All-Cash Offers: Healthy for Real Estate Market, or a Hindrance?

stacks of dollarsBy Kate Rogers

With many pointing to the housing market as the backbone of the economic recovery, investors are flooding the market with all-cash offers and it's squeezing out many traditional homebuyers.

"People are worried about the returns on alternative investments," says Karen Dynan, vice president and co-director of economic studies at the Brookings Institute. "There is still a lot of uncertainty about bonds and the stock market, which makes the housing market look good."

According to the National Association of Realtors May 2013 Confidence Report, all-cash offers account for 33 percent of home sales, with international buyers taking the lead. In addition, 87 percent of surveyed Realtors say they are expiring constant or increasing home prices. Homebuyers, particularly first-time homebuyers, are already battling low inventory and rising home prices, but the added pressure from investors creates stiff competition.

William Delwiche, investment strategist at Baird Research & Insights, says cash buys are being bolstered by investor pools snapping up real estate, and less so by individuals looking to live in the home. "These are investment pools paying cash for houses to hopefully get returns," he says. "It's not necessarily a trend among individual homeowners because most people going to buy houses don't have that kind of cash sitting around."

And for sellers, an all-cash deal is ideal since is cuts down on complications, says Patrick Newport, U.S. economist at IHS Global Insights. "If you own a home and are selling yourself, it's probably easier if someone pays you cash -- it cuts out the messiness and having the homebuyer get approved for a loan." Typical cash buyers are either young people who come into a lot of cash, or international investors, he says.

Cash buys signal a housing market that people are more willing to invest in, says Delwiche, but the market's attractiveness may also be due to a lack of other solid investment options. "The housing market is recovering, but people are also looking to diversify their portfolios," he says. "They don't' want to put it all in stocks and bonds."

It's a sign that people are under the impression the market is turning around, says Dynan, which may be a self-fulfilling prophecy if enough investors follow. "A lot of those cash investors are looking for a return," she says. "If a lot of people think home prices will rise, they will put money into the market, and that increases demand and pushes up prices."

The cash-buying trend also gives the overall economy a short-term boost, according to Delwiche.
"This helps to bid up asset values for houses, and is good for homeowners who already own houses," he says. "There is also a benefit to state and local government finances because of the taxes associated with these purchases."

Dynan says the trend will reinforce the momentum in the housing market, but will impact hopeful first-time homeowners negatively in the future. "It just makes the housing market less affordable," she says. "It's good for the overall economy, but not for every person in the economy."

Delwiche agrees, and says it may prevent more people from getting into the market in the future.
"Home prices go up and it affects housing affordability," Delwiche says. "You can't have first-time homeowners who are seeds for long-term growth, because they are then crowded out of the market. So short term it's something of a positive, but is a headwind for first-time homeowners."

Delwiche says he'd be surprised to see the trend continue, as well. "It's just a reflection of poor alternatives for investment dollars," he says.

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