Freddie Mac Economist Finds Growing Investor Preference for Hard Cash
In the ever-changing state of the US financial economy and housing market, homebuyers and real estate investors tend to move quickly to keep pace by investing hard cash into real estate instead of investing in loan origination pools. In Freddie Mac's report, "Where Have All the Originations Gone?" released Wednesday, the government sponsored entity (GSE) said that 25% of 2010 existing home sales are all-cash transactions. This proves to be a growing trend in home buying as the percentage of cash transactions was between 5% and 10% just a few years ago. Amy Cutts, deputy chief economist at Freddie Mac, said there are many reasons why paying in cash to purchase a home is a more attractive alternative to originating a loan. First and foremost, she says, it's much less stress. "Lending terms on investor loans have become quite tough. There's a high level of scrutiny and it's very tedious," Cutts told HousingWire in an interview. "Some buyers are just going to say that it's too much hassle." All that a buyer needs to do to buy a property with cash is provide proof they have access to funds, such as a letter from the bank or proof that funds are in escrow, or even simply have a cordial conversation with the seller. Cutts said the facts that GSEs like Freddie Mac are "the only game in town" when it comes to originating investor loans and that the private label investment sector is "pretty much dead," prompts investors to see a larger cash flow from investing directly into real estate. She believes this is especially true when comparing investment yield from a cash home purchase to investment in Treasury bonds and the stock market. "If you have cash to invest, what's the next best opportunity for that cash?" she asked rhetorically. "Investors are willing to buy Freddie MBS and our debt, which allows us to drive down yields on mortgages…cash is just the better option." Many analysts would say that less people feeding the volume of mortgage originations signifies a lack of demand for housing and could drive home prices down. But Cutts sees any home buying activity as positive activity, whether or not buyers are taking out mortgage loans. "Given how weak home sales are to begin with, this is very important right now," she said. "It supports what little sales we have." Homebuyers can purchase homes for cash at auctions, sheriff sales (also known as foreclosure sales), and through regular broker real estate transactions. Write to Christine Ricciardi.