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TheStreet Open House

Fewer Cash Home Sales Is a Good Sign

NEW YORK (TheStreet) -- Cash sales in housing would seem to signify a healthy economy. After all, excessive borrowing can be a red flag, with defaults and other troubles to follow. And who wouldn't like to be flush enough to lay down cash for a home?

But it's not necessarily so. In the past few years the high percentage of cash sales has indicated a nagging problem -- one that now seems to be easing.

A high percentage of cash buyers means there are not enough traditional homebuyers, the kind that take out a mortgage for a primary residence. First-time homebuyers, for instance, are typically young people without enough cash to buy a home. And, to keep the market healthy, there must be a supply of first-time buyers to replace people who leave the homeownership market later in life, and to keep the home building industry going as the population grows.

A high percentage of cash buyers also means investors are flocking to the market, and they do that only when prices are depressed. Low prices are obviously bad for homeowners who want to sell, and if they persist they discourage buying as well, because no one wants to be stuck with a home that's worth less than they paid.

Also see: How Stagnant Wages Have Trapped the Housing Market

So new data from Zillow.com, the marketing and housing-data firm, hint things are moving in the right direction.

"The share of cash buyers fell year-over-year in 102 of the 126 total metro areas analyzed by Zillow," the firm said. "Among the top 30 largest metros, the share of cash buyers was highest in the first quarter in" Miami (64.9%), Tampa, Fla. (57.1%), and Cleveland (54.2%). Large metros with the lowest share of all-cash sales in the first quarter were Virginia Beach (17.4%), Va., Denver (22.4%) and Portland (22.95), Ore.

While improving, conditions are far from perfect. "Even as the share of all-cash sales falls in many areas, it's pretty clear that cash is still king, especially at the lower end of the market," Zillow Chief Economist Dr. Stan Humphries says.

Low-cost homes, those in the bottom third by price, are the most frequent targets of all-cash offers, Zillow says. On average, about 30% of those home sales are for cash, and the figure soars to more than 80% in troubled markets such as Detroit, Tampa and Miami.

Also see: How Much Income Do You Need for a Home? It's Easiest in Cleveland

That indicates investors think prices at the low-end of the market are still bargains. Investors hope to sell homes at a profit later or to profit on rent. Obviously, cheaper homes also appeal to small investors with only so much to spend.

All-cash deals make conditions tougher for buyers who must take out a mortgage, because sellers often prefer the speed and certainty of cash deals.

"It can be difficult for more traditional buyers to compete with cash offers, especially in a tight inventory environment and among cash-strapped first-time buyers most likely to seek lower-priced properties," Humphries said. "Housing is much more than an investment for most buyers, and it's heartening to see more buyers armed with traditional financing begin to enter the market. This is a critical step on the way back to a more normal, balanced housing market."

Another step forward -- but still a long way to go.

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