I know first hand that cash is king because I did it and edged out a higher offer that had a mortgage attached to it.
Obviously, I’m not the only one. Investors, downsizing Boomers, wealthy foreigners, MIllennials with the good fortune of having parents/family willing to “help,” and people from pricey coastal markets looking to lower their living costs are driving the surge in all-cash deals.
According to Data Solutions, a data provider, 28.8% of all transactions so far this year are cash transactions. In the 2000’s, 20% of all transactions were all-cash deals and before the financial crisis in 2011-2012, 40% were all-cash transactions.
Sellers are attracted to all-cash deals and often choose those offers over offers that involve a mortgage arrangement with a bank. Sellers don’t have to wait for a bank to determine a mortgage deal, closings happen faster and often, call deals involve fewer risks and glitches.
Economists tend to be puzzled about this rush to pay cash when mortgage rates are at an all time low. Who would want to tie up so much of their liquidity in this one thing? Won’t cash buyers be strapped for cash for other things after they’ve spent everything they’ve saved on a house?
Turns out that lending institutions such as Bank of America and online lender Better Mortgage Corporation are promoting products for just such cash buyers. Bank of America now allows such buyers to take out a loan up to 80% of the home value soon after they’ve purchased that home. And Better Mortgage is testing out a product that would underwrite a loan within a day in order to allow buyers to better compete with cash buyers.
When all is said and done, however, younger buyers without “helping” parents/families are the buyers most shut out in this all-cash reality. Younger buyers have a hard enough time coming up with a September 2017 average down payment of $18,360 for a starter home, let alone coming up with an all-cash deal.
Nela Richardson, chief economist at Redfin, points to potential industry problems in this all-cash environment. “First time buyers drive the market and if they’re blocked out…then we are not building that next generation of homeowners.”
To buyers who have lost out on homes 2 or 3 or even a dozen times to cash offers, this pay to play reality is today’s home buying reality. Ward Willis, the 12-time “loser,” said. “We lost…because we were deliberating…all of that needs to go out the window. You’ve got to be prepared to jump.”