Greg Leffel, an investor in Columbus, Ohio, said he relishes cash deals as much as he dislikes home loans. He has spent $150,000 buying and renovating 10 foreclosed houses in the past two years and turned them into rentals.
“Lending is so tight, and even if you do get a loan you’d have to jump through a bunch of hoops first,” Leffel, 44, said. “I like buying with cash, because then I can control my investments.”
Investors like Leffel helped spur all-cash home purchases to a record 43 percent of U.S. deals in the first quarter, more than double the share a year ago, according to data firm RealtyTrac Inc. Cash is keeping residential sales trudging along while mortgage lending plummets, hurt by rising interest rates and stiff credit requirements. Americans seeking a loan to purchase their first dwelling are increasingly shut out.
“The cash buyers today mean that all is not well in the housing market,” said Clifford Rossi, finance professor at the University of Maryland’s Robert H. Smith School of Business. “First-time home buyers should make up 40 percent and we’re not seeing it because of mortgage rules.”
U.S. lenders are cutting jobs as business contracts. They made $226 billion in mortgages in the first quarter, a 17-year low, according to the Mortgage Bankers Association in Washington.
Smaller investors, who deploy cash for homes to rent, flip, or vacation in, are finding better deals now that institutions have pared buying foreclosures, said RealtyTrac Vice President Daren Blomquist. Cash sales are rising from coast to coast, comprising more than half of all purchases in many metropolitan areas in the first quarter.
In the Miami area, 67.1 percent of sales were cash deals; New York posted 57 percent; Detroit recorded 53.5 percent; Atlanta had 53.2 percent, and Las Vegas posted 52.2 percent, according to Irvine, California-based RealtyTrac.
In Manhattan, buyers are using cash for trophy apartments and to gain an advantage over borrowers who must depend on loans to finance a purchase. Pej Barlavi, owner of brokerage Barlavi Realty LLC in Manhattan, said three of his five current clients buying homes prevailed with all-cash offers.
Barlavi said two of them are hedge fund managers who used year-end bonuses to buy the properties: a $2.2 million two-bedroom apartment in Midtown, selling for $150,000 above the asking price; and $1.5 million for a one-bedroom in Tribeca. His client in the second transaction was “nudged higher by a foreign buyer” before being chosen by the seller, Barlavi said.
“In Manhattan, you have foreign buyers coming in and using properties as a second, third, fourth or fifth home and hedging risks in their home countries,” said Chris Mayer, a real estate professor at Columbia University Business School in New York.
Private-equity firms, hedge funds and other institutional investors have spent more than $20 billion to buy as many as 200,000 rental homes in the last two years. They snapped up properties after prices fell as much as 35 percent from the 2006 peak and rental demand rose from the almost 5 million owners who went through foreclosure since 2008.
New York-based Blackstone Group LP, the biggest U.S. single-family home landlord, cut purchases by 70 percent from last year’s peak and is now concentrating on just five markets, Jonathan Gray, global head of real estate, said in a March interview. Blackstone has invested $8.5 billion since April 2012 to amass almost 44,000 rentals in 14 cities.
American Homes 4 Rent and Colony American Homes, the second- and third-ranked U.S. home landlords, have also cut acquisitions as the rebound in prices requires them to raise capital or improve operations.
“As institutional investors pull back their purchasing in many markets across the country, there is still strong demand from other cash buyers, including individual investors, second-home buyers and even owner-occupant buyers,” RealtyTrac’s Blomquist said.
Banks’ stricter credit standards following the housing crash, in combination with rising mortgage rates, have put the brakes on lending. More than 40 percent of borrowers had FICO scores above 760 in 2013 compared with about 25 percent in 2001, according to Goldman Sachs Group Inc. analysts in a Feb. 20 report. The 4.22 percent average rate for a 30-year fixed mortgage on May 6 rose from 3.53 percent a year ago, following the Federal Reserve’s announced plan to taper its bond buying, according to Bankrate.com.
“The increase in all-cash purchases is partly because rates are higher than they were a year ago, so it’s made buying with a mortgage more expensive on top of home price increases,” said Jed Kolko, chief economist at real-estate information service Trulia Inc. in San Francisco.
At Wells Fargo & Co., the biggest U.S. mortgage provider, home-loan originations plunged to $36 billion in the first quarter after surpassing $100 billion for seven straight quarters ending in June 2013, according to the San Francisco-based bank. Second-ranked JPMorgan Chase & Co.’s $17 billion total in the first quarter fell below the trough in originations made during the housing crash.
First-time buyers in particular are struggling to get home loans. They comprised 30 percent of total existing-home sales in March compared with an average of 35 percent since October 2008, according to the National Association of Realtors.
Without these buyers, existing-home sales are declining. They fell 7.5 percent in March to a seasonally adjusted annual rate of 4.59 million compared with a year earlier, according to NAR. The sales volume in March remained the lowest since July 2012, according to the trade group.
“With fewer first-time buyers, you end up with more all-cash buyers and less trading up in home activity,” said Columbia’s Mayer. “To get that ecosystem working, you need to have first-time homebuyers so the trade-up purchasers can buy bigger homes.”