Who is Buying What Types of Homes with Cash?
As home values fell after the peak in 2007, many investors entered the market and purchased lower priced homes with all cash. As investor-driven activity has been fading, more traditional buyers have re-entered the market while the mortgage rates are still low. As a result, the portion of home purchases made with all cash fell in the first quarter compared to a year ago in a majority of metro areas nationwide.
We examined cash transactions in 126 metros across the nation. The share of cash buyers fell year-over-year in 102 of the 126 total metro areas. Among the 30 largest metros, we found the following trends. Figure 1 shows the share of cash sales in the first quarter of 2014. The share of cash buyers was highest in Florida metros, among them Miami with 65 percent cash buyers, 57 percent in Tampa, 51 percent in Orlando and 50 percent in Jacksonville. It is also noteworthy that more than half of the sales were all cash in Detroit, Cleveland and Cincinnati. Home values in these metros were rising slowly, and price to income ratios were at historically low levels. Housing remains a good investment for cash-rich buyers in these markets.
On the other hand, the home values in the San Francisco Bay Area have exceeded their bubble peaks, so it is more difficult for cash buyers to afford homes. Cash transactions accounted for only 23 percent of sales in San Jose and 28 percent in San Francisco in 2014 Q1. Similarly, Denver has less than a quarter of cash buyers in the market as home values surpassed the previous peak level and are at an all-time high. With fewer investors in the market, more buyers with traditional financing returned to the housing market in Denver.
To answer the question of who was buying what type of home with cash in the top 30 metros in the first quarter of 2014, we break down cash sales by buyer types, home types and transaction types. Business buyers were defined as those purchasing under a LLC, LTD, LLP, Partner, Company or Corporation designation. Although business buyers were not the majority buyer type in the housing market, on average they were more likely to pay all cash for home purchases than individual buyers (see Figure 2).
In 28 of the top 30 metros, the portion of sales that were all cash paid by business buyers was more than double the share from individual buyers. In 20 of the top 30 metros, more than 80 percent of homes purchased by business buyers were all cash. On the other hand, the cash sales share of condos and co-ops was higher than that of single family homes in 28 of 30 metros (Figure 3).
The difference was most obvious in Florida metros, especially in Orlando, where the portion of cash sales of condos and co-ops were almost double that of single family homes. Notably, among high-end homes, which are defined as the top five percent of homes with highest Zestimate, the share of cash deals was surprisingly high in Sacramento, reaching 90 percent of all high-end home sales in 2014 Q1, followed by 68 percent in Charlotte and Denver. It is clear from Figure 4 that most foreclosure sales were cash transactions.[1] In two-thirds of the metros, more than 85 percent of foreclosures were purchased in cash, while the percentage in REO sales or short sales purchased with cash was much lower.
We also examined the share of cash sales made in the bottom, middle and top third of home values, and the portion of sales made by individual buyers and business buyers in each market. In 27 of the top 30 metros, more than one third of home sales in the bottom value tier were made with cash. In three of the top 30 metros – Tampa, Detroit and Miami – more than 80 percent of all sales in the bottom value tier were cash deals. Individual, non-business buyers were more likely to buy bottom-tier homes with cash in the first quarter – in 21 out of the top 30 metros, the portion of sales that were all cash in the bottom tier was more than double that in top-tier homes (Figure 5). Business buyers, on average, were more likely to pay all cash in home purchases than individual buyers. In 11 of the top 30 metros, more than 90 percent of homes purchased by business buyers in the bottom price tier were all cash (Figure 6).
After looking at the snapshot of cash buyers in the first quarter of 2014 Q1, we were also interested in the historical levels of cash sales shares in these metros. Figure 7 plots the historical level of cash sales shares for the 30 metros. The portion of cash sales fell from 2013 Q1 to 2014 Q1 in almost all the metros analyzed (except Cincinnati, which had a slight increase of two percentage points). Two-thirds of the metros experienced a decrease in the share of cash sales of five to ten percentage points. The lowest level of cash sales occurred between 2005 Q2 and 2007 Q2 for the majority of metros when the home values were at historic highs and the mix of buyers was very different than it is now. As the housing bubble collapsed, cash sales started rising and reached the peak between 2012 Q4 and 2013 Q1 in 14 metros, where on average half of the home purchased were made with all cash.
Moreover, we found a similar pattern in the ten metros in Florida and California. The cash sales shares in these metros bottomed around 2006 Q4 and hiked up rapidly after the housing bust to a peak in 2011 Q1. The shares steadily increased in some metros during 2011 Q1 – 2013 Q1, but then experienced a sharp decline in 2013. On the other hand, there wasn’t a significant jump or drop of cash sales in Cincinnati, Cleveland and Columbus where cash sales were at a similar high level of around 45 percent as they were in 2007.
[1] Foreclosures exclude transactions with a re-possessor buyer, i.e. financial institutions, federal government and local government. Thus, foreclosure sales reflect non-repossessor buyers only, who can be individuals, trust, business entities, or non-profit organizations. The majority of these foreclosures were bought at an auction.