come a point when the rental market is so insane people are going to feel extorted if they don’t buy.”