The number of homebuyers paying in cash has been on the rise, partially due to high mortgage rates. As of September 2023, 34.1% of U.S. home purchases were made in cash, up from 29.5% the previous year. This trend is expected to continue into 2024. In fact, nearly half of all luxury homes were bought with cash in the three months ending February 29, 2024. This is the highest percentage of all-cash luxury home purchases in at least a decade.
There are several reasons for this increase in all-cash home purchases. The most obvious is the rise in mortgage rates. The average 30-year fixed-rate mortgage has almost tripled from about 2.75% in 2020 to roughly 7.15% in 2024. This has led to fewer homebuyers taking on debt to buy a home. However, paying all cash for a home in a high-mortgage rate environment also means giving up earning high risk-free income.
Another reason is that it’s become harder to get a mortgage. Since the 2008 global financial crisis, lending standards have tightened significantly. For example, the average credit score for an approved mortgage applicant is now over 720, an excellent score. This has led to more homebuyers purchasing homes with cash.
The growth of consulting work is another factor. The number of freelancers in America is now around 73.3 million, or over 40% of the American working population. However, it’s much harder to get a mortgage as a freelancer or consultant, leading more freelancers to opt to pay cash.
Homebuyers are also wealthier today than in the past. Despite mortgage rates in 2024 being near 17-year highs, the percentage of homebuyers who pay cash is not at a 17-year high. This suggests that cash buyers are relatively richer than before.
The boom in tech and AI has also led to more cash buyers. Investors are richer thanks to robust performance in the S&P 500, and tech workers in the Bay Area are mostly richer thanks to the surge in big tech prices and artificial intelligence. As a result, more investors are able to sell stocks and pay all cash for a house.
Finally, some Americans may be paying all cash for a house to lock in stock market gains and buy real estate before prices surge higher. Due to high mortgage rates, real estate prices around many parts of the country are depressed. As a result, homebuyers can get better deals. By paying cash, homebuyers can often get an even better deal because there’s more certainty the deal will close once in escrow.
In conclusion, while the percentage of homebuyers paying all cash is growing, there are also some downsides to paying all cash for a home. It may not grow your net worth as fast as purchasing with a mortgage, and it puts you in greater financial risk by having much less liquidity. However, real estate is a real asset and will likely last long after we’re gone. For those of us who want to make our wealth last, real estate is a favorite asset class to build and maintain our wealth.
