While mortgages often pave the way to homeownership, a new report from Goldman Sachs Group revealed that cash has truly been king over the past year and change.
In fact, the investment bank’s economists revealed that more than half of all homes that sold in the United States last year were purchased with cold, hard cash.
The same goes for all the homes sold so far in 2013 – more than 50% are apparently being scooped up sans mortgage, which explains why prospective buyers are having so much trouble getting their hands on their dream home.
The researchers gathered their data from four different sources, including home sales figures from the Census Bureau and National Association of Realtors, along with mortgage origination data from the MBA and Lender Processing Services.
Who Is Forgoing the Mortgage?
While it’s not entirely clear who is using cash, most speculate that it is the hedge funds and other groups who have been buying bundles of single-family homes on the cheap, following Buffett’s advice to invest in residential real estate.
For the record, the Oracle of Omaha also recommended that Americans get a low rate, long-term fixed mortgage.
There is also the wealthy, who have forgone mortgages to beat out bidders who must qualify for a mortgage to close the deal. Sellers are much more willing to take an all-cash offer, seeing that lenders have become a lot more particular in recent years.
And finally, there are foreign investors, who are trading in their piles of cash for residential real estate, thanks to bargain basement prices relative to where they stood several years earlier.
20% of Home Sales All Cash Before the Crash
Before the housing boom turned to housing crisis, the cash-share was a lot lower, closer to 20%, per the economists.
By dollar volume, around 30% of purchases were furnished with cash, a number that has since doubled.
Looked at another way, only about 44 cents of every $1 of homes being sold is currently financed with a mortgage, compared to 67 cents before the crisis took hold.
There are a number of reasons why financing numbers are down. For one, home sales have been a lot lower since the crisis. While things are beginning to pick up, they’re nowhere close to where they once were.
For example, purchase-money loan originations hit about $1.5 trillion during the peak in 2005, but have since fallen closer to $500 billion over the past couple years.
While that’s part of the story, Goldman estimates that 40% of the decline is the result of less financing per home.
There’s also the idea that buyers are coming in with larger down payments, with zero down financing largely a thing of the past.
The upside is that purchase mortgages seemed to have bottomed. The economists see purchase-loan volume increasing about 50% to $750 billion in 2014, and to $1.1 trillion by 2016.
So there is hope for the purchase market, it just might take a while, which is bad news for brokers and loan officers trying to make a living, especially with refinance business expected to tank.
Read more: When Qualifying for a Mortgage Isn’t Enough