According to Case Logic, cash purchases make up for 36.4% of real estate sales nationally. This is a decline from the peak in 2011 of 46.6%, nearly half of all the sales.
In Massachusetts, about 22% of the transactions are cash and the percentage is higher in states with more significant proportion of distressed sales (foreclosures), such as Florida where 50% of sales are cash, and Michigan with 53% cash transactions.
Boston has seen a decline in the share of cash deals for the past few months. Although the market has been robust, tempered only by lack of inventory, more deals are financed by a mortgage.
Why fewer cash deals?
First, cash buyers are often investors. Investors buy when prices are lower, when they perceive the value of the property is not fully realized in the price. Investors buy either to speculate or to generate income.
Speculators are finding the margins are getting smaller as home prices have climbed so aggressively in Boston and Brookline. Finding a bargain in this real estate market is nearly impossible.
Investors buying income properties are also feeling the pinch. Although there is still a better return in real estate than most other options these days, rental income is flattening, while prices are still rising. This makes for lower returns on investments. Investors are being out-bid by home buyers.
Other than investors, cash buyers are often foreign non-residents who are looking for an investment in United States real estate. There is no shortage of foreign nationals searching for a safer asset than anything they can find at home. But, with the Boston real estate market rise in recent years, their money seems to be better spent in less expensive metropolitans.
A Welcomed Change of Pace?
After a few years of cash buyers outbidding home buyers, this is a welcome change for many. Renters trying to buy their first home and forgo the outrageous increase in their housing costs have been hitting a wall. Squeezed between rents going through the roof, and cash buyers sweeping up entry-level properties, first time home buyers can hopefully find a light at the end of the tunnel.
But lower share of cash deals is not all sunshine and moonbeams for home buyers. Lower share of cash buyers also means the bargains are gone, and we are soon reaching a saturation point in pricing. Investors provide a great leading indicator of where prices will go next. If they stop buying, we can expect a slowing of price increases.
With that, more homeowners may be ready to put the property on the market, which is great…but it also means a shifting market. What’s the point? Buyers should use their heads and a good real estate agent when making offers and not get caught up in buying frenzies.
When prices go up at a steady pace, rather than the big jumps we’ve seen, there is a greater danger of overpaying for a home. After years of multiple offers, homes selling well over asking price, and aggressive bidding, it is easy to fall into that rhythm. When prices increase by 5% annually, rather than 21% annually, it is possible to lose money on a home you bought three years prior by overpaying by just a little.
More than ever it will be imperative for home buyers to hire an experienced real estate agent. Find someone who is unaffected by the hype and can discuss the danger of overpaying for a home. Home buyers will soon be able to take back a little control over the real estate market as long as they realize the past couple years are no indication of what will happen next.