RealtyTrac reports that 40 percent of residential property sales in the month of July were made in all-cash purchases. This is 5 percent more than the previous month and 9 percent more than July 2012. In addition, Goldman Sachs (GS) reports that cash sales in residential home sales have skyrocketed to 57 percent from the 19 percent reported in 2005.
These numbers support the cash-is-king belief and there are clear benefits to purchasing a home in cash.
The most obvious benefit would be the convenience of buying in cash. People who buy in cash do not have to go through all the hoops of applying for loans. In addition, mortgages are not guaranteed and can be quite difficult to obtain for some would-be buyers.
Another benefit is that people who buy their homes in cash often receive a discount. In a time of uncertainty, sellers are attracted to the sureness of a sale that cash buyers bring. In a lot of cases, it may even qualify the buyer for a discount on the home. Buying in cash also allows people to avoid high interest rates that could add up to a large sum of money.
However, the rise in cash purchases could mean bad news for the housing market. Vice president of RealtyTrac, David Blomquist, said that the trend, "will have a chilling effect on home sales and prices."
It is speculated that the majority of people purchasing houses with cash are wealthy, old retirees, and investors. These groups of people are not large enough to maintain the housing market in the longer terms. In addition, the number could be misconstrued by foreign buyers who do not qualify for mortgages.
The rise in all-cash purchases in the housing market could be a troubling indicator that it is getting harder to get financing according to Susan M. Watcher, the professor of real estate and finance at the Univeresity of Pennsylvania. The strict lending standards and rising interest rates is causing the pool of potential home buyers to shrink.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer