Buying a home hasn’t been easy for the past few years. Besides increasing interest rates, a decrease in purchasing power, and a housing shortage, cash buyers have also put a squeeze on some would-be buyers.
Nearly a third of U.S. home purchases were made with cash in April, a nine-year high, according to data from Redfin that looked at the 40 biggest metropolitan areas in the U.S. That’s in line with data from February, which saw cash purchases reach 33.5% and continuing a trend that started during the pandemic.
The share of homes being bought with cash is at levels not seen since 2014, when the housing market rebounded from the Great Recession. But the housing market today looks very different. So what’s driving this drive of cash buyers?
Rising Interest Rates
The main reason cash buyers are making up a bigger portion of real estate is that mortgage rates have increased thanks to rising inflation.
While rates slid down slightly in June, they remain elevated compared to the same time last year. The 30-year weekly average at the end of June was 6.67%, near a 15-year high. That’s made borrowing costs more expensive and sidelined many buyers who need a mortgage.
Buyers have two choices: pay with cash and avoid monthly payments or take out a loan with high interest rates. Buyers who can’t pay in cash have to either drop out of the market or pay the higher rates, Redfin Senior Economist Sheharyar Bokhari explained.
“That discrepancy is the reason the all-cash share is near a decade high even though all-cash purchases have dropped: Affluent buyers have the choice to pay cash instead of dropping out of the market,” he said.
The rise in rates has even made home buying slightly less attractive for all-cash buyers, as they can instead invest in assets that are more attractive when interest rates rise, like bonds. In fact, home sales were down 41% from a year earlier, compared to a decline of 35% for all-cash sales.
Lack of Inventory
Another reason that cash buyers are king in the housing market these days is because of competition. While it’s not as big of a trend, in some metropolitan areas, the lack of available housing means all-cash buyers are pricing out homebuyers who need a mortgage.
And while high rates have pushed out many buyers, it’s also caused a lot of would-be sellers to not sell. In other words, there’s still a supply issue.
According to data from the National Association of Realtors, housing inventory was down 6.1% in May compared to the prior year and remains at roughly half the level it was before the pandemic.
Ways to Come Up With Cash
With more demand than houses available and rising interest rates, cash buyers are at an advantage. If you can buy a home outright, you’re not only more likely to win a bidding war, but you, of course, save money in the long run.
But paying for real estate with hard cash isn’t accessible to everyone. Thankfully, there are ways to find cash, namely through a self-directed individual retirement account (SDIRA) or through a Home Equity Line of Credit (HELOC).
Self-directed IRA
While it’s more common to hold financial assets like stocks and bonds in an individual retirement account, it is possible to hold real estate. However, to do so, you need to have a self-directed IRA.
Some people prefer an SDIRA to other types of IRAs because it gives you more freedom to decide what to invest in and helps you save on taxes.
With a self-directed IRA, you cannot buy property outright, but the IRA itself does as a separate entity. Because of that, you can only purchase property for investment purposes. You and your family cannot live there or use it as a vacation home. You also have to have a large enough account to cover the whole transaction.
HELOC
To purchase property using a HELOC, you need to already own a home. With a HELOC, you can get a revolving line of credit that is secured by your home and can be used for large purchases.
While a HELOC is a different type of loan, it’s about the same as a mortgage. However, because you’ll need to put your home up as collateral, it’s important to make sure that the loan or investment is worth the risk. If not, you could end up losing both properties.
Conclusion
While not everyone might have the means to put cash up for a house, that doesn’t mean investing in real estate is completely off the table. With a little bit of research, you can find a way to expand your real estate portfolio in a way that makes sense for you and your finances.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
