Here’s some good news if you’re buying a home: cash is no longer king
All-cash home purchases have waned in popularity. The reasons include fading bidding wars, falling mortgage rates and rising prices.
Just a few years ago, more than a third of home buyers didn’t blink at throwing down cold hard cash to make their purchases.
But the share of all-cash home buyers has trended down since 2014 and the decline has accelerated in recent months. In June, just 16% of home buyers paid in cash, down from 23% in February, according to the National Association of Realtors. The rest bought the old-fashioned way – by taking out a mortgage. Applications for home loans jumped 9.5% last month from a year earlier, according to the Mortgage Bankers Association.
The shift can be traced to several factors, including a less competitive, more buyer-friendly market and tumbling mortgage rates.
The trend could be good news for a sluggish housing market in which existing home sales fell 4.2% the first half of the year compared with the same period in 2018, according to NAR figures.
he slowdown may partly reflect a drop in cash deals and the rise in purchases of homes using mortgage, says Ian Shepherdson, chief economist of Pantheon Macroeconomics, an economic research firm.. Since mortgage applications can take a couple of months to process, the lag could mean there will be a surge 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 rage, “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.
In many cases, parents gave cash gifts to their kids to buy 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 took out loans to quickly repay whoever provided the funds.
But 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 were 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. Yet the share of home purchases made by investors has declined from 11.3% in 2018 to 11.1% so far this year, according to a housing research firm CoreLogic.
Many are less eager to buy homes than they were a few years ago on fears that prices may 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 prior 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
Mortgage rates have decreased sharply since last year, which makes home loans more affordable. 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 might have put up cash — whether investors or owners who plan to live in their units – to obtain mortgages instead, Shepherdson says.