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King Cash Kills Off Many ‘Subjects’

In a dwindling market, cash really hurts appraisal business

Lew Sichelman headshot
Lew Sichelman
King Cash Kills

Like the old grey mare, the mortgage business ain’t what she used to be.

High interest rates — above 7% at this writing — and ever rising housing prices — a median of $396,000 in May — have seen to that. Both have forced would-be sellers as well as wanna-be buyers to the sidelines: sellers because they balk at paying a higher rate then they have now and even if they were willing, there isn’t much to buy. According to Redfin, fewer houses were for sale in May then at any other time since 2012.

The impact has been severe. Numerous lenders have shut down, sold out or cut their workforces to the bone. According to the latest Bureau of Labor Statistics report, the bloodbath that followed resulted, at last count, in some 50,000 poor souls who have lost their jobs in just the last 12 months.

At the same time, property data provider ATTOM reports that lending in the first quarter was down 70% from the same period two years earlier. Lending was at its lowest point in Q1 since late 2000, and it was down, although not evenly, in every facet, from purchase money mortgages to refinancings.

But there’s another factor besides high rates, high prices and low inventories at play here: cash buyers.

Things Not Needed

Of course, everyone is a cash buyer at closing, whether they have financing or not. But true cash buyers, those who don’t need a mortgage, now account for roughly a third of all transactions. And when you don’t need a loan, you don’t need title insurance, mortgage insurance and possibly not even an appraiser.

According to the Census Bureau, 11% of all new home sales were for cash in last year’s fourth quarter. That’s the highest share since 1990 — 32 years! And according to the latest from the National Association of Realtors, 78% of 2022’s existing home buyers financed their deals, down from 87% the previous year. That leaves 22% who went commando.

“I talk to agents (from all over the country) every single day,” says Denise Lones, a sales trainer based in Bellingham, Wash., “and they all are saying the same thing: ‘There’s an awful lot of cash these days.’”

There’s good reason to pay cash. Because there are no lenders involved, it puts you at the head of the line, as in cash buyers are gold. But at the same time, it might not be such a smart idea to put everything you’ve got into a illiquid asset that cannot be traded like stocks and bonds. And as long as the financed buyer does his homework, like obtaining a pre-approval and passing on a laundry list of contingencies, he should be just as solid.

This isn’t to debate the pros and cons of buying with cash, though. Rather, it is to take a deeper dive into the impact cash sales have had on companies and people all along the mortgage food chain.

First, however, there seems to be some disagreement on the impact of cash deals on overall lending. While some — like Lones — say it has been severe, others discount the affect. “Nothing major in the overall scheme of things,” says ATTOM CEO Rob Barber.

Doubled But Down

While cash deals have doubled, they’re only responsible for about 20% of all transactions, which have declined substantially, Barber believes. In hard numbers, he believes the actual quarterly number of cash sales has declined by half, from 500,000 to 250,000. So, while cash money is “helping somewhat” to drive down lending, he says, “it doesn’t look like a major factor.”

Redfin’s latest figures seem to confirm that. While cash deals were down 35% year-over-year in April, overall sales were off 41%. But a a third of the places that did sell went for cash, the highest share in nine years. And NAR’s members are saying the same. “The data from the Realtors Confidence Index is directly from a member survey,” says Jessica Lautz, second in charge of NAR’s economics department. “They are reporting higher shares” of cash sales.

Pushing aside this ongoing debate, let’s look at the impact all-cash deals have had on the mortgage food chain:

Mortgages — If the above figures from ATTOM don’t resonate, here’s this from the Mortgage Bankers Association’s first quarter performance report, courtesy of analyst/advisor Joe Garrett: The loss per loan was 67 basis points. That’s down from a 99-tick loss in last year’s fourth quarter. But lenders are still losing money when they write a mortgage.

Refinancing is all but gone! Not as many people are buying houses! And a third of those who do buy pay with cash! “It’s a triple whammy,” says Michael Isaacs, CEO of Columbus, Ohio-based GO Mortgage, which has actually grown its business by adding loan officers picked up from other companies. “That’s just one more customer we don’t have.”

Meanwhile, a small survey by payroll data company Everee of just 314 commission-based industry professionals — managers, loan officers, processors and underwriters, half of whom had been in the business for more than five years — found that 60% are living from paycheck to paycheck. Moreover, a third of them plan to exit the field in the next 12 months while 15% more haven’t made up their minds.

Mortgage Insurance — The type of home buyer who needs private mortgage insurance is not typically the type who pays with greenbacks. First-timers who have trouble scraping a few nickels together for a downpayment need mortgage insurance, while move-up buyers taking a passel of equity with them from the sale of their former residence are the most likely to pay cash.

Of all the loans purchased using private MI last year, 62% supported first-time buyers, reports Brian Berry, a spokesman for the US Mortgage Insurers trade group. Consequently, the MI business doesn’t slump much when cash buyers proliferate. And that’s why the MI business enjoyed its third best year ever in terms of colume in 2022.

At the same time, though, a surprising 6% of all first-timers paid cash in 2021, NAR reported in May of that year. And it’s likely a similar number are currently paying cash, if not more. So the business has been impacted, if only minimally.

Title Insurance — It’s hard to get a handle on title insurers. The American Land Title Association has no economist on staff, so the group does not produce much in the way of statistics. But spokesman Jeremy Yohe told me he doesn’t think all-cash sales have had much of an impact. “I don’t think it is any greater than during the run-up to the Great Recession,” he said. “Nominal.”

Cash King Kills Subjects

Because title practices vary from state to state, cash deals have had little to no affect in places like Texas where sellers have traditionally paid for the buyer’s coverage. But in markets where buyers pay, title companies usually get two shots at the brass ring — once for the lender’s policy and once for the buyer’s. And when someone pays cash in those places, insurers lose at least the lender-policy share.

Chrissy Ziccardi of SingleSource Property Solutions, the Pittsburgh-based settlement firm, says her company has seen an increase in business recently, largely because it can close deals far more quickly — 16–20 days vs. 30–45 days when a lender’s involved. ‘We can get ‘em in and out the door much quicker,” she told me. But because there are fewer lender-involved loans, revenue is down 20–25%.

The second ring? When buyers understand the benefits of title insurance, they generally buy coverage, says Washington, D.C., settlement attorney Harvey Jacobs. “They usually listen to reason,” he said. “People who don’t (buy coverage) tend to be flippers” who study the market and know their costs.

Perhaps to press the issue, two title companies owned by a major Mid-Atlantic real estate firm reportedly are refusing to settle transactions in which the buyer turns down buyer’s coverage. Repeated attempts for comment from the agency or its in-house title outfits have gone unanswered, so I have been unable to verify this report.

Appraisers — “All of us who focus on the residential market are feeling the slowdown to some extent,” says Appraisal Institute President Craig Steinley of Steinley Real Estate Appraisals in Rapid City, S.D. “This is the third cycle I’ve seen where volume is down; it’s all part of being in the mortgage lending business.”

Steinley can’t point to any specific numbers but he says most cash buyers eventually obtain an appraisal — investors when they put places back on the market after they fix them up or equity-rich move-up buyers when they refinance at a later date to take cash back out of their purchases.

Jeremy Yohe, American Land Title Association

Of course, it doesn’t help the appraisal business that a fair number of appraisal waivers are being obtained on Fannie-Freddie loans. According to Ed Pinto at the American Enterprise Institute’s Housing Center, appraisals were waived on 13 percent of all loans purchased by the GSEs in April. That’s fewer than in previous months, largely, says Pinto, because of “the shift away from refis.”

But cash deals also mean fewer deals for valuators. “Cash buyers almost never get an appraisal,” realty agent Robert Goldman of Michael Saunders & Co. in Venice, Fla., told me. And in his suburban Washington, D.C., market, Joe Shaver of RE/MAX in Olney, Md., says 75% of all cash buyers pass on an appraisal. “Rarely,” adds broker Rob Jensen, who works Las Vegas’ high-end, guard-gated communities, where a whopping 57% of the sales in May were cash on the barrel head.

Goldman, a former attorney, estimates that cash sales in his Sarasota region account for more than 50% of all sales — and two-thirds of his transactions. Down the road in Naples, Matthew Klinowski of Downing Frye Realty reports that 67% of all deals in his market in April were for cash.

Most buyers shun a valuation because it’s not required when no lender is involved. But, Goldman warns that buying sans appraisal is “not a good practice.” After all, cash buyers have 100% exposure when they pay above market value. Appraisers are “not always the be-all, end-all final arbitrator of fair market value,” he told me. Nevertheless, they perform an important function.

Because cash buyers may order property condition reports and other products, Steve Kahane of Greater Houston Property Appraisals says “it’s hard to say” exactly how much cash deals alone have impacted his business. But overall, he reports, his purchase mortgage appraisals are down 33–40% from an otherwise “normal” year.

“You can’t know what you don’t get,” agrees Mark Hammack of Appraisals of South Florida. “There have always been cash deals, so its not really measurable. Still, there’s no question cash has had an impact.”

Add cash transaction to the mix of high interest rates and fewer refis and the impact is profound. “My business is down 65% year-over-year,” Hammack told me. “It’s definitely slow.”

Cash Buyers Can Retrieve Their Money

While it’s admirable that some buyers have enough money — cash, savings and/or investments — that they don’t have to worry about the cost of borrowing, do all-cash buyers really want to tie that much to a single asset, one that doesn’t always rise in value over time?

Sure the stock market hasn’t performed that well, mostly because the Federal Reserve Board has driven up interest rates to control inflation. And yes, earnings on savings accounts or even CDs aren’t what they used to be.

But eventually, inflation will be tamed and the stock market should take off on the back of an otherwise strong economy. Banks may never pay as much as they once did. But it’s important to have some cash set aside — some financial experts suggest six months’ worth of your total monthly expenses — in case of an emergency.

It’s a conundrum, all right. But there is a way for buyers to pay cash and then finance their purchases later. The little known technique is called a “delayed finance exception” that is offered through both Fannie Mae and Freddie Mac. For the exception to work, though, the cash sale must adhere to the GSE’s rules.

Under Fannie’s guidelines, for example, the sale has to be an arm’s length transaction. Then, the borrower must meet all of the GSE’s borrower eligibility requirements, including a good credit score, a manageable debt-to-income ratio and an acceptable appraisal. And after that, borrowers have to move fairly quickly. They have only six months from the day they closed on the property to the day they close on the financing. After those 180 days, the opportunity is off the table.

The loan amount cannot exceed what you paid for the house as documented by the settlement statement plus closing costs, prepaid fees and points on the loan. But there are limits: Loan amounts cannot exceed $762,200 in most places but go as high as $1,089,300 in high-cost markets.

There can be no existing liens, either. If there are, they must be paid off either before closing on the loan or with funds from the new mortgage.

> Lew Sichelman

Anatomy Of A Cash Buyer

It’s been nearly a decade since the share of buyers purchasing a house without a mortgage has been as high as it is now. Certainly, interest rates bouncing around 7% at this writing are a major factor, but they do no tell the entire story.

One reason is the proliferation of multiple-bid situations in which more than two would-be buyers go head-to-head for the same house. While multiple-bidding is not nearly as widespread as it was during the height of the pandemic, the typical seller still receives 2.7 offers, according to data from the National Association of Realtors.

Another is the movement of people who sell their houses in high-cost markets and use the proceeds to buy a place in less expensive markets. The typical buyer who had owned his previous house for a decade had more than $200,000 to play with last year, NAR reports.

Baby Boomers make up the largest share of cash buyers. More than half of all buyers age 68 and over paid cash in 2022, while 53 percent of the Silent Generation did the same. Historically, the percentages of Boomers paying cash is about 33 percent. But the number of all-cash purchases “has jumped” for all generations, says Jessica Lautz, NAR’s deputy chief economist.

Surprisingly — or not — single women are the most likely cash buyers at 28%. Married couples account for 27%. Women cash buyers often are widowed or divorced and have housing equity to burn.

White buyers are more likely to pay cash than Blacks, but not by all that much — 23% vs. 15%. But then, about half of Blacks were first-time buyers last year. Only 8% of both Hispanics and Asian/Pacific Islanders used cash.

> Lew Sichelman

This article was originally published in the NMP Magazine August 2023 issue.
Lew Sichelman headshot
Lew Sichelman,
National Mortgage Professional Contributing Writer

Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country. He also has been the real estate editor at two major Washington, D.C., dailies and spent 30 years on the staff of National Mortgage News, formerly National Thrift News.

Published on
Jul 28, 2023
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