All-cash transactions have always been part of the real estate marketplace, but in recent years their numbers have been growing. Why so much interest in buying homes for cash when so many financing options are available? The answer, as we shall see, largely involves changing economics, new tax policies, and old-fashioned personal preferences.
2023: A Year Of Benchmarks And All-Cash Purchases
Residential real estate had mixed results in 2023.
- The good news for owners is that home prices generally rose. According to ATTOM, “The U.S. median home price increased 2.1 percent from 2022 to 2023, reaching another all-time annual high of $335,000.”
- The good news for buyers is that the national median home price only rose 2.1%, the smallest increase since 2011. In 2022, according to ATTOM, home values rose 10% while in 2021 there was a 17.6% surge.
- A Bloomberg headline from October 2022 said that the “Forecast for U.S. Recession Within Year Hits 100% in Blow to Biden.” The 2023 recession expected by many never happened.
- Overall market activity plummeted. According to the National Association of Realtors (NAR), there were 4.09 million existing home sales during 2023, “the lowest level in nearly 30 years.”
- The much smaller new home market did better. The Census Bureau reported that “An estimated 668,000 new homes were sold in 2023.” This was a 4.2% increase over 2022, a total of just 27,000 additional units nationwide.
- Interest rates rose for much of the year. The Mortgage Bankers Association said rates reached a weekly high of 7.9% in late October.
Why All-Cash Deals Are Hot
The combination of rising home values and steep mortgage rates for much of the year created affordability woes for many potential buyers. NAR estimated that monthly mortgage costs rose $84 just between September and October 2023. That’s $1,000 a year in higher financing expenses, a big qualifying hurdle for borrowers with already steep debt-to-income ratios.
Although many households could not keep up with rising prices and higher mortgage rates, that was not the whole story. It was also true that large numbers of potential buyers were flush with cash. Lots of cash.
The worst of the pandemic lasted from early 2020 to 2022. To ward off a recession and maybe worse, the government gave out more than $5 trillion in various programs to businesses, the unemployed, individuals, hospitals, schools, and local governments.
While many people needed the money because of Covid – think of those laid off because of closed businesses – others had employment, income, and could save.
Those with money simply had fewer opportunities to spend during the pandemic because many businesses went to reduced hours or shut down completely. The
result was that bank deposits went from $13.3 trillion in mid-January 2020 to $17.4 trillion at the start of 2024.
Some of that money went into residential real estate.
“Nationwide,” said ATTOM, “all-cash purchases accounted for 38%, or about one of every three single-family home and condo sales in 2023 – the highest level since 2014. The latest portion was up from 36.1% in 2022, although still off from the 44.7% peak this century in 2011.”
Why Are So Many Transactions All-Cash?
It may seem odd that so many transactions involve lots of checks and few mortgages, but many buyers are moving in that direction.
It’s usually argued that all-cash purchases are not a good idea for several reasons. First, buyers lose leverage when purchasing for cash. It might be better
to have more financial balance with a broader range of investments such as stocks, bonds, etc. Or, maybe use mortgage financing with cash to buy several properties. Second, real estate equity is not liquid, a concern if there’s a quick need for cash. Third, mortgage interest may be tax-deductible.
These are not unreasonable or illogical arguments, but large numbers of 2024 homebuyers still prefer all-cash transactions. How can that be?
The Case for Buying Real Estate With Cash
Investment preferences are always a moving target because times change. The DJIA no longer includes such once well-known names as Central Leather (1912) or Standard Rope & Twine (1896). In a similar sense, all-cash transactions are getting a new look because the market
has evolved.
Leverage
It’s a common practice to leverage investments. For instance, stocks are routinely bought on margin. With real estate, if cash can be used to buy two properties instead of one and values rise 10%, that’s a better result than using the same amount of cash to buy one property.
The catch is that leverage works in both directions. It magnifies returns when prices rise, but it also inflates losses when values decline. The fact is that rising home prices are not a certainty. This was widely demonstrated during the mortgage meltdown and even more recently. ATTOM research shows that in the third quarter, “Metro areas where median prices dropped most in 2023 were Austin, TX (down 6.2%); San Francisco, CA (down 4.4%); Stockton, CA (down 4.4%); Boise, ID (down 4.1%) and Phoenix, AZ (down 3.8%).”
Millions of people have decided that leverage-free living is the way to go – a process that can start with all-cash purchases. The Census Bureau estimates that 51.4 million homes secure real estate financing, while 33.3 million homes are owned free and clear.
Cashflow
It’s sometimes said that homeowners should put “idle” equity to work by financing and refinancing to access their cash. But equity is not idle, it produces steady cash savings – savings that can add up.
If you have a $300,000 mortgage at 6.5%, the monthly cost for principal and interest is $1,896 over 30 years. If you don’t have a $300,000 mortgage, you can put $1,900 in your savings or checking account every month. That’s $22,800 a year, money that is a “savings” and not taxable income. If a job is lost or income declines, mortgage payments are not a worry.
All-cash purchases can be especially important for seniors because incomes tend to decline as people enter retirement age. In the third quarter, according to the National Reverse Mortgage Lenders Association, homeowners aged 62 and above had real estate equity worth $15.39 trillion but only $2.32 trillion in mortgage debt. That’s $13 trillion in real estate equity and not a dime in monthly payments.
Tax Deductions
Homeowners have long been able to deduct mortgage interest and property from federal and state tax returns and effectively reduce financing costs. However, the rules changed under the 2017 Tax Cuts and Jobs Act. Yes, mortgage interest and property taxes are still deductible, but rather than itemize, most taxpayers will instead take the standard deduction and get a bigger write-off.
IRS figures show just how much the 2017 legislation impacted homeowners. In 2016, before the new rules were enacted, almost 33 million tax returns included a mortgage interest deduction. By 2020 there were just 12.3 million returns with a mortgage interest claim.
The mortgage interest deduction is now less valuable as a result of the 2017 tax changes. This means many of those who buy with all cash will not lose a
deduction because they are unlikely to take the deduction.
All-Cash Leverage
In January 2020 mortgage financing was available at a record-low 2.65%. Those days are gone, but millions of homeowners will not move because they want to keep their current financing and its low rate.
One byproduct of lower mortgage rates is that owners who might want to sell are hanging on to their homes. The result is less inventory for sale. This inventory shortage explains in part why 2023 sales were lower, but prices generally increased.
Given that there’s a lot of demand for a limited supply of homes, it follows that sellers will want the best possible offers. In other words, it’s still a seller’s market and owners have leverage, so what can a buyer do to stand out?
An all-cash offer will certainly get attention. With 100% cash, there are no worries about lender approvals, low appraisals, buyers who ultimately can’t qualify, or underwriting delays. Well-financed buyers – and no one is better financed than an all-cash purchaser – can often trade a sale with greater certainty for a lower price.
Personal Preferences
Some things just bring joy; for many people one happiness is a home owned free and clear. There are no statistics or charts to explain why, maybe it’s the sense of security that all-cash purchases can provide, or perhaps the lack of monthly payments. Whatever it is, going all-cash works for a lot of people.