Not all homebuyers struggle to put together a down payment or concern themselves with the quirks of underwriting associated with obtaining a home mortgage. The latest data reveal, more people across the country use all cash to purchase real estate. Investors are forking over cash. In addition, some buyers pay ready money for their primary residences.
The REALTORS® Confidence Index, released for October 2011, reveals 29 percent of real estate purchases in the United States consisted of cash deals. The index represents a random survey of members. The poll does not include cash only sales at foreclosures or courthouse auctions.
The fact that almost a third of buyers throughout the country pay all cash —in a market of historic low interest rates, hovering around four percent— contradicts conventional thinking.
In a typical market, buyers prefer to hold on to their cash and take advantage of the low mortgage rates. Normally, they invest capital in other instruments that offer safety and a higher rate of return.
Obviously, investors see the real estate market as safe and expect to earn a higher ROI, compared to other investments.
Tighter credit and underwriting standards may also be a key reason for the high rate of cash sales. Today, mortgage lenders tend to give mortgages and the lowest interest rates to borrowers with solid jobs and pristine credit scores. First-time homebuyers and others have a harder time obtaining financing.
Cash Buyers Have an Advantage
According to the Miami Association of Realtors, some real estate agents have investors purchasing five or ten properties for cash. In September 2011, 60 percent of residential real estate transactions resulted in cash deals. The Arizona housing market remains a top destination for retirees and other people looking to buy second homes.
A branch manager of a major real estate company operating in Scottsdale, Arizona says 45 percent of May 2011 sales resulted. In Las Vegas, 49 percent of purchases, at the end of Q2, consisted of cash transaction.
An unintended consequence of cash sales arises in South Florida. In Broward and Palm Beach counties, an onslaught of wealthy U.S. residents and international cash buyers have made it difficult for average homebuyers to bid on properties and obtain mortgage financing.
South Florida’s reasonable real estate prices and a warm weather make the location desirable to real estate investors. Home sellers and banks prefer to deal with cash buyers because transactions close faster.
High Price Home Markets
At the upper end of the housing market, cash transactions have also become common. In Scottsdale, cash purchases account for 66 percent of closings. Fannie Mae and Freddie Mac do not buy or insure the “jumbo loans” required to buy these properties. Fannie and Freddie have a conforming loan limit of $625,000, which applies to most regions of the country.
Lenders charge higher interest rates on jumbo loans, compared to government-insured mortgages.
With the recent announcement that conforming loan limits will remain in place, if wealthy buyers continue to renege on paying higher interest rates, the trend towards cash purchases for high-end homes may continue.
In the current housing market, cash buyers have the upper hand. Many, sellers take less money for cash transactions. They prefer not waiting for appraisals. Cash deals usually have fewer contract contingencies and quicker closings— since buyers do not have to qualify for financing.
Many buyers pay cash because of the emotional comfort of outright owning their home, without the hassles of mortgage payments. These homeowners always have home equity to draw on if needed.
Assuming the housing market approaches near bottom, current cash investors, may come out better than investors who bought near the height of the real estate market. They found themselves overleveraged, unable to flip real estate investments. Many foreclosed or walked away. In the existing real estate market, investors clear distressed properties out of the system.
This buying supports local markets, prevents neighborhood deterioration and slows further decline in housing values. Investors seem content on holding properties for the long-term. In addition, investors can take advantage of vibrant rental housing demand created by droves of homeowners who have become renters because of foreclosure.