Cash sales are one the rise in the competitive housing market, significantly above historic levels, according to Freddie Mac’s monthly Outlook for August.
Mortgage originations are decreasing due to the increase in cash sales, the report showed. While not popular among homebuyers, the highly competitive market is driving more buyers toward cash sales.
“Usually, not many people like to invest a lot of cash into real estate, which is illiquid and has high transaction costs,” Freddie Mac Chief Economist Sean Becketti said. “However, in the current, highly-competitive housing market, a cash offer is an effective way to gain an advantage over other bidders.”
Cash sales made up about 18% of total home sales in June, up from the historical average of 10% but down from the previous peak of 35%. If cash originations remain around the 20% mark, this will translate to $172 billion less in mortgage originations than would occur at the historic norms.
“In a cash sale, the seller doesn't have to worry about the buyer's ability to obtain a mortgage or the chances that an appraisal will come in below the agreed sales price,” Becketti said. “And each cash sale means one less mortgage origination.”
The increase in cash sales isn’t the only thing holding back originations, as housing inventory is also holding back sales. Housing starts are expected to improve during the second half of the year, but will still come in lower than their long run average at 1.24 million this year.
As mortgage rates remain below 4%, home sales could reach 6.2 million units in 2017, according to Freddie Mac’s predictions, up 3% from home sales in 2016. But Freddie Mac explained sales would be much higher if inventory were less tight.