Cash is King – In the Housing Market

For decades it seemed that 12 to 14 percent of all housing sales were cash transactions involving no loans what-so-ever.  Then along came the housing crash in 2007, and by 2010 investors (those buying a home to rent rather than own) became a significant part of the purchase market.  They were buying homes in many circumstances for almost one-half the cost to build the structure, and the economics of deal was very positive cash flow.  There was a limitation, however, imposed by Fannie Mae and Freddie Mac of having a total of four loans financed via Fannie or Freddie guaranties.  While there is a second way to finance five to 10 loans, most banks failed to participate in the program—hence the four loan limit.

At the same time in 2010, yields on investments ranging from Treasuries to Certificates of Deposit hovered near zero.  The combination of fantastic buying opportunities coupled with an almost zero opportunity cost saw the percentage of cash transaction rocket from the normal 12 to 14 percent, to 30 percent of all purchases since 2011.  In April of 2013, the National Association of Realtors® reported that 32 percent of all existing home sales in that month were for all cash.

Now, however, that drive to use all-cash is no longer relegated to investors, but has spilled over into the owner-occupied buyer segment.  This structural change is no longer a function of the maximum number of loans an owner can have using Fannie and Freddie, but the power of an all cash sale closing quickly with no loan impediments.  Literally, an all cash deal is faster and less conditional than sales requiring loans for buyers—hence a sure thing for sellers.

The New York Times this week had an article tracking the increased use of cash sales in residential transactions.  A combination of historical low levels of inventory coupled with potential owner-occupiers and investors competing for the same property is resulting in rising prices, often with offers greater than asking price, and in some circumstances literally bidding wars.  A cash offer reduces the fall-through risk of loan approvals and expedites the closing, thus reducing the risk of not closing for the sellers.

The Times article noted that while just 7 percent of all home sales in Los Angeles were for cash in 2007, last year almost one-third involved no loans at all.  In Miami last year, 65 percent of all sales were for cash versus 16 percent in 2007.  Cash is king once again, and sellers recognize such.

To read the entire New York Times article on cash sales and multiple offer – and I encourage you to do so — click:  http://www.nytimes.com/2013/06/09/us/cash-is-fueling-quick-home-sales.html?src=recg&_r=0

Finally, in the past when a buyer of a home put as little as 3 percent down to buy a home, they were not risking much if home values declined.  Today, with one-third of all existing home sales as cash, buyers are making a statement that they believe there is little downside risk in housing values.

Housing is back with a roar.

Ted

Comments

  1. Brucebarnes

    In the property real estate industry a huge risk in this business. Business level is move up and down. But some of Miami real estate condos and property owner is doing brilliant job for long time.

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