Is anybody getting a mortgage to buy a house these days? Just kidding of course! Yes, the great majority of buyers need or choose to get a loan. Not a bad deal, really, when you pay only a skinny rate today to borrow the bank’s money and leverage it for years and years. The question, however, is not as silly as it might appear. The fact is that the percentage of homes which were purchased without mortgage financing more than doubled in just the last 5 years! The weekend Wall Street Journal, using a DataQuick study across 55 large metropolitan areas, reports that 36% of homes sold last year were all-cash deals. The percentage was short of 30% in ‘09 and was….15% in ‘07! The WSJ notes that, even though the number of sales is back to 2007 levels, the mortgage activity is only a fraction of what it was back then. In the last quarter, mortgage originations totaled $123 billion, according to the Mortgage Bankers Association. The number was $226 billion in ‘07.
A big reason for this phenomenon is the huge appetite that investors of all sizes have shown for income property. As we mentioned here many times over the year, investors have been gobbling up distressed-price homes all over the country to rent them out, often with positive cash-flow right from the start. No better return on the money in today’s economy. After a while, if prices keep on rising, these investors may want to put their houses back on the market to benefit from the appreciation.
“Amid uncertainty, cash is king.” This was the title of a segment of the Luxury Portfolio’s white paper referred to in my previous blog. The survey, done by the Harrison Group, remarks that the savings rate among the wealthy stands at 23%, up from 11% in ‘07. Also significant is the fact that 63% is in money markets rather than financial markets (37%), the exact opposite of 2007. 31% of affluent and wealthy households owe nothing on their primary home and 48% of second home owners own their homes outright.
All year-long, we have seen a burst of cash offers in the most affluent markets. In a multiple-offer environment, an all-cash deal obviously gives the buyer a greater chance to win and, sometimes, a stronger position to negotiate a better price. It’s a double-win. Buyers can later refinance if they so wish, to leverage the bank’s money and recoup their valuable cash.
Some sellers are unimpressed by cash; after all, an offer is almost always all cash to them anyway, whether the money comes straight from the buyer’s account or from the bank’s own cash register. It is nonetheless reassuring to know that the buyer can cut a check for the whole thing. It goes a long way towards eliminating worries about the property not appraising for full-price, a contingency which has become largely meaningless in a market where values go up month after month. Even if an appraisal were to come short, cash covers the difference. No sweat. Cash is what you call peace of mind today, for both sellers and buyers!