A record-high 31.6% of home purchases in July were made without a mortgage, according to an analysis by Redfin. That figure is down from a peak earlier this year but still higher than both pre-pandemic times and the 2021 buying frenzy.
What’s driving this change?
There are several reasons why more buyers are paying cash for homes. For one, mortgage interest rates are increasing, which makes getting financing harder for many people.
Another reason is that borrowers are finding it harder to get approved for a loan with a credit score that isn’t great. Those with thin credit files may be able to bulk up their files to qualify for a mortgage, but it will take time.
Paying with cash might also be an option for those who are looking to buy a home for investment purposes. It’s less expensive for real estate investors to purchase a home with cash than it is to rent out the property. Read more https://www.fastlandoffers.com/
Purchasing a home for cash can also be beneficial if you want to save money on taxes, says Nick Holeman, head of financial planning at online adviser Betterment. A cash buyer could invest the money in a tax-favored investment fund, which would likely earn more than mortgage interest, Holeman says.
More cash buyers are swooping up luxury homes in coastal markets like California, where the wealthiest millennials are concentrated. These buyers are looking for spacious alternatives to their cramped city dwellings, and they’re bringing cash to the table.
The housing affordability crisis in New York is also a big factor behind cash-only purchases, according to Neda Navab, president of brokerage operations at Compass. The city has a disproportionately high share of millennial homebuyers, and it is a top destination for cash-only sales because of the low homeownership rate and soaring property prices.
Some buyers are making cash offers in competitive markets to gain the edge over other buyers who need mortgages. These are called “iBuyers,” and iBuyers make up an increasing share of home sales in certain cities, such as Atlanta, Phoenix, DallasFort Worth, and Charlotte.
There are also other types of home buyers who prefer to pay cash, such as secondtime homebuyers who have equity in their current homes to use for a new purchase, says Peter Grabel, managing director of MLO Luxury Mortgage Corp. Those buyers might be inexperienced or don’t have a lot of time to search for and secure a loan.
Other types of buyers who choose to pay cash are savvy investors, or those who have the ability to quickly close on a property and finance it afterward. This group often has access to a large chunk of cash that they’ve saved from a previous home sale or closing, or it might be from liquidity events like IPOs or crypto gains, says Daniel Durkin, CEO of the cash-focused real estate investor iCapital LLC.
In addition, the pandemic forced remote workers to move away from more expensive metro areas and into lower-cost regions where they paid cash for their homes, says Durkin. These workers’ relocations have slowed in recent years, but some are still doing so.
