Are all-cash deals the way to go in today’s market? According to the National Association of Realtors, 28 percent of national sales last year were all-cash transactions. The rate was 14 percent in October 2008,
when the trade group began tracking the measure.
Downtown Miami - Image by Tim Kiusalaas/Corbis
An article in the Wall Street Journal reported that more and more homebuyers are paying cash for real estate, betting that prices are just about at the bottom in the housing market.
The percentage of buyers in Phoenix paying cash hit 42 percent in 2010—more than triple the rate in 2008, according to Raymond James’s equity research division. In addition, cash buyers represented more than half of all transactions in the Miami-Fort Lauderdale area last year, according to an analysis from real-estate portal Zillow.com.
The jump in real-estate purchases made with cash is a sign of a revival in the U.S. economy. The Wall Street Journal reported that the Dow Jones Industrial Average rose 69.48 points, or 0.6%, to 12161.63, and the Standard & Poor’s 500-stock index rose 8.18 points, or 0.6%, to 1319.05.
The announcement in early February of $13 billion in acquisitions helped the stock market get hopes up of more deals, share buybacks and dividends as companies regain momentum in an improving economy. The two stock indexes have soared more than 80 percent since early March 2009.
Residential real estate has been slower to bounce back than stocks, but the presence of apparent bargains is luring in newly confident buyers. The Federal Reserve reported that Americans increased their use of credit cards in December for the first time since August 2008, showing that consumers are getting less skittish about opening their wallets.
The Wall Street Journal recently interviewed Richard Stoker, a retired sales executive, who bought two condominiums in Miami Beach, and plans to close on one more in the near future. The 73-year-old was inclined to buy because “the prices were just irresistible.” To pay the $1.8 million, $1.2 million and $1 million prices on the condos, Stoker and his wife, Jane, cashed out of some financial investments and sold a Roy Lichtenstein painting and an Alexander Calder mobile.
Stoker admitted he could have taken out mortgages, but decided to pay cash because “it was a good time to lighten up in the art market and take on real estate at a favorable price,” he said. However, the Wall Street Journal reported that some of the cash purchases reflect a tight lending environment, where even people with good credit and ample down payments are sometimes turned away for conventional borrowing.
“The rates are great but the underwriting is brutal,” Henry Schlangen, an agent with real estate firm Pacific Union International who buys and sells for clients, mainly in Napa Valley, Calif., told the newspaper.
“They hang these people upside down and shake them till they see what falls out of their pockets. So people are buying with cash and maybe they’ll ‘refi’ later.”
Schlangen, who deals in higher-end properties such as vineyard estates, estimated that 95 percent of his deals last year were all-cash, an increase from about half of sales being all-cash sales in previous years. “The deals that are consummating, these are buyers who feel they got a great deal,” he said, noting a surge of buyers from China.
Cash buyers can often command 5 to 10 percent more off the asking price than a potential buyer using a mortgage, but even sellers prefer cash deals; they close more quickly and avoid risks such as a buyer’s job loss or a bank changing its mind.
Nationally, it isn’t clear whether prices have bottomed, according to the Wall Street Journal. The Case-Shiller index of housing prices in 20 cities showed a steep decline in prices until 2009, when they appeared to bottom and began to trend upward. But in the second half of last year, prices began falling again. A Zillow index, meanwhile, never noted the uptick.