Double-digit home price increases once enticed mom-and-pop investors to enter the market, but the cash sale investors are falling together with year-to-year price increases. However, an increase in small investors leaving the market might lead to the number of affordable home listings to surge.
Decrease in Cash-Sale Investors Could Help First-Time Buyers
Just a few years ago, over a third of home-buyers didn’t blink at throwing down cold hard cash to make their purchases. However the share of all-cash home-buyers has trended down since 2014, and the decline has accelerated recently.
In June, just 16% of home-buyers paid in cash, down from 23% in February, in accordance with the National Association of Realtors. The remaining bought the old-fashioned way – by taking out a mortgage. Applications for home loans jumped 9.5% last month from a year earlier, as reported by the Mortgage Bankers Association.
The shift could be traced a number of factors, including a less competitive, more buyer-friendly market and tumbling mortgage rates.
The trend could be fantastic news for a sluggish housing market in which existing home sales fell 4.2% the first half of the year in comparison with the same period in 2018, based on NAR figures.
The slowdown may partly reflect a decrease in cash deals and the surge in purchases of homes using mortgages, says Ian Shepherdson, chief economist of Pantheon Macroeconomics, an economic research firm. Since mortgage applications can take a few months to process, the lag could mean there will be an increase in home sales this fall, painting a brighter housing picture, he says.
Here are some reasons cash sales have lost favor:
Bidding wars have faded
When competitive bidding was the craze, “People were cashing in their savings, such as 401(k) plans … in order to beat out” rival bidders who needed mortgages, says Jessica Reinhardt, a broker at RE/MAX Alliance in Denver. Sellers loved cash offers because they meant quick purchases with few hassles.
Oftentimes, parents gave cash gifts to their kids to purchase homes. And some real estate brokers even put up cash for their clients, says Jessie Culbert, a Redfin agent in Seattle. “You needed cash to stand out,” she says. Often, she says, the buyers then obtained loans to quickly repay whomever provided the funds.
Nevertheless the market has cooled as home prices climbed beyond the reach of many buyers. Last month, just 12% of purchase offers handled by Redfin faced competitive bids, down from 51.7% a year earlier.
As a result, shoppers who would have come with cash a year or two ago are taking out mortgages.
Investors have pulled back
Fifty-seven percent of investors – who buy homes to rent them out or make repairs and then sell for a big profit – pay in cash, NAR says. However the share of home purchases made by investors has declined from 11.3% in 2018 to 11.1% so far this year, in keeping with housing research firm CoreLogic.
The majority are less eager to buy homes than they were not too long ago on fears that prices could possibly have peaked. Nationally, average home prices have risen 55.2% from their 2012 bottom and are 12.6% above their pre-housing crash peak, according to the S&P CoreLogic Case-Shiller home price index.
“Investors naturally have become more cautious,” says Lawrence Yun, chief economist of the National Association of Realtors.
Also, foreign purchases of American homes fell 36% in the 12 months ending in March compared to the previous 12-month period, partly because of a sluggish global economy and tighter capital controls by China, according to the National Association of Realtors.
Falling borrowing costs
Rates on mortgages have decreased sharply since last year, which makes home loans more cost-effective. The average 30-year fixed mortgage rate was at 3.75%, down from 4.54% a year earlier, according to Freddie Mac. That has led many buyers who likely would have put up cash – whether investors or owners who intend to live in their units – to obtain mortgages instead, Shepherdson says.
Some investors get mortgages
Some investors still are in the market but higher home prices are forcing them to rely on mortgages, says Ralph McLaughlin, deputy chief economist of CoreLogic. Darius Smith, a Detroit developer, has always paid cash for units that cost $10,000 to $20,000, including renovations, he says. However, he says, the same units cost $60,000 to $80,000, and so he likely will begin taking out mortgages. “The cost for things is way higher than it was,” he says.
The stock market swoon
The huge sell-off in stocks late last year could possibly have spooked home-buyers who intended to pay in cash, Shepherdson says. They may have seen the drop in share values as an indication of a coming recession that also would have clobbered home values.
“Making a cash purchase means the buyer is exposed dollar for dollar to any decline in home prices,” Shepherdson says.
Have a questions or concern? Nick, Cindy & Nicholas Davis with RE/MAX Premier Group are here to assist you with all your Real Estate Needs. We are always available at 813-300-7116 to answer your questions or you can simply click here and we will be in touch with you shortly.
Need to get started with your mortgage process? You can contact Kyle Edwards with Iberia Bank at 813-495-5131, or simply click here to start your online application.
Ways Our Family Can Help Your Family
