We have been learning for years that it is only smart to use other people’s money rather than your own to purchase a big ticket item. It is especially pertinent when the rate offered to borrowers is as low as what it is now. So you would think that more & more homebuyers are eager to leverage bank financing today, right? Wrong. Just the opposite. The market has changed. Big time. New would-be-buyers, whenever they have the choice, are using new ways (or is it old ways?) to buy quick & easy, and on better terms. You got it: the magic recipe is cash. Who wants to bother with financing when you can use the true gold standard to open all the doors wide and cut yourself the best deals?
The stats are very eloquent: during the first Quarter of this year, a third of all homes sold in the country were cash transactions. The numbers come from a survey commissioned by the National Association of Realtors. The stats can actually be even more amazing, depending on what criteria and what info source you use. According to RealtyTrac, a real estate data provider, 43.7% of existing home sales in Q1 were bought entirely in cash. The percentage was “only” 19.1% for the same period of 2012.
Let’s take a look at who is buying what and how today, to better understand the phenomenon. First of all, we need to recognize that, in spite of the recent dramatic surge of cash deals, the majority of the buyers are still relying on institutional financing to buy a home. Only normal, considering that cash does not grow on trees and given today’s attractive cost of mortgage money.
So, anyway, who are the cash buyers? They can be ranged in 4 main categories:
- The wealthy: Money is meant to be used. When you have it, it’s usually because you know how to make it and know how to leverage the power it affords you. At the age of multiple offers and bidding wars because of a skinny inventory of properties for sale at all price levels, cash is king. It gets the sellers’ attention. Given the choice, most sellers quickly discard contingent offers. Cash also “buys” discounts because a sure thing today is always more attractive than a possible better one tomorrow. Of course, we all understand that a cash deal is not always a true cash deal. In the luxury market, it is not unusual for buyers to refinance after the close (more and more banks offer same rate & fees as for a new purchase money loan), or use their private credit line, or…. The options & tactics are many.
- The foreigners: Most of them don’t have the choice; they have to pay cash. Their bank, in the “old country” (wherever that might be) is not likely to use the house for security and therefore will not make the loan. If the buyers need bank money, they have to arrange for it before coming to town on a house hunt. There can be many hurdles since many countries place restrictions on the amount of money people can take out of the country, and can make it very difficult for the money to be converted and eventually channeled over to the US. But, let’s face it, when you have money, you can always find a way. Case in point, nearly all purchases made by foreigners in the multi-million dollar price range are cash deals.
- The investors: Large institutional investors are no longer busy looking for too few good deals in the real estate arena, but small investors are, cash in hands. Over the last 7 years or so, they have been chasing short sales and foreclosures. They made a killing at the sport. They are using the profit to do more of the same, even though the number of distressed sales are today not even half of what they were only 5 years ago (15% of all existing-home sales vs. 35% in 09). They are on the lookout for whatever properties to rent or flip their cash can buy at a substantial discount.
- The retirees: The “new kids in town” in the cash world of real estate sales. Several reasons: for one, they are using the equity their main house produced, especially during the last 3 years of furious price appreciation in most of the country. Some are looking to downsize and use the left over cash to buy rental properties susceptible of paying for a comfortable retirement. Some pay cash just to avoid the headaches of applying for financing. Not easy to get these days if you don’t have a dependable income flow. And of course, they can leverage their cash, just like the other above categories of cash buyers, to try to get a better deal and be in a strong position in case of a competitive situation.
May cash be with you in 2014 (and beyond).