All-cash transactions are back in fashion for home buyers, a shift that favors the wealthy.
Luxury real estate markets in New York and Florida are showing near-record shares of transactions paid for in cash, according to first-quarter data from real estate appraisal and advisory firm Miller Samuel Inc.
This represents a sharp reversal from deals more reliant on mortgages during the pandemic, when interest rates were considerably lower.
“These people have privilege and influence,” said Jacky Teplitzky, who leads a Douglas Elliman brokerage team that serves the luxury real estate markets of New York, South Florida and the Hamptons.
“They say, ‘OK, I’ll buy cash and when the interest rates go down, I’ll refinance and take my money out.'”
Affluent buyers are just as opposed to today’s higher mortgage rates, currently above 7 percent, as everyday home seekers. They simply have the means to circumvent the fares more often than those with smaller budgets.
Learn more: Mortgage rates exceed 7%: is it a good time to buy a house?
All-cash transactions are on the rise at all price points. The share of purchases made all-cash in the United States in the first quarter of the year was a monthly average of 31%, according to data from the National Association of Realtors (NAR). This corresponds to the highest monthly average for a full year since 2013.
But the numbers are considerably higher in places like Manhattan, one of the country’s best-known luxury markets. In the first quarter, 63.4% of Manhattan sales were all cash, the third highest share in a decade, according to Miller Samuel. At the same time, the share of mortgage transactions was the lowest on record.
A normal market in Manhattan, where the average sales price for luxury homes was $7.5 million in the first quarter, would be “50% cash and 50% financing,” said Jonathan Miller, president and CEO. the management of Miller Samuel Inc.
The story is similar in some of Florida’s fanciest markets.
All-cash sales accounted for 85.7% of all transactions in Royal Palm and Boca Raton, Fla., higher than the decade average for the first quarter. The average sales price there was nearly $10.9 million.
In the coastal towns of Manalapan, Ocean Ridge and Hypoluxo Island, Florida, 92.9% of all sales – with an average sales price of $9 million – were made in cash, the second highest share for a decade.
And in Miami Beach, the market share of luxury condos, selling for an average of $6.5 million, reached a new high during the quarter.
“Cash is not exclusive to the wealthy, but the likelihood increases as prices rise,” Miller said, “due to withdrawals from the booming stock market of stocks and other assets they can leverage to make the purchase.”
And in the first quarter, the S&P 500 exploded, jumping just over 10%.
In a different market, these affluent buyers might have used a line of credit backed by their stock portfolios to make a purchase, Teplitzky said, a transaction that would still be considered all-cash by the seller.
But this is becoming less acceptable with rising interest rates and taking out a mortgage.
In a lower interest rate environment, others might have paid all cash but refinanced shortly afterward to capitalize on a tax or other wealth strategy, Miller said.
“They buy an apartment for $10 million and then get a $1 million or $1.5 million mortgage after closing because their advisors told them to,” he said. “It’s very common, but we also don’t see it as much because of the rate situation.”
But there are some advantages to buying for cash now. Both Miller and Teplitzky expect prices to continue to rise, especially if mortgage rates moderate, so buyers get a better deal now than waiting until later.
Cash buyers can also get a better deal. A recent study from the Rady School of Management at the University of California, San Diego, found that cash buyers pay an average of 10% less than mortgage buyers.
All-cash offers also stand out in a bidding war, Teplitzky said, because offers that rely on financing aren’t safe.
“But if it’s an all-cash transaction, you’re basically guaranteed to get to the closing table,” she said.
Although wealthy buyers are more likely to have the financial means to complete an all-cash transaction, these types of transactions are also becoming more common in the lower price ranges.
The current level of all-cash purchases reached this high in 2011 and 2013, when foreclosures and short sales accounted for a large portion of all-cash transactions made by investors, said Lawrence Yun, chief economist at NAR.
This is far from being the case today. Distressed sales made up just 2% of all sales in the first quarter and the number of investors in the market is “kind of normal – nothing out of the ordinary,” Yun said.
Today’s cash buyers are “of course, high-income and wealthy people,” Yun said.
But in mid-price markets, these are retirees moving from a high-cost market to a more affordable market and bringing in cash from the sale of their old home, which has increased in value over the over the last few years. last four years.
They are also younger buyers who may tap other sources of money – family savings or retirement – to increase their chances in multiple offer situations.
“People have to be creative to win the tender, and part of that creativity is making money,” Yun said.
“But it’s frustrating for people who can’t compete with cash.”
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Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
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