Here’s a milestone you wouldn’t expect in a weak economy with high unemployment: in September, a record share of home purchases were made with cash instead of loans. If you had that kind of cash lying around, is it really smarter to pay cash than get a mortgage?
Like all financial matters, it depends.
The Campbell/Inside Mortgage Monthly Survey of Real Estate Market Conditions reports that cash transactions accounted for 30.5% of home purchases in September, up from a recent low of 21.4% this time last year.
Usually, loans backed by the Federal Housing Administration take the biggest share of the market, but that fell to 28.6%, down from 37.4% a year ago. Loans backed by Fannie Mae (Stock Quote: FNMA) and Freddie Mac (Stock Quote: FMCC) continue to be the third largest source of home financing, at 13.6%, down from a high of 18.65 in Sept. 2009. Veterans Administration loans and private mortgages make up the rest.
“A combination of more distressed properties on the market and an ongoing slide in first-time homebuyer activity created a very unusual home purchase market in September, where cash was the number one source of new financing,” Campbell said.
A key factor, the firm said, was the increase in the number of “distressed properties” for sale. Those include “real estate owned” properties, such as those taken over by lenders after foreclosure, and “short sales” in which the lender agrees to accept less than it is owed after the owner sells.
Because it is difficult for buyers to get loans for distressed-property transactions, many resort to cash.
A second factor, said Campbell, is the reduced number of first-time homebuyers. Since they typically take out loans, this reduction helps push up the share of cash deals. There are fewer first-time buyers because of toughened lending standards and the expiration of the government’s $8,000 tax-credit program.