More Americans are buying homes in all-cash deals, according to several recent studies. But real- estate experts say this increase may not be a good sign for the health of the housing market.
All-cash purchases accounted for 40% of all sales of residential property in July 2013, up from 35% during the previous month and 31% in July 2012, according to data from real-estate data firm RealtyTrac released Thursday. That’s the second highest rate since the survey began in January 2011 – second only to 53% in March 2012.
All-cash purchases accounted for 40% of all sales of residential property in July 2013, according to a new study. But experts caution that this increase may not be a good sign for the health of the housing market. MarketWatch’s Jim Jelter reports (Photo: Getty Images)
Another report by Goldman Sachs last week was even more strongly in the cash-is-king camp, estimating that cash sales now accounted for 57% of all residential home sales versus 19% in 2005. Walt Molony, a spokesman for the National Association of Realtors, says that the association’s estimates of the share of the market made up by all-cash buyers are lower than the others, at 31% in July, but that they’re still at an all-time high.
The cities with the biggest month-over-month jumps in the number of all-cash sales, according to RealtyTrac included Dallas (up 82%), St. Louis (up 66%), Los Angeles (up 32%), plus Seattle and Phoenix (an increase of 21%, respectively). This helped boost overall sales of U.S. residential properties, which sold at an annualized pace of 5.5 million in July 2013, a 4% increase from the previous month and a rise of 11% from a year ago.
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While cash buys help explain the surge in home sales over the last year, some experts say it’s an unsustainable trend – and one that should be greeted with caution. “The rise in cash sales is not a good long-term trend for the housing market,” says Daren Blomquist, vice president at RealtyTrac. Although RealtyTrac doesn’t identify who has cash-in-hand, experts say wealthy Americans and downsizing retirees account for some of these all-cash deals. Investors who are keen to make a profit by buying low and renting those properties – or flipping them – also drive up the number of all-cash deals, he says. None of these three groups – flippers, retirees and the wealthy – are big enough to sustain the market in the long run, he says. If it remains dominant in the long run, cash buying “will have a chilling effect on home sales and prices,” Blomquist says.
Molony says that investors make up 35% of all-cash buyers (70% of all investors pay cash), while retirees who’ve built up equity in their homes or paid off their mortgages account for 12%. The rest include vacation-home buyers and foreign buyers.
Another problem: Cash’s dominance is a sign of the fact that “it’s more costly and hard to get financing,” says Susan M. Wachter, professor of real estate and finance at The Wharton School at the University of Pennsylvania. “That’s a bad thing.” The pool of potential buyers is being limited thanks to a combination of tight lending standards and rising interest rates, experts say. The average rate on a 30-year mortgage reached 4.58% last week, the highest level in two years.
Signs of that problem are appearing in other data. The National Association of Realtors “Pending Home Sales” index – Americans who’ve already signed contracts to buy homes – declined 1.3% to 109.5, though it still hovers at a 6.5-year high, according to data released Wednesday.