Today’s Wall Street Journal had an interesting piece on cash buyers and how they’re breathing life into some of the nation’s most battered housing markets. See Cash Buyers Lift Housing.
According to the WSJ piece, cash buyers represented more than half of all transactions in the Miami-Fort Lauderdale area last year, and the percentage of buyers in Phoenix paying cash hit 42% in December 2010.
Nationally, 28% of sales were all-cash transactions last year, according to the National Association of Realtors.
The story also listed the cities with the highest percentage of homes purchased through all-cash deals in December 2010. The top-ten cities were:
- Miami: 54.2%
- Las Vegas: 45.9%
- Tampa, Fla.: 44.6%
- Phoenix: 35.6%
- Stockton, Calif.: 29.1%
- Chicago: 23.4%
- San Diego: 23.1%
- San Francisco: 20.4%
- Los Angeles: 18.7%
- Seattle: 16.0%
- Washington DC: 12.2%
So I wondered how does Reno-Sparks’ housing market rank when it comes to cash purchases? With the help of our MLS I pulled all residential stick built (non-condo) sales for 2010. Of the 5,348 sales in 2010, 1,126 were purchased for cash. That’s 21.1 percent.
Next I performed the same exercise for the month of December only. 126 cash sales of the 476 sales for the month yields 26.5 percent. One in four houses purchased for cash clearly places Reno-Sparks in the top-ten list above.
In case you’re wondering FHA is currently the preferred method of finance home purchase (see table below).
| how sold | sales | % |
| FHA | 2,107 | 39.4% |
| Conventional | 1,722 | 32.2% |
| Cash | 1,126 | 21.1% |
| VA | 300 | 5.6% |
| other | 93 | 1.7% |
| total | 5,348 | 100.0% |
skeptical
So, it’s likely a mix of investors (mostly) and strategic defaulters (can’t get a loan) that are taking advantage of current prices. Good. Health won’t be restored until strong hands control a larger percentage of properties in the local area. Just that simple.
That said, with over 60% underwater, it’ll probably be a while until the market is again “healthy.”
Wazoo’s reminders about coming state govt. and university cuts do nothing for any hopes that the bottom will be here soon.
Ken Jansen
Hi Guy,
I am seeing similar things in the KC market. A lot more cash buyers or nearly all cash buyers. Folks are putting a lot more down to take advantage of the low prices. Especially on the top 25% of our local market. I hope the trend continues. Thanks.
Guy Johnson
Thank you for your comment, Ken. Are you a new reader of the Reno Realty Blog?
MikeZ
I don’t understand why anyone who qualifies for a mortgage – with fixed rates were they are now, ~ 5% – would choose to pay cash. What am I missing? Does anyone here see a clear financial benefit to an all-cash purchase?
Zen
I met someone recently that collected a group of investors, mostly from California, who purchases property around town with the investors cash and quickly resells it. They told me on average they return a 10% profit to the investors and a handsome income for themselves. I suspect that there are many others doing the same. Even in a falling market, good deals can be found and turned over quickly for a profit. I suspect that this is not the case with every cash buyer, but it must contribute to some of it.
Grand Wazoo
” Even in a falling market, good deals can be found and turned over quickly for a profit”
How is that possible in a falling market? Buy it today, cash or not, sell it tomorrow for less? I don’t follow the logic.
Zen
“How is that possible in a falling market? Buy it today, cash or not, sell it tomorrow for less? I don’t follow the logic.”
If it’s a good enough deal on the day the asset was purchased, it can sell over a short amount of time for more than it was purchased for. These people are not holding onto property for a couple of years, they are buying under valued property, doing some minor cosmetic cleanup, and quickly reselling it for a profit. Why is it so hard to believe that there aren’t houses for sale at say 115K that can be purchased for maybe 95K from a distressed owner, quickly cosmetically cleaned up and then put back on the market for 125K and finally sold for 115K after being marketed properly? When we talk about medians and price per square foot values falling, we are looking at statistical distributions over an entire market, not each individual asset within that market. Every asset within in the market rects to market forces differently. Each individual asset within the market can rise or lower over a short period of time even if the market as a whole is falling. Look at the stock market. On most days or weeks when the market is rising or falling, there are many stocks doing the opposite of what the market as a whole is doing. The housing market reacts slower than the stock market, so this allows them the time to make these transactions and profit. I don’t know for sure, but I assume that this person that I met is also a real estate agent or broker, or working with one at a discounted rate, and has cheap labor set up to reduce their overhead as much as possible to make this work out for their investors. I was also told that they are not only buying housing. They are also purchasing commercial real estate. The people doing this have the skills and contacts to find deals within the market and make some quick cash. They may even get a few losers, but overall they profit.
Steve Herschbach
Wazoo, I am surprised you were unaware of this. Cash buyers have been buying and selling at profit for some time now in Reno. It has been commented on here before.
When I tried to buy in Reno I was outbid by a cash buyer even though I had the high offer by a good margin. My higher pre-approved loan offer was ignored. Cash buyers get an automatic 10-15% discount. That alone gives them a leg up on making a quick profit selling to a bank financed individual.
And that said plug Reno into http://cgi.money.cnn.com/tools/homepricedata/index.html?iid=EL I have no idea of the methodology but interesting.
Anonymous Coward
Re: MikeZ
If one has the cash sitting around, and is looking for a “safe” investment, loaning the money to yourself (and avoiding paying the 4.5%, or whatever it is today) is currently beating money markets funds (which are returning something like 0.1%).
Please note I am not referring to buying a house as a “safe investment” — you’d be buying the house either way — just the paying off of the loan. While there are places to put your money that may have higher returns, they involve more risk than paying off one’s debt.
Of course interest rates may rise in the future. When money market funds (or banks) start paying higher rates than the house loan, our hypothetical cash buyer may be kicking herself. But prediction is difficult, especially of the future.
Sully
MikeZ; I see the point in your question, however some of us would rather not deal with a mortgage – period. Not that it makes sense from an inflation viewpoint, but as AC said, where else you gonna put your cash? Right now the stock market is overextended (to say the least) and any yield returns of significance are in high risk investments, or the principle is at risk. QE 2 has created a whole new set of problems that will show up in the future (unintended consequences). Debt free is probably the safest position to be in right now, at least I think it is.
Guy Johnson
I was intrigued by December’s 26.5 percentage of sales being cash sales, and wondered how this compared with past years’ numbers. So I looked at past sales data going back to 2005. The percentage of cash sales by year are:
2010: 21.1%
2009: 17.5%
2008: 12.6%
2007: 7.8%
2006: 6.0%
2005: 6.0%
Clearly, a trend can be seen here. Do these cash buyers sense a bottom as the WSJ suggests? Or are these purchases a hedge against future inflation? Or, perhaps, financing is simply more difficult to obtain today.
pending buyer
Re: Steve Herschbach, “cash buyers get an automatic 10-15% discount…”
Oh, if that were true. Just bought a REO. While it was priced well below market comparables, the bank was very strict regarding any contingencies, timelines, and price. Full cash was irrelevant to them, as long as I showed a pre-qual letter and demonstrated that I could easily obtain financing in timelines required (only 45 days).
So, full cash doesn’t seem to effect REO’s, and if I were a seller, I would care about full cash either, as long as I was confident you’d get your financing.
Zen
Steve,
Thanks for the link. Check out Las Vegas.
Pest Control Kansas City
Cash? Seriously? That’s amazing!!
Steve Herschbach
Hi pending,
http://ktar.com/category/local-news-articles/20110209/%60Astronomical'-number-of-Valley-home-buyers-paying-cash/
bob_c
Cash is trash, the dollar is weak and the market has crashed. These cash sales make total sense. If we have a total market collapse, the ‘robber barons’ will step in and virtually all sales will be cash. I hope our policies work!
MikeZ
When I tried to buy in Reno I was outbid by a cash buyer even though I had the high offer by a good margin. My higher pre-approved loan offer was ignored. Cash buyers get an automatic 10-15% discount. That alone gives them a leg up on making a quick profit selling to a bank financed individual.
You’re saying that sellers are taking 10-15% less if the buyer pays with cash, instead of a mortgage?
From a purely financial point of view, that makes no sense to me. The only way that might make some sense is if the seller wants to avoid any buyer protections and procedures (e.g. inspections) that would tend to come with the mortgage.
I would be very weary of any seller that offered me a 10% discount for using cash, instead of a mortgage.
Zen
Regarding a seller giving a discount to a cash buyer; I could see a scenario where the seller already went through a couple of failed purchases due to buyers not qualifying for their loans and then frustratedly giving in at a discount to a cash buyer. Otherwise, I agree that it doesn’t seem to make a lot of sense.
Sully
I agree with the consensus here, I don’t think cash is the ‘king’ it’s made out to be! The only thing I noticed about using cash was a quick close of escrow. At some point, cash might get a better deal, but for now I’m not seeing that much difference and certainly not 10 – 15%. Also, if it’s B of A or Wells Fargo – they just want the price they’re asking, they don’t care how you pay for it.
This is not to say Steve didn’t have this experience, however I’m quite sure this was more of an exception than the rule.
Move to Reno?
I recently bought a house in Henderson, NV for cash. Escrow was fast and closing costs were very low. The seller picked up all of the transaction taxes. I paid listing price but it was a foreclosure and the bank listed it far below recent comps. I paid $345k and my insurance company insured it for $472k. At the time Smarten and I had a discussion on why he thought I should have financed it but he apparently is on vacation. The reason I used cash was because I think interest rates will stay low for quite some time and paying $16k a year in interest doesn’t make sense. In 10 years that’s $160k.
skeptical
M2R,
I have a different take regarding whether to use cash or get a loan (if you’re lucky enough to have those options). Perhaps a key reason for our disagreement on this issue is our different perceptions on the likelihood of increased inflation and, therefore, interest rates going forward. I believe that the trillions printed by the Fed out of thin air will eventually find their way into the economy. In fact, many could argue right now that the increased food prices around the world are a result of money printing, and have led to the food riots and demonstrations we are now seeing throughout the Middle East.
So, with that stated, here’s my take on whether to get a loan or not:
Advantages to getting a loan:
1) Having cash on hand. If a disaster should befall you or your family, would you prefer equity in your home or cash on hand at your disposal? I’ll take option two.
2) Tax Advantage. Assuming a 30% marginal rate and 4.5% mortgage rates, the actual interest you are paying on any mortgage loan is ~3%. Even if you do not expect significant inflation going forward, it’ll likely not be alot less than 3%, unless you don’t shop or heat your home or drive a car. Additionally, you can now right off all other kinds of deductions (like property taxes) that would otherwise not exceed the standard deduction.
3) Record low interest rates. I’ve lived around the world. I know of no other country that will offer a prospective homebuyer a 30 year fixed rate loan. This is a ludicrous idea that exposes the bank to huge risk. Does anyone believe interest rates will remain below 5 or 6% for the next 30 YEARS?
4) Skin in the game. As a corollary to (1), why not expose the bank to the risk of your new, wonderful depreciating asset, instead of yourself?
5) Inflation. You state that after ten years you might pay $160k on your $345k loan. And you think that’s a BAD deal? Do you realize how much less $160k will be worth in 10 years than it is right now? If you would do me the favor of lending me $345k today, I’d be thrilled to give back $160k over ten years, plus principle.
As my favorite investment commentator likes to say in his daily column, “In a social democracy with a fiat currency, all roads lead to inflation.” If I were you, I’d get a loan.
Move to Reno?
Thanks for the advice. I agree with many of your arguments. For me, the most compelling reason for a cash buyer to get a mortgage is to let the bank (government) assume all the risk for the house in the case of natural disaster like an earthquake.
I don’t have any debt and I would like to keep it that way. So, my decision not to get financing is not entirely based on a purely objective criteria.
Steve Herschbach
OK, mea culpa. I pulled the percentage out of my posterior and it is no doubt too high. But it is pure fact some sellers are accepting cash offers that are lower than financed offers.
billddrummer
Interesting discussion.
Notwithstanding the excellent points skeptical made above, if you just would rather not borrow the money, why not pay cash?
Anonymous Coward
Re: skeptical
Your points are mostly solid, but just for fun here’s why I don’t necessarily agree with all of them.
1) An excellent point. If paying cash will tap out your reserves it should certainly be avoided.
2) While you get a tax deduction for the loan interest you pay, you have to pay taxes on any interest earned (on the money you didn’t use for the house; if that money isn’t earning interest I really don’t see the point of getting a loan). So the effect is not as great as claimed.
3) It’s certainly likely that interest rates will rise above the stated figure at SOME point in the next 30 years. But will they rise rapidly enough to make it a win? I don’t have much confidence that I can predict the future better than the banks.
My guess is that on average, the bank’s rates are about right. But perhaps someone with more historical knowledge than I have can correct me. I’d expect riskier investments to outperform the interest rate on average, but you always have to pay to mitigate risk.
4) I agree that having that option is power.
5) I don’t get the inflation argument. Having cash is bad during inflation. Isn’t this a wash for cash vs. loan?
One point that favors cash that hasn’t been touched on above is avoiding the additional expenses (and work) associated with getting a loan. But that’s pretty minor.
skeptical
AC,
I understand your position. Respectfully, I’ll respond to a few of your points.
(2) You are correct that any capital gains on properly invested cash will result in taxes, but as long as those gains exceed 4.5% return, you’ve successfully beat the bank at its own game buy making more than what they are charging you for your loaned money. Further, tax efficient investing can significantly affect after tax returns.
(3) You state, “I don’t have much confidence that I can predict the future better than the banks.” ….. Really?…. Really, Really? After all that has happened in the world and to our country and economy in the aftermath of two major bubbles (Nasdaq and the housing/credit bubble) you really don’t think you can predict the future better than the banks?? OK.
I’ll take a wild guess. I’ll wager that eventually the massive, unprecedented money printing the Fed has embarked upon will result in crippling depreciation of the dollar. Combine that with the massive structural deficits of Congress and we may get to a point where interest rates will need to be sky high to tempt anyone to buy US debt. Then again, the banks might disagree with me.
(5) Inflation is great if you owe people money. The relative value of your loan decreases with time. That’s why the government loves inflation so much. Stated differently, if you have a loan, you are short cash — you’re on the other side of the bet.
Hope that clarifies my position.
jimh009
As a long-time lurker of this blog and who bought in Reno this time last year (February 2010) using cash, let me provide some insight on why I made the decision to pay cash instead of screwing around with a bank and a home loan.
1. Savings on closing costs. By telling the bank to shove it, more than 4K was immediately saved on a sub-100K home purchase (loan would have been 69K), which is no small-chunk of change. Closing costs would have literally been 7% of the damn loan amount.
2. Savings of 160K in interest over the life of the loan. Or, to look at it another way, that’s a 160K “risk free” investment. Is it possible to take the money you paid for the home and instead use it to make money in the market/etc…to exceed that 160K risk free investment? Sure, but it isn’t risk free. To me, doing that is like “chasing dollars in front of a steam roller.” You might do well, even over a long-period of time, but the odds are high that sooner or later you’ll get crushed unless you really know what you’re doing and have some luck on your side, too.
Moreover, I’d argue that (see below) that it is FAR more important to have a home paid off for than to try to chase risky dollars in various investments.
3. Economic Safety. As a self-employed person who doesn’t earn a tremendous amount of money, paying cash for the place has provided a huge safety net. With my “mortgage” consisting of property taxes/hoa fees of $300 a month (and my utility bills not being much different than renting), I have a massive safety net in the event of a drop in income. I can live an “ok” existence on 1K a month, or even less for a while. At 2K a month income I can live well. And at 3K a month income I can live like a king (by my standards anyway).
In this very uncertain economy – here in Reno and elsewhere – safety should be paramount to most people. Being highly leveraged in an economy where jobs are here today and gone tomorrow dramatically increases the risk of finding oneself foreclosed on, homeless, or back renting in a apartment with nothing to show for what you spend each month on housing costs.
Unless your buying a property to rent out, a home is a PLACE to live. Forgetting that fundamental principle is what caused so many people to take out home-equity loans, adjustable loans and the like during the last bubble.
4. Forget the Stupid Taxes – As the loan I would have taken out would have been small, the interest likely wouldn’t have been deductible anyways. And since I’m in the 15% to 25% tax bracket, the tax savings even if I qualified for the home interest deduction wouldn’t have been all that much anyways. Remember, less than half of all people with mortgages even qualify for the deduction.
More to the point, though, do you really want to base your income – let alone whether or not you can afford your home – on the whims of fickle and corrupt politicians? This country has a massive national debt and is completely incapable of managing the national finances. Sooner or later, many “sacred” tax shelters, tax deductions, social spending programs and more will all come under fire. Basing a long-term investment strictly on taxes can prove to be a losing bet when politicians desperate for revenue come around and suddenly “change the rules.” And having something as fundamentally important as having a place to live dependent on the whims of politicians is a very risky proposition, in my opinion.
Some Drawbacks to Paying Cash
As Skeptical pointed out, paying cash does have some risks. In my case, I drew down my reserves substantially to pay cash for the place, and I don’t mind admitting that this caused some uncertainty and initial anxiety this time last year. If I had a unexpected “big bill” in the first half of 2010, well, it would have sucked! However…
1. By paying cash, my living costs dropped dramatically. Thus, I do not need to earn as much money to survive on now as I did before (not to mention I live one hell of a lot better now than I did in my old crappy apartment).
This extra savings each month, combined with always being a “compulsive saver” in general, has allowed me to rebuild my reserves fairly quickly. After just a year, my reserves are nearing the point where I’ll once again have two years worth of savings (cash and investments) to survive on in the event my income drops dramatically. It’s still not there yet, but it’s getting close.
Overall, in the short-term there definitely WAS some risk paying cash. However, I decided that the long-term benefits of having a great, inexpensive place to live more than made up for the short-term risk of drawing down my reserves.
And now, after a year, I can absolutely say it was a superb decision and I have ZERO regrets about doing it.
Sully
jimhoog brought up a point I failed to mention above, that is self-employed. In the past that meant the same as unemployed to the bank.
It was still possible to get a loan, however you had a lot more hoops to jump through. I was going to ask smarten about that – as he claimed to be retired and receiving income from second mortgages.
That was actually better than being self-employed, but at a discount of about 20%.
If the banks are back to that set of rules, then in this economy a self-employed person has practically no choice but to pay cash.
All is not lost however as jim mentioned – being debt free makes everything else easy.
Steve Herschbach
I am a business owner and so the banks consider me self-employed. If a guy has worked for me for 15 years the banks consider him to be stable. If I work for myself for 35 years I am a risk. I have to not only prove I am financially sound but that the company is on sound footing. They generally want corporate returns going back at least three years.
After losing out on my first Reno offer to a cash offer for less, I decided to refi my house in Anchorage, which was paid off. Same bank I had financed with before, same house, never a late payment, and yet they held me up by the ankles and shook me for 6 weeks. So I was counted as a cash buyer in Reno but I borrowed the money elsewhere. May be more of that going on.
My business partner simply got a line of credit established, so when he bought he appeared to be a cash buyer but he also was borrowing the money.
I am now mulling whether paying of my mortgage quickly is a better use of my money than investing it elsewhere. Same arguments keep going through my head. Paying off the loan is a “safe” return. But if inflation does take off the 5.25% money may be looking cheap down the road (a bit higher than should have been since it was a refi). I am pretty conservative so I will probably pay off the loan unless I see something else where I could do better but these days everything seems pretty risky.
skeptical
I think Jimh009 stated the other side of the cash v. loan argument just about as well as anyone could. At the end of the day, it’s up to the individual homebuyer.
billddrummer
@jimh009,
Well said.
MikeZ
5) I don’t get the inflation argument. Having cash is bad during inflation. Isn’t this a wash for cash vs. loan?
It’s financially advantageous to be a borrower with a rate below the rate of inflation, the greater the difference, the more advantageous it is to borrow.
So if the inflation proponents are correct, and we’ll be entering a period of protratcted high inflation soon, then now is a good time to take that fixed-rate mortgage.
binya
It is surprising that cash buyers are so many recently. Now we see the diversity of economy, interesting.
billddrummer
I go back to my original point.
Notwithstanding interest rates, tax rates, inflation rates or appreciation rates, what’s the upside to owing money?