Currently cash is king in the real estate industry, as the activity accounted for one third of all home sales transactions in February. According to the National Association of Realtors (NAR), cash only sales reached record highs and comprised approximately 33 percent of home sales transactions. The rest of the sales were backed by home mortgages, including fixed rate mortgages, adjustable rate mortgages and every type of home loan in between.
Cash sales have been especially popular in Southern California in communities boasting luxury properties at the $1 million mark. Research conducted by DataQuick Information Systems, a San Diego based analysis company, has charted nearly two-thirds of the region's activity have been cash transactions. Within the luxury market place, 62.2 percent of home buyers paid cash for properties exceeding $5 million. Candy Spelling's cash purchase of a sprawling 15,555 square foot, luxury condo is just one example of the activity in action.
New challenges in securing mortgages has been cited as the reason that hundreds of home buyers have opted to pay cash for their homes and the trend is prevalent as consumers have found it increasingly difficult to secure jumbo loans.
Cash Purchases Dragging Down Home Values
Courtesy of the mortgage meltdown and the influx of real estate owned properties being sold at discounted prices, cash sales are further dragging down the fair market values of homes. The NAR reported that the median home value has decreased 5.2 percent to $156,000, and discounted home sales accounted for 39 percent of all sector activity. It is common for home sellers, (both private and REO) to further discount home prices for cash sales as the transactions move much more quickly and will not be hindered by the mortgage application and approval process.
Lenders burned by the recent mortgage meltdown have tightened up the procedures associated with home loan approval. That has put a substantial damper on the traditional home buying market that has been crippled by current credit approval. Lenders are now requiring borrowers to have exceptional credit scores exceeding the-730 point. The Fair Isaac Corporation (the company responsible for generating credit scores) have reported that approximately 70 million consumers now have credit scores below 650, it is tougher than ever for consumers to easily qualify for home loans. Ultimately, it is that activity that has helped fuel the growing trend for cash only home sales.
Pros of Buying a Home With Cash
Consumers have opted to use cash for a myriad of reasons, including the ability to stay within budget and keep debt free. Not only do those rules apply to home cash sales transactions, but also the additional perks associated make the purchases even more enticing. Home buyers opting to pay cash can completely avoid the stress associated with securing a mortgage and have the power to negotiate a better home price because of the simplicity involved with a cash sale.
Cash sales are also favored by the wealth as it minimizes the risk of losing money on the sale. The potential loss of the investment is capped by the decline in home values meaning if a home's price decreased by 10 percent that is the amount of cash that can be lost. However, loss risk is greater for a mortgage holder as "In the case of a 20 percent down payment, if the house's value goes down 10% then you lose 50% of the money you put in because of leverage," (WiseBread.com).
Cons of Buying a Home With Cash
Of course there are also negatives assigned to cash only home sales transactions. Consumers who buy their homes with a mortgage are able to get a significant break on their income taxes, courtesy of the tax incentive provided by the interest paid on a homeloan. Taxpayers can legally deduct the interest on mortgages worth up to a total of $1 million on either primary residents or second homes and that can result in thousands of dollars of savings.
Additionally, the math that can mitigate the potential losses associated with a cash payment can also result in lost gain opportunities. According to WiseBread.com when “the value of the home goes up, then the percentage gain of an all cash buyer would be comparably lower than the person who purchased with a mortgage."
Some homeowners may invest too much cash in the purchase and may find that they do not have the liquidity they need to survive. Home buyers who think a complete cash purchase may stress their budget are better off putting a minimum of a 20 percent down payment in order to avoid paying private mortgage insurance to fund the transaction and opting to lock into a conventional fixed rate mortgage with the best rates available. Ensuring that there are no prepayment penalties for reducing the principal balance will provide cash heavy home buyers with the flexibility they need to get the best of both worlds.
