CW Blogcast 59 - Cash and Carry in the Housing Market

The Creating Wealth Show Blogcast

Interest rates that continue to run low and rising prices make the housing market pretty hot right now. Banks are offering attractive mortgage packages, too. But, say some market watchers, it’s hotter still for buyers who can pay cash. To compete in the cash wars, what’s an investor to do?

Recent data crunched by DataQuick reveal that the number of homes bought with cash has been rising steadily over the last few years, with cash transactions accounting for as much as 30 percent of home sales in some major markets. The reasons?

Although hosing prices are rising, in many areas they’re remaining low enough to put a cash purchase within reach of many buyers. When home prices hit higher levels, that excludes most c buyers except those backed by large investment groups. Now, lower-cots homes, especially foreclosures, are available to residential homebuyers as well as startup investors.

Foreign buyers also account for a significant percentage of cash sales. Whether buying fur investment purposes or just to have a vacation home, well-off foreign buyers are finding American real estate a secure place to put their money. Cash ales bypass complicated financing issues and make for a quick sale.

Sellers love cash sales. The sale moves quickly without glitches related to financing and there’s no worry about defaulting on mortgage payments down the line. Given a choice of a buyer with cash in hand over a qualified buyer with a loan, many sellers opt for the cash, leaving the “typical” homebuyer locked out.

Where does the money come from? Some cash buyers are backed by third party financial groups or individuals. But, say real estate pros, still others have raided retirement accounts and investment portfolios, rolled over money from a previous home sale, or tapped into inheritances. Younger buyers may even turn to parents for a cash boost.

While cash sales are quick sales, cash buyers miss out on the benefits of using other people’s money and being able to “refi till you die,” as Jason Hartman says. They lose the tax breaks that come with long-term mortgages and lose leverage over the lifetime of the purchase. But Ilyce Glink, managing editor of the Equifax Finance Blog, points out that in many sales, cash is only a bargaining chi

Offering cash gets a buyer’s foot in the door and catches a seller’s attention, according to Glink. Ad once a buyer establishes the ability to back the purchase with cash; they can go out and get a traditional mortgage to actually carry the sale.

Used wisely, cash can offer a competitive edge in today’s housing market. But as Jason Hartman advises, mortgage debt can be a “good debt” that frees up that cash for other important needs.