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The Fed\u2019s relentless effort to stomp out inflation is having a huge impact on one of the nation\u2019s biggest builders. KB Homes reported a homebuyer cancellation rate of 68% in December. And the \u201chousing market reset\u201d isn\u2019t over yet. Although the latest inflation reports show that inflation is subsiding, the cost of a home is still too high for many buyers. \xa0 Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review. \xa0 Inflation is Slowly Decreasing \xa0 A report on the Consumer Price Index shows a decline of .1% in December with an annual rate of 6.5%. (1) It\u2019s the lowest rate of inflation we\u2019ve seen in more than a year, and a big drop from a peak of 9.1% last summer. Lower oil prices accounted for most of the latest decline. \xa0 When you remove prices for fuel and food, the monthly core rate of inflation was .3% with an annual rate of 5.7%. According to MarketWatch, there were few negatives in the CPI report, although the cost of housing is still rising. The report shows the annual cost of shelter at a 40-year high of 7.5%. And those high prices are scaring a lot of potential buyers. \xa0 Surge in Contract Cancellation Rates \xa0 For KB Home, the Q4 cancellation rate of 68% was almost double what it was in the third quarter. And much more than that compared to a year earlier when it was just 13%. \xa0 The last time the cancellation rate was anywhere near that level was at the beginning of the pandemic, but even then it was around 40%. A Fortune article says that, historically, the cancellation rate for builders has only gone as high as 47%. (2) \xa0 The data varies from builder to builder and metro to metro. According to John Burns Real Estate Consulting, the Southwest and Texas experienced high cancellation rates of 45% and 39% respectively. Zonda\u2019s chief economist Ali Wolf tweeted recently that the cancellation rate in Phoenix hit 70%. \xa0 Based on data from John Burns, the nationwide contract cancellation rate was 25.6% in October. That\u2019s up from 7.9% in October of last year.\xa0 \xa0 \u201cConditions Remain Challenging\u201d \xa0 KB Home said in a statement: \u201cCurrent conditions remain challenging. High mortgage rates and persistent inflation, together with an uncertain economy, have made homebuyers more cautious since the middle of last year.\u201d That\u2019s putting affordability out of reach for many people. Others may be hoping that home prices will go lower in the months to come.\xa0 \xa0 For many buyers, it\u2019s not a choice to cancel. They may have signed a contract and paid their deposit before the home was built, and then with construction delays, and a steady increase in mortgage rates, are finding out they no longer qualify for a loan.\xa0 Unfortunately, for some, that means the loss of an earnest money deposit, although a survey of 100 builders by John Burns indicates that most builders will return that deposit. \xa0 For buyers who don\u2019t get their money back, there\u2019s not much they can do about it. Florida attorney Craig Rothburd says: \u201cEverything in these agreements is drafted in favor of the developer.\u201d That includes a warning that they could lose their deposit if they back out. \xa0 Housing Market \u201cReset\u201d Continues \xa0 The situation has left home builders with a lot of inventory, and a lot of strategizing to reduce that inventory. Many are helping buyers by offering mortgage rate buydowns instead of price cuts. KB Home says it is very cautious about price cuts because it doesn\u2019t want to spook buyers who are already under contract. If they think there\u2019s a cheaper option, it could lead to more cancellations.\xa0 \xa0 The Federal Reserve sees the current housing market situation as a \u201creset\u201d to bring demand in line with supply, along with lower home prices. Higher mortgage rates typically push home prices lower, which has started to happen, but home prices are still too high for many homebuyers. And lower-priced homes are in short supply. \xa0 A return to lower mortgage rates could help but with the current fight against inflation, they are expected to remain in the 6% range for this year. The increase has added about a $1,000 to a typical monthly mortgage payment. According to The National Association of Homebuilders, the monthly payment on a $450,000 new home rose from $1,925 at the beginning of 2022 to $2,923 for the same home by the end of the year. (4)\xa0 \xa0 New Home Affordability Weakens \xa0 That has substantially reduced the number of households that can afford to buy a median-priced new home. NAHB drew a comparison. It says that a mortgage rate of 3.22% is affordable for 34% of U.S. households. When that rate goes up to 6.42%, which is about where it is now, just 22.3% of households can afford that home. And, when the mortgage rate goes above 7% like it did in October, only 20.3% of households earn enough to qualify for a loan. At that level, you\u2019d need an income of almost $150,000.\xa0 \xa0 Always keep in mind that reports like these are averaging the results for the nation as a whole. Sub-markets will vary, and many of them are still affordable. If you want to learn more about some of those more affordable markets, please visit newsforinvestors.com. You\u2019ll find data on some of the strongest rental and growth markets across the nation. You\u2019ll also have access to experienced brokers and property managers in those markets. It\u2019s free to join and free to access all that information. \xa0 Thanks for listening! \xa0 Links: \xa0 1 - https://www.marketwatch.com/story/inflation-softens-at-the-end-of-2022-and-clears-path-for-slower-fed-rate-hikes-11673530439?mod=newsviewer_click \xa0 2 - https://fortune.com/2023/01/12/fed-housing-market-reset-homebuilder-cancellation-rate-spike-kb-home/ \xa0 3 - https://www.businessinsider.com/homebuyer-lose-cash-and-homes-as-mortgage-rates-soar-2022-12 \xa0 4 - https://eyeonhousing.org/2023/01/how-many-households-are-priced-out-by-higher-mortgage-rates-in-2022/