A new report from Redfin shows nearly one third (31.4%) of U.S. home purchases were paid with all cash in July. That’s edging near the eight-year record set in February this year and up from 27.5% a year earlier. Beginning in early 2021, when the pandemic homebuying frenzy took off, the share of all-cash purchases skyrocketed and has remained elevated ever since.
Essentially, affluent buyers have been taking up greater market share largely because interest rates doubled from a year ago, reaching 6% in mid-September. Buyers who don’t use loans are able to avoid high interest payments that exacerbate home prices, which have remained elevated even though the market is beginning to slow.
All-cash purchases began to surge in popularity last year because it allowed buyers to stand out among fierce competition. In early 2021, bidding-war rates reached record highs due to sub 3% mortgage rates and remote work driving homebuyer demand. Remote work also gave more Americans the option to do all-cash purchases, since it allowed a record share of homebuyers to relocate from expensive to more affordable parts of the country.
Surging home prices also helped Americans relocate since they could sell their home in a pricey place like San Francisco and use that equity to pay for a home in a more affordable area like Las Vegas.
Investors are also contributing to the all-cash boom. Real estate investors bought up a record share of the U.S. housing stock in the fourth quarter of last year, and their share has remained above pre-pandemic levels since then. About three-quarters of investor home purchases are made with cash.
Metros With Largest Share Of All-Cash Purchases
Florida has three of the five metro areas with the highest share of all-cash purchases, partly because the state is home to a lot of affluent buyers. But Long Island, NY — which includes the Hamptons — is home to the highest share of cash buyers, with two-thirds (66.5%) of home purchases made in cash in July. This is followed by West Palm Beach (56.4%), Jacksonville (45.5%), Milwaukee (45.3%) and Fort Lauderdale (43.3%).
Conversely, expensive West Coast markets have the lowest share of all-cash purchases, because high prices make it more challenging to pay in cash: Oakland, CA (15.1%), San Jose, CA (16%) and Seattle (16.7%). Washington, D.C. (17.5%) and Pittsburgh (17.8%) round out the bottom five.
FHA Loans Regain Some Popularity
Although all-cash purchases are near record highs, most home purchases still use loans. Conventional loans are the most common, followed by FHA loans, and VA loans.
More than eight in 10 (81.3%) of home sales that used a mortgage in July took out a conventional loan, down slightly from 81.9% a year earlier and down from the record high of 83.8% set in April.
About 12% of homebuyers who took out a loan in July used an FHA loan, about the same as last year but up from the all-time low of 10.4% in the spring. Additionally, 6.8% used a VA loan, up slightly from 6.2% a year earlier but up from the record low of 5.4% in spring 2021.
“The spike in interest rates is pricing some buyers out of the market, but it’s also helping some buyers get into the market because there’s less competition,” Tampa Redfin agent Eric Auciello said. “A lot of buyers who were repeatedly outbid earlier this year are having their offers accepted, including those using FHA loans, those with smaller down payments and ones that include inspection and financing contingencies. In 2021, hardly any buyers used FHA loans. The story is completely different now, as low down payments are no longer an automatic deal breaker for sellers.”
FHA loans have been losing popularity since the start of the pandemic; in 2019, 17% of mortgaged purchases used them. Although the market has cooled and FHA borrowers are less likely to face competition, homes are still very expensive. The typical U.S. home that sold in July cost about 8% more than a year earlier. That means a lot of the people who would use an FHA loan — lower-income, first-time homebuyers — are priced out of the market.
VA purchases are about as popular as before the pandemic with roughly 7% of mortgaged purchases using them in 2019.
