Cash Sales, Driver of the Housing Recovery, Starting to Wane

NEW YORK ( TheStreet) -- Cash sales, which have played a major role in the housing recovery amid tough mortgage conditions, are showing signs of peaking, according to a new report from CoreLogic

In May 2013, sales to buyers who paid cash outright rather than take a mortgage, stood at 39%, down from 40% a year ago. Cash sales have been down slightly for 19 consecutive quarters. Among non-distressed sales of homes, the share of cash sales has dropped to 39% from 41% a year ago.

Cash sales have dominated home sales activity in recent years, amid heightened interest from real estate investors. Traditional first-time home buyers and existing homebuyers have been largely absent. Many first-time homebuyers have been unable to access mortgage credit despite lower interest rates, while many existing homebuyers have lacked the equity in their homes that would allow them to "trade up."

As a result, most sales in the early part of the recovery were made to those who paid all cash, usually investors. The entry of institutional investors more recently has also kept the level of cash sales unusually high.

Prior to 2007, when mortgage lending conditions were easy, cash sale accounted for about 25% of total sales. Then after the housing bust, demand from traditional first-time home buyers and existing home buyers plummeted, amid a significant tightening in mortgage underwriting standards.

While mortgaged sales dropped 78% from its 2005 peak, cash sales declined by a smaller 47%. And while mortgaged sales are up 10% from the trough, cash sales have increased 33%.

"Without the cushioning effect of cash sales during the housing bust and a much higher increase since the trough relative to mortgaged sales, overall sales today would be much lower," CoreLogic economist Sam Khater noted. "The dire price declines of the past few years would have been worse because cash sales provided demand that wouldn't otherwise have been there over the last three years."

The share of cash sales is still historically high, but it may have reached its apex, according to the report.

Which means, for the market to continue to recover, "trade-up and first-time homebuyers have to replace the declining number of cash buyers in the market."

This might still be a challenge. Although home prices remain low compared to historical levels, mortgage rates are on the rise, denting affordability. Mortgage underwriting standards also remain too tight.

And while rising home prices are pulling more people out of water, millions remain trapped with a underwater mortgage loans, unable to trade-up.

Still, CoreLogic is confident that traditional homebuyers will take over from cash buyers, as affordability is still very high. Home prices will have to rise 47% or interest rates will have to rise 6.75% for home affordability levels to return to those seen in 2000-2004 period, according to the report.

Core Logic remains "optimistic that rising rates and home prices will not dissuade more traditional buyer from entering the market and financing a purchase" Khater wrote.

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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