When buying a property, it's long been common knowledge that home shoppers willing to pay in cash hold an advantage over buyers with a mortgage. Let's face it, cash talks. Why would home sellers face the uncertainties of prospective buyers' mortgage processes when they can just accept cash? In fact, cash buyers can often obtain a discount from eager sellers. Yet, in 9 percent of U.S. property markets, cash buyers actually paid a premium to purchase a home in 2016, up from 5 percent a year ago. These cash buyers would have done better if they had gotten mortgages!
So, is it still true that using cash to buy a property is better than getting a mortgage? Here, we at GET.com will show you when it's a better idea to get a mortgage rather than pay for your new property in cash.
There are several skewed property markets in the U.S., which include:
- Los Angeles
- Naples, FL
- San Diego
- San Francisco
- San Jose
All of these markets are hot, and cash buyers in the past have usually received discounts. A vice president of RealtyTrac, Daren Blomquist, has an explanation: Irrational behavior on the part of cash homebuyers.
With this in mind, what can you do if you want to get a better deal by paying for your property in cash? According to Blomquist, cash buyers should always pursue discounts. Past history suggests that discounts were a fixture of cash purchases, especially in high-flying markets. For example, in the past 15 years, cash buyers in San Francisco have enjoyed a 17 percent discount.
Other cities had a similar experience, including San Diego (11 percent discount), San Jose (11 percent), Seattle (7 percent) and Naples (6 percent). In fact, cash buyers were not paying premiums even during the housing bubble that ended in 2008, even though San Francisco cash buyers came close in 2005, receiving an average discount of only 1.6 percent.
Cash-buyer premiums have artificially boosted home prices. But the trend can't continue, because cash buyers are a dwindling percentage of the market. The good news is that over the remainder of the year, home prices should flatten out or even pull back to more affordable levels, according to Blomquist.
Simultaneously, institutional investors have found emerging rental markets especially appealing, thanks to starter home prices of $150,000 or lower. These homes have become available as banks finalized lengthy foreclosure proceedings. The hot areas are those in which jobs, population and wages are rebounding faster than the national average, putting upward pressure on rents.
A case in point is Jefferson County Alabama, in which the Department of Housing and Urban Development fair-market rents climbed 11 percent in the last year. The county has seen an influx of Millennials (folks born between 1980 and 2000), up 9 percent during the period of 2008 to 2013. RealtyTrak ranks the county as 39th out of 448 in terms of returns to investors in single-family rental units.
Blomquist warns that, after a strong 4-year run, the current cash-buyer and institutional-investor frenzy won't continue much longer, and that the housing market will need to increasingly rely on mortgage-financed buyers. In some markets, this adjustment may create turbulent conditions for a while as the era of irrational pricing of cash offers ends.
Looking for an affordable mortgage? Use a mortgage website like GET.com to get the best mortgage rates currently available in the market.