Money talks, but cash shouts in the real estate market.
An unprecedented number of home buyers are forgoing a mortgage. Nearly half of all U.S. buyers during September paid cash, compared with 30 percent last year, according to RealtyTrac.
“Cash is king,” said Dave Delgado, co-owner of a medical supply company in the Minneapolis-St. Paul area. He recently paid cash for a couple of suburban rental houses. “It’s hard to say how the stock market will do, so we feel more confident and comfortable in the real estate market.”
Delgado and other investors are spending billions on real estate, signaling a deepening confidence in the housing recovery and a steadfast belief that demand for rentals will remain strong. For Delgado, purchasing real estate with cash also helps to diversify his investment portfolio.
Yet the cash trend is creating unwelcome competition for those who can’t afford to buy a home without financing. With low appraisals still scuttling deals and mortgage approvals more difficult to come by, sellers often favor cash buyers even if they don’t have the highest offer. This can leave sellers with less profit, hold back home prices and put buyers back on the house hunt.
“The housing market continues to skew in favor of investors, particularly deep-pocketed institutional investors, and other buyers paying with cash,” said Daren Blomquist, vice president at RealtyTrac.
The trend presents opportunities as well as challenges. Though home sales are on the rise, mortgage originations have fallen, in part because more buyers are paying cash. Last month, Wells Fargo Home Mortgage announced a fourth round of layoffs, citing a falloff in mortgage originations. Nationwide, the Mortgage Bankers Association expects a 32 percent decline in mortgage originations in 2014, suggesting that more layoffs are on the horizon.
Home values are also at risk, as cash offers often go for less than ones made with the backing of a mortgage. For sellers, it’s a simple decision: Go with a cash offer that’s sure to close instead of a bid that could end up falling through if the appraisal isn’t high enough. Jeremy Rupp, a full-time real estate investor and frequent cash buyer, said most sellers are willing to take a quick-close cash offer over one that has a financing or inspection contingency.
“It gives us a way bigger competitive advantage,” he said. “Trade a little bit of profit for the certainty of a closing.”
Rupp and his partners plan to buy at least 40 houses this year. Some will be fixed up and resold, while others will become rentals. In most cases, using cash allows him to pay less than the asking price. Then, after the deal closes, he gets a mortgage on the home to free up more cash to keep buying.
Corporate investors represent a rising share of cash offers. A recent report by Goldman Sachs said cash deals have represented more than half of all sales during the past 18 months, with giant private-equity firms accounting for a growing share of cash deals.
During September, the number of institutional investors nationwide rose to a new high, accounting for 14 percent of all sales, RealtyTrac said. That includes entities that have acquired at least ten or more properties during the past 12 months.
Blomquist said that while cash purchases have peaked in some markets, other areas, such as Minnesota’s Twin Cities, could see an increase. That’s because large investors are likely to seek new ground as they exhaust options in other parts of the country.
“These institutional investors have an insatiable appetite,” Blomquist said. “Once they pick one market clean of all properties that make sense for them, they move on to other markets.”
These private equity firms, hedge funds and real estate investment trusts, or REITs, have funneled an estimated $20 billion into the housing market, acquiring more than 200,000 houses intended for rentals.
Patrick Ruble, business development director at Century 21 Jay Blank Realty, said a survey of closings in his office shows that about 30 percent of all deals over the past year were cash, of which a third came from investors.
Chris Willette, a short-sale expert with Edina Realty, is also seeing the phenomenon. He said there is strong demand for fixer-uppers in communities that have top-notch schools and are close to downtown Minneapolis and St. Paul. Recently, he listed a short sale in Edina, Minn., and within 24 hours, the home received eight offers, including seven that were cash.
“There are cash buyers at every level who don’t mind taking a gamble,” Willette said. “In 18 years of selling real estate, I have never seen so many cash buyers.”