Nearly a third (31.4%) of all home sales in the U.S. were all-cash purchases in July, according to a new Redfin report.
That percentage is close to the eight-year high reached in February and up from 27.5% in July 2021. All-cash purchases spiked in early 2021 during the pandemic buying frenzy and have remained elevated ever since.
Affluent buyers pay cash to avoid mortgage interest
Given the option, who wouldn’t pay all cash to avoid paying hundreds more per month due to higher mortgage rates (not to mention the total additional cost)?
Do the math with homes priced at $1 million and up, and it makes sense—at least if you can afford to drop a cool million or more in cash.
Yet another reason the luxury real estate market continues to thrive while buyers at the median price point feel the brunt of every shift in the market.
All-cash sales gave pandemic buyers an edge
All-cash home purchases surged in popularity last year because they gave buyers a competitive edge when competition was fierce. Bidding war rates rocketed to a record high in early 2021, thanks to sub-3% mortgage rates and remote workers joining the market.
Remote work allowed a record number of homebuyers to relocate, and many took the opportunity to migrate to more affordable areas.
Buyers moving from more expensive markets like San Francisco or Manhattan could cash out their equity to pay for a new home in a less expensive area, reducing (if not eliminating) the added cost of mortgage interest.
About 75% of investor home purchases are made with cash
Real estate investors contribute substantially to the increase in all-cash purchases. In the final quarter of 2021, investors bought a record percentage of U.S. housing stock. That share has stayed above pre-pandemic levels ever since.
Since about three-quarters of all investor home purchases are cash purchases, an increase in investor purchases helps drive up the share represented by this transaction type.
Areas with the highest shares of all-cash purchases
Three of the five U.S. metros with the highest percentage of all-cash purchases are in Florida, partly due to the state’s appeal to affluent buyers.
That said, the metro with the highest share of cash buyers is Long Island, New York, which includes the Hamptons. Two-thirds (66.5%) of July home purchases were made in cash.
The top five metros for all-cash buyers:
- Long Island (66.5%)
- West Palm Beach (56.4%)
- Jacksonville (45.5%)
- Milwaukee (45.3%)
- Fort Lauderdale (43.3%)
At the low end of the all-cash purchases spectrum are a trio of West Coast markets plus a couple of East Coast metros:
- Oakland, CA (15.1%)
- San Jose, CA (16%)
- Seattle, WA (16.7%)
- Washington, D.C. (17.5%)
- Pittsburgh, PA (17.8%)
FHA and VA loans are up
Even with all-cash purchases at an eight-year high, at least two-thirds of home purchases in the U.S. use loans. And while conventional loans are the most common, the number of FHA and VA loans has increased slightly from the all-time lows of spring 2021.
In 81.3% of home sales involving a loan, buyers took out a conventional loan—down just slightly from 81.9% a year earlier and from April’s record high of 83.8%.
In about 12% of July home sales with mortgage loans, buyers took out an FHA (Federal Housing Administration) loan, the same as a year ago but up from spring 2021’s all-time low of 10.4%.
FHA loans are still less prevalent than in 2019 when about 17% of mortgaged home purchases used them. That’s partly due to the higher cost of homes. Even with less buyer competition, the typical U.S. home sold in July cost 8% more than it would have a year earlier.
Many who would qualify for an FHA loan—first-time homebuyers, typically with a lower income—remain priced out of the market.
In July, 6.8% used a VA (Veteran’s Affairs) loan to buy a home—up from 6.2% a year ago and from spring’s record low of 5.4%.
Benefits for remaining buyers
Looking at the larger picture, the rise in interest rates is pricing out some buyers while benefiting others. The less competitive market means more options for those who can still afford to buy a home. It also means they likely won’t have to bid over the asking price.
Some who were outbid earlier this year are now having their offers accepted—including those with FHA loans, smaller down payments, inspections, and financing contingencies.
Last year (2021), few buyers used FHA loans. The landscape today is completely different. Low down payments aren’t the deal breaker they were a year before.
As an agent, use this data to help your clients see past misleading headlines so they can assess their options with clarity and confidence. They’ll remember the agent who made the process far easier and more enjoyable than they expected.