A new record has recently been set in the United States for the number of people paying cash for residential properties. Among USA houses for sale in the first quarter of 2014, 42.7 percent were bought with cash rather than traditional home loans. In the previous quarter, only 37.8 percent of homes were purchased with cash, which is an increase of 19.1 percent.
This startling data was first reported by RealtyTrac, the respected real-estate information company based in California. However, the record quarter is based on the fact that cash purchases were not specifically tracked before 2011.
Another significant detail shown in the RealtyTrac report is that activity by institutional property investors has declined for the time since the beginning of 2012. In the first quarter of 2014, 5.6 percent of properties sold were purchased by institutional investors, which is down by 1.2 percent over the previous quarter and down by 1.4 percent over the previous year.
The vice president of RealtyTrac offered a public statement concerning the report. “Strict lending standards combined with low inventory continue to give the advantage to investors and other cash buyers in this housing market,’ said Blomquist. “The good news is that as institutional investors pull back their purchasing in many markets across the country, there is still strong demand from other cash buyers, including individual investors, second-home buyers and even owner-occupant buyers, to fill the vacuum of demand left by institutional investors.”
This is great news for small investors who are considering jumping into the U.S. property market because small investors no longer have to compete against giant firms with deep pockets. In addition, home prices continue to appreciate in 18 out of 20 markets where institutional investor activity has declined.
Majority of Cash Buyers are Investors
After the report of the increase in cash buyers, some question remained as to who, exactly, has been buying homes with cash. It turns out that 54 percent of cash purchases were made by individual investors and people buying second homes. Most of those who are buying primary residences continue to do so by taking out mortgages.
“Strict lending standards combined with low inventory continue to give the advantage to investors and other cash buyers in this housing market,” said Blomquist.
Most of the individuals buying homes with cash are baby boomers and retirees. These people often acquire the cash by selling a previous home and buying another that is less expensive. However, retirees are also dipping into their retirement accounts to buy homes in comfortable locations, such as Florida. In fact, Florida accounted for the top five metropolitan areas with the highest number of cash sales:
• Cape Coral-Fort Myers – 73.6 percent
• Miami – 67.1 percent
• Sarasota – 65.1 percent
• Palm Bay – 64.1 percent
• Lakeland – 61.8 percent
Some cash buyers also acquire the money from family and friends. Many new investors use this strategy to buy distressed homes and other bargain properties that they can make quick profits on by flipping them. These individuals then use the profits to pay the money back or to continue investing.
Foreign Investors using Cash to Buy Property
Another group of people responsible for cash sales are foreign investors, who are particularly fond of properties located in Las Vegas, Miami and New York City. One reason why foreign investors are prone to buy properties with cash is because of the strict lending practices of U.S. banks. The majority of lenders require residents of other countries to have down payments of 30 percent to 40 percent of the sale price of the property. This has prompted many foreign investors to take out loans from banks in their home countries to buy USA houses for sale, and these sales register as cash purchases.
The three states with the highest number of cash property sales are Florida, New York and Alabama, and foreign investment plays a large role in each of them. In Florida, home values dropped significantly from 2006 to 2009, and investment activity during that time was fiercely competitive. As housing prices increased in recent years, institutional investors began to look elsewhere, but ample opportunity still remains for small investors.
New York City is ranked as the second most popular city in the world for property investors and is only slightly behind London. In the first quarter of 2014, nearly 60 percent of residential properties for sale were purchased with cash payments.
The state with the third highest number of cash sales was Alabama, which has flown under the radar of many property investors. However, industrial businesses have long known of the advantages of investing in Alabama. Several foreign automakers, including Honda, Hyundai, Toyota and Mercedes-Benz, have built factories in the state.
Author: Julian Sutherland
Julian Sutherland is an International real estate agent based on the Gold Coast, Queensland, Australia, servicing the Asia Pacific Region.