Now, More Than Ever, Cash is King in Real Estate

WASHINGTON (McClatchy Washington Bureau/MCT) -

One in three buyers of U.S. homes is paying cash, a record high number, according to data made available to McClatchy.

The trend is being driven by retiring baby boomers and rich investors, who unlike most first-time buyers can bypass tighter lending requirements to pay cash. They now rule the roost, composing record percentages of residential home sales.

It’s meant the field is closed off for conventional purchasers in some hot markets, but in others it’s meant forward momentum for the struggling housing sector.

All-cash sales as a percentage of residential real estate sales stood at 33 percent from January to March this year. That’s up from 31 percent for all of 2013 and 2011 and 29 percent for 2012. These are the highest percentages since the National Association of Realtors started collecting the data in 2008. Before that, it estimated that cash buyers historically represented less than 10 percent of all sales.

The group analyzed state-level numbers on behalf of McClatchy, and it found that states such as Florida, South Carolina and Wyoming had outsized cash sales during the first quarter of 2014.

The rising cash sales come despite a drop in one of the main draws for cash purchases: financially distressed properties sold through foreclosures or at a loss to the banks.

“What is surprising is how cash continued to remain high even though distressed property sales are declining. Distress sales invited all the cash purchases,” said Lawrence Yun, the chief economist for the Realtors’ group.

Distressed home sales declined from 26 percent of the national market in 2012 to 17 percent in 2013 to 15 percent in the first three months of 2014. It means that even as the housing market heals and conventional sales return, all-cash purchases remain a big chunk of residential sales.

Yun points to a couple of trends that are driving the boom in cash purchases, trends that fall into the broader debate about rising income inequality in the United States. One driver appears to be wealthy investors, foreign and domestic, diversifying into real estate. Another is baby boomers selling homes that were paid off and retiring elsewhere with the proceeds, purchasing homes.

“Trade-downs are certainly a reason,” Yun said. “The five-year bull run on the stock market is also helping the upper-end households,” he added, noting many are diversifying out of stocks after several years of big gains.

That’s in line with what 41-year veteran Sandra Schede has been seeing.

“The rates (of return) are so low for putting their money into the bank or investments at this time that it makes much more sense to purchase real estate using cash,” said Schede, the incoming president of the Connecticut Association of Realtors.

“The rental market is really strong right now, so it gives them a better return over a short period of time.”

Boomers are buying the higher-priced properties with cash, while investors tend to buy below the midpoint price.

The trend raises questions about where first-time homebuyers fit in.

“I am worried, honestly, about having a real-estate finance structure that enables people to borrow and get a reasonable mortgage,” said Leslie Appleton-Young, the chief economist of the California Association of Realtors.

Her state sees cash buyers from China and Canada snap up investment property of all sorts in Los Angeles and the San Francisco area, and often traditional buyers “are not able to compete with all-cash,” she said.

At the request of McClatchy, Yun’s staff analyzed the national data to provide state-by-state estimates on all-cash sales as a percentage of total sales. The group plans to make this sort of data public going forward, and will issue its first such report Thursday.

The Realtors’ group was able to calculate a reliable estimate for 29 states, while surveys in the other 21 states and the District of Columbia were considered to have sample sizes insufficient to offer a hard number. Instead, a range was given for four of these 21 states, where McClatchy publishes papers. The Realtors’ group did so with the warning that these ranges aren’t considered statistically reliable for Idaho, Kansas, Kentucky and Mississippi.

Florida topped all states for all-cash home sales, with 55 percent of sales done in cash the first three months of this year. That’s on a par with 54 percent for all of last year and 56 percent in 2012.

Many of those sales are in South Florida, where buyers from Russia, Latin America and the Caribbean often buy in cash.

“It is cash, cash, cash, cash,” said Joan McCaughan, a top Miami real estate agent with the McCaughan & Mandiola Real Estate Group, adding that these buyers are “from all over the world” and stay part of the year in Miami.

Investors are a smaller share of today’s South Florida buyers, she said, noting they got into the market immediately after the housing crisis several years back during the time of depressed prices.