Buyers Bailing Out

Now here is some particularly interesting news: With the housing market cooling, a number of people are backing out of their agreements to buy new homes. Even though buyers often put down hefty deposits, there still has been an uptick in buyers asking for their money back or even walking away from their deposits entirely.

It's not just the middle-class buyers who are under pressure. Last month, luxury-home builder Toll Brothers Inc. told analysts that its cancellation rate had increased in the fourth quarter of 2005. Overall, the whole market is being affected. A recent survey by the National Association of Home Builders found that 20% of builders were seeing cancellation rates somewhat or significantly higher than six months earlier. That's an indicator that is based on the buying habits of us Americans, and it seems to be the best indicator I've seen that something is afoot. After all, if someone is willing to walk away from a deposit of several thousand dollars, then they have to have a really good reason.

There are regional variations in this trend. The most impacted areas include many California markets; Washington, D.C.; Phoenix; and Chicago, according to an analysis prepared for The Wall Street Journal by Hanley Wood Market Intelligence. Of course, these markets have also been very hot in the past few years. In Sacramento, Calif., for instance, the number of cancellations quadrupled in last year's fourth quarter from the year-earlier period.

Why are buyers bailing? The typical reasons: Buyers can't sell their current home, or they are having trouble getting a mortgage or fear that they may be buying at the top of the market. It would seem that all the gloom being peddled by analysts is starting to filter into the home-buying public's awareness.

Not a good sign. After all, economics is a purely human function, and it rides largely on the confidence of us humans.

Michael

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