Increasingly, borrowers are eschewing mortgage loans in favor of cash purchases of homes, especially distressed properties, according to a Wall Street Journal article by S. Mitra Kalita. Across the country, 28% of all home sales in 2010 were of the cash variety according to the National Association of Realtors. This is up from 14% in October of 2008 when the NAR began measuring all cash sales.
There are a variety of reasons for the increase in cash purchases. It has become increasingly difficult to qualify for a mortgage over recent years, a trend which will likely continue in 2011. Many people’s credit was hurt during the Great Recession, making it more difficult or impossible to get a mortgage loan. Eighty-five percent of American homeowners have credit scores less than 660, and 30% of Americans have scores of less than 620. Increased loan level risk adjustments from Fannie Mae and Freddie Mac have increased the costs of mortgages, especially for those with less than pristine credit or those with second mortgages. Changing risk retention rules resulting from the Dodd-Frank regulatory reform will also increase the costs of mortgages for many people.
Many of the people quoted in the WSJ article are selling assets, such as cashing out IRAs, 401ks, or other investments in order to purchase what they feel are under-priced distressed properties that could provide a high rate of return. Cash buyers are often able to get a discount of 5-10% versus those who are getting a mortgage due to the ease and speed of the sale. Only time will tell if these investments in housing will pay off, but this is a trend that bears watching, especially for those of us in the mortgage business.
Percentage of home sales conducted in cash at the end of 2010:
- Miami : 54.2%
- Las Vegas: 45.9%
- Stockton, CA: 29.1%
- Phoenix: 35.6%
- Tampa: 44.6%
- San Francisco: 20.4%
- San Diego: 23.1%
- Chicago: 23.4%
- Los Angeles: 18.7%
- Seattle: 16%
- Washington, D.C.: 12.2%
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