More properties were purchased for cash in 2011 than in any previous year. Of the 7,233 MLS-reported sales (all property types) in the Reno and Sparks markets 2,517, or nearly 35% were purchased for cash. If we restrict the analysis to only site/stickbuilt houses that figure drops to 26 percent – however that is still an incredible 1 in 4 homes being purchased for cash. How does that compare with recent years sales?
| units sold | for cash | % cash sales | |
|---|---|---|---|
| 2011 | 5,910 | 1,551 | 26.2% |
| 2010 | 5,359 | 1,130 | 21.1% |
| 2009 | 5,260 | 919 | 17.5% |
| 2008 | 3,591 | 454 | 12.6% |
| 2007 | 3,365 | 262 | 7.8% |
| 2006 | 4,111 | 248 | 6.0% |
| 2005 | 6,072 | 366 | 6.0% |
| 2004 | 5,753 | 497 | 8.6% |
| 2003 | 4,448 | 452 | 10.2% |
| 2002 | 4,909 | 429 | 8.7% |
As can be seen in the table above, cash purchases are on quite a tear. And there appears no signs of a slow down – looking at year-to-date sales, already more than 31 percent have been cash sales.
With interest rates at historical lows what could account for these increase in cash sales? Well there are many reasons:
Low Prices – with home prices also at historical lows, buyers now have the ability to pay cash where they once they may not have
Tighter lending requirements – as lenders enact stricter guidelines many buyers either can’t qualify for financing, or simply prefer to not even try to qualify
Cash offers are more attractive – in our increasing competitive marketplace (i.e. dwindling inventory; multiple offer scenarios) buyers make every attempt to make their offer most attractive to the seller. And it doesn’t always come down to price. Many sellers view cash offers as more attractive than those of buyers seeking financing, because there it much less uncertainty regarding a cash offer. The seller needn’t worry whether the prospective buyer will successfully complete the underwriting process, or whether the property will appraise for the required amount, or whether the lender will perform on time. And speaking of time, offers from cash buyers equate to shorter escrows. There is no waiting for loan docs to arrive, which can require 30 – 45 days depending on the lender. Cash buyers can close much faster – as the process is typically only a matter of transferring funds. Also streamlining the cash offer process, many cash buyers waive the appraisal contingency. Buyers presenting offers based on acquiring financing do not have the option to waive the appraisal contingency.
Undoubtedly many other reasons exist for buyers paying cash for properties. I would love to hear your thoughts on this trend.
Matthew
I wonder what impact the increase in cheaper properties has on this metric.
If you count it specifically on units sold, certainly the decreased median price will cause an increase in cash settlements given the same number of participating cash buyers.
What would be interesting would be the cash *gross* versus the total gross sales value.
Walter
I think it’s a pretty safe bet that a lot more $135K and under sales are for cash than for sales at $300K and above. Especially considering that there are not very many sales above $300k these days. Actually, 93% of everything selling these days is below $300K.
I’d like to know what the median sales price was for those houses that sold for cash. Or to put it another way, what was the median sales price of those 26% of all sales that were for cash?
Can you tell us that Guy?
Thanks.
Guy Johnson
Walter, the median sales price for the 1,551 cash sales in 2011 was $135,000. Compare this to the median sales price of all 5,910 sales in 2011, which was $154,000.
Looking at the median of all other (non-cash) sales in 2011, we get $158,900.
Norton
My speculation (and that’s all it is) is that most people paying cash are investors and not people intending to reside in the house, and that most of the cash sales are at the bottom end of the market. When CDs are yielding .3% and the stock market is a volatile roller coaster, buying a house for $90K to rent out seems like a sensible thing to some people.
Guy, I’d also like to know what percentage of the cash sales are REOs if that info is available.
Guy Johnson
Norton,
Of the 1,551 cash sales in 2011, 654 (or 42%) were REOs.
Cal
So the median of all cash sales ($135K) is about 13% below the overall median for all sales ($154K). This seems to suggest that cash buyers are not doing anything to raise prices, and in fact they are contributing to the market’s price decline.
Which is totally consistent with what we have seen over the past year: increasing sales volume, vastly enlarged numbers of cash buyers as compared to historical norms, and falling sales prices.
Matthew
Cal, I don’t see how you can conclude that cash buyers are contributing to the market decline.
That isn’t what the data suggests at all.
Twister
I bet theirs a lot of demand, by renters, for houses under $1000 a month and so investors are buying up these cheap little fixer-upers, built in the 50s,60s and 70s, to meet that demand. Who wouldnt want to buy a house for $40k that sold for 200k 6 years ago, fix it up and rent it out for $800 a month. So I think its the sale of those houses filling that demand that has caused the median price to be lower than it otherwise would be. My guess is that when the rental demand is filled or inventory of these small older homes dries up, the median price will reflect that to the upside.
Lithium
It does appear that the cash sales are pulling the market lower. They are for less money than sales where buyers get a loan. They are lowering the overall median. It’s hard to know with any precision what percentage of these cash buyers are investors, but I tend to agree with Twister and Norton that a lot of these cash buyers are investors buying houses that are 65-70% off of their bubble high and that can be rented out with not much effort for $800-$900 a month.
Guy Johnson
According to the latest results of the monthly Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, between last October and January, current homeowners purchasing a new principal residence with 100% cash surged from 30.8% to 34.1%. See the article here: Current Homeowners Increasingly Using Cash When Buying a New Home, Latest HousingPulse Survey Finds
Sunlight
I have spent the last ten days in Phoenix. The housing market there bears many similarities to the market in Reno. Sales volume way up. Lots of cash buyers. Most of them investors. A report out by ASU just a couple of days ago said that for houses selling under $100K, and there are thousands of them in Phoenix, 92% of them are for cash, and almost 70% of them are to investors.
So yes, cash buyers are clearly in the market, buying at the lowest end for the most part, and most of them are investors.
joey
Cash purchases DO in fact lower the overall median sold price! It’s quite common that a CASH offer on an REO or Short sale often gets the better deal as oppose to a traditional offer. Banks will almost always accept a smaller profit in return for a guaranteed closing.
How much of a discount? It could be 5-10% depending on the situation.
January median sold price, units, DOM, $/sq.ft. | RRB Home
[…] I first brought the dwindling inventory point to light in October – see Looming inventory problem in Reno-Sparks? At that time, the months supply of inventory was at 3.7 months. It is now at 2.2 months. Folks, we’re in a Seller’s market. Of course, the lack of inventory is not seen across all price points, but at and around the median sold price there is shortage of available Active listings. This thin supply is being manifested as multiple offers scenarios, offers over asking price, lower days on market, and higher incidence of cash offers (see Cash is King – more than ever). […]
February median sold price, units, DOM, $/sq.ft. | RRB Home
[…] I first brought the dwindling inventory point to light in October – see Looming inventory problem in Reno-Sparks? At that time, the months supply of inventory was at 3.7 months. It is now at 2.2 months. Folks, we’re in a Seller’s market. Of course, the lack of inventory is not seen across all price points, but at and around the median sold price there is shortage of available Active listings. This thin supply is being manifested as multiple offers scenarios, offers over asking price, lower days on market, and higher incidence of cash offers (see Cash is King – more than ever). […]
Move to Reno
Folks are paying cash for houses to live in because (1) they have plenty of cash, (2) interest rates totally suck, and (3) they don’t need the tax benefits.
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