All-Cash Transactions Increase with Interest Rates on the Rise

Inman News

30 August 2013

Rising Interest Rates, Tighter Lending Practices Account for Uptick

As mortgage rates creep up and stringent lending standards continue to make it difficult for many homebuyers to get loans, all-cash deals are accounting for more and more home sales completed in the U.S.

RealtyTrac data released today shows that 40 percent of all home sales in July — including single-family homes, co-ops, condos and townhomes — were made without a loan being recorded, up from 35 percent in June and 31 percent in July 2012.

A Goldman Sachs Group report released this month estimated that more than half of home sales during the last year and a half were all-cash deals.

Organization Estimated percentage of deals that were all-cash in July 2012 Estimated percentage of deals that were all-cash in July 2013
RealtyTrac 31% 40%
Goldman Sachs Group 50-plus% 55-plus%
National Association of Realtors 27%* 31%*

Sources: RealtyTrac, Goldman Sachs Group (PDF), National Association of Realtors *Existing-home sales

Goldman Sachs analysts compared home sales data from the National Association of Realtors and the Census Bureau with data from the Mortgage Bankers Association and Lender Processing Services to come up with that estimate.

NAR’s data, built from monthly surveys of agents, shows all-cash deals made up 31 percent of existing-home sales in July, up 4 percentage points from the same time a year ago. But that estimate is made by calibrating sales with Census Bureau home sales data from 2011 — the last time NAR had enough data to recalibrate estimates — which could account for the some of the difference, NAR spokesman Walt Maloney said.

NAR has plans to come up with a benchmarking methodology, using courthouse deed records, that more accurately and more timely estimates all-cash deals and other home sales-related data, he said.

“One reason for the rise in all-cash deals could be rising mortgage rates — since rising rates make buying more expensive for people needing mortgages but not for people paying cash; furthermore, some people might have decided to buy with cash rather than getting a now-more-expensive mortgage,” said Jed Kolko, Trulia’s chief economist.

As the RealtyTrac chart shows below, Kolko says he would expect that the percentage of all-cash deals would rise with increasing mortgage rates. Rates on 30-year fixed-rate mortgages started creeping up in May from historic lows of around 3.5 percent.

Some homebuyers, particularly investors, prefer all-cash deals to those requiring a loan because they are less complicated, and deals have a tendency to close faster. In high-demand markets, where inventory is low and interest high, sellers can pick buyers who can bring cash to close the deal over those who need a loan to complete the purchase, said Daren Blomquist, vice president at RealtyTrac, in a statement.


Source: RealtyTrac

Rising prices and scarce credit has also reduced the number of sales funded by mortgages, he said.

“The recent uptick in interest rates could also be contributing to a higher percentage of cash purchases, as some non-cash buyers can no longer afford to buy, particularly in high-priced markets,” Blomquist said.

But, it’s not just low inventory and rising prices and interest rates that are contributing to the increase in all-cash deals; the increased presence of investors, who are buying distressed properties and turning them into rentals, are also playing a key role, the Goldman Sachs analysts noted.

And this trend could continue, noted Sheldon Detrick, CEO of the Oklahoma-based brokerage Prudential Detrick/Prudential Alliance Realty.

Detrick thinks proposed guidelines in the Dodd-Frank Wall Street Reform and Consumer Protection Act could make it more difficult for prospective homebuyers  to secure loans.

However, the Goldman Sachs analysts estimate that purchase loan originations, which totaled about $500 billion in 2012, will climb back up to above $1 trillion in 2016, closer to the all-time high of $1.5 trillion seen in 2005 before the housing crash.