All-Cash Home Purchases: Looking Behind the Numbers

All-cash home purchases are growing significantly in the real estate market – thanks to tighter bank lending practices, repeat buyers who are opting to forgo the mortgage process, and investors gobbling up distressed real estate.

For every month so far in 2010, all-cash buyers comprised either 26 percent or 27 percent of home purchasers, according to the Realtors Confidence Index from the National Association of Realtors. That's nearly double the cash buyers (15 percent) from a year ago, and about three times higher than previous years, when all-cash buyers ranged from just 7 percent to 9 percent of the market.

With a glut of foreclosures and short sales hitting the real estate market, one might be tempted to think that those paying cash for homes are mainly real estate investors.

But digging beneath NAR's numbers tells a different story – and so do Realtors.

Move-up buyers and baby boomers who are scaling down their lifestyle actually represent the biggest numbers of those who are snatching up homes with all-cash deals, experts say.

Jed Smith, an economist and managing director of quantitative research at NAR, broke down the numbers for HousingWatch:

  • Wealthy foreigners: 2 percent
  • Investors: 12 percent
  • Repeat buyers: 86 percent

Right now, NAR is forecasting 5.4 million existing-home sales in the U.S. for 2010.

According to Smith, foreigners account for about 4 percent of all U.S. existing-home sales. Investor activity makes up roughly 18 percent all of property sales. The remaining 78 percent of home purchases are made by first-time buyers (40 percent) and repeat buyers (38 percent).

Since about half of all foreigners pay outright for real estate, Smith says, that means wealthy foreigners represent a total of 2 percent of all-cash buyers. Based on Realtor feedback, Smith says a majority of investors are paying cash. So he estimated that about 12 percent of the all-cash market is derived from investors. The remaining 86 percent of all-cash buyers is from those with enough assets to buy without a mortgage.

Who make up that last group? They certainly aren't first-time buyers. Most first-timers have a hard enough time coming up with a down payment; recently, most have been putting down 3 percent to 5 percent to buy their homes, and then getting a mortgage to finance the purchase.

According to Smith, real estate agents around the country report that the repeat buyers who purchase homes with 100 percent cash generally fall into two categories: move-up buyers purchasing bigger homes, and baby boomers who are trading down to smaller ones.

Among the baby boomer crowd, many buyers are selling homes in more expensive areas, such as New York and California, and using the proceeds from sales to make all-cash offers in less expensive regions of the country.

Smith said that in addition to Florida, there has been stepped-up demand for real estate in Tennessee, North Carolina and Arizona – all of which have relatively affordable housing.

"For those who are selling or downsizing, and have equity in their house, this is predominantly the place that cash is coming from," says Smith.

"And given decreased credit availability, more buyers are paying cash," he adds. "As you move up the scale, in terms of house price, the banks scrutinize the loans even more than they do at the lower end of the market."

Melissa Jenkins, of Weichert, Realtors in Bridgewater, N.J., echoes that sentiment. Jenkins works with both investors and owner-occupants seeking property in the Garden State.

Like Smith, Jenkins said it's tougher to get jumbo mortgages (i.e. home loans above roughly $729,000), so she wouldn't be surprised if well-heeled buyers who could afford to do so wound up avoiding mortgages, just to have fewer hassles in the home-buying process.

Jenkins says she closed on three homes in the past two weeks – but not before each of her buyers had to jump through last-minute hoops with their banks.

"With each of my clients, three days before closing they all got e-mails – from three different banks – saying they couldn't close on the date scheduled," Jenkins said. Fortunately, Jenkins was able to save one closing by calling a lender and getting a documentation issue resolved. With the other two deals, the closings were briefly postponed, including one transaction that closed two weeks later.

Meanwhile, Jenkins recalls: "A colleague of mine last year had a cash buyer who bought a $5 million home in Basking Ridge," Jenkins said, noting that the all-cash deal was one of the priciest home sales in the region for Weichert in 2009.

For her part, Jenkins just had an all-cash buyer, too – in this case an investor – who plunked down $150,000 for a property in Plainfield, N.J.

"Most investors are buying properties under $200,000, renovating them and renting them," she says.

Adds Smith: "The foreclosure problem in America is a really miserable situation for people involved. On the other hand, it's a great time if you're an investor."

Lynnette Khalfani-Cox, a former reporter for the Wall Street Journal and New York Times is also the author of the best-selling personal finance book Your First Home: The Smart Way to Get It and Keep It. See Lynnette Khalfani-Cox on our upcoming online event What Works Now: Smart Moves When Buying A Home in participation with Bank of America Home Loans, premiering on AOL Real Estate at 7:30pm on June 23. Sign up here for an email reminder to tune into the event.

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