Cash Offers Plunge: A New Dawn for Homebuyers
Remember the frenzied housing market during the pandemic? Investors with deep pockets were outbidding everyone, snapping up houses with all-cash offers and driving prices through the roof. But now, the tide is turning. According to a recent report from Realtor.com, cash purchases by investors dropped to 64% in the first quarter of 2024. This is a significant decline from the peak in late 2021, when 69.7% of investors paid in cash to secure homes. This marks the lowest share of cash buyers since 2008.
For regular homebuyers, this is a welcome change. The dominance of all-cash offers has been a significant factor in inflating home prices, making it challenging for those who rely on mortgages to compete. With fewer all-cash offers flooding the market, the playing field is starting to level, providing more opportunities for everyday buyers and potentially signaling the end of the intense bidding wars that have characterized the housing market in recent years.
Despite the rise in interest rates, the shift toward financing among investors is largely attributed to the increasing presence of small-scale investors. These small investors, defined as those who have made 10 or fewer home purchases since 2001, accounted for 62.6% of investor purchases in the first quarter, according to Realtor.com. This is the highest proportion of small investors ever recorded in the dataset, indicating a significant transformation in the investor landscape.
G. Brian Davis, a real estate investor and co-founder of property management software SparkRental, sees the rise of individual investors as a positive development for the housing market. “It’s better for everyone involved that institutional money is withdrawing from the single-family home space,” Davis said. “It creates less artificial demand among buyers, therefore reducing some upward pressure on prices. It also leaves room for mom-and-pop investors to operate.”
Brie Schmidt, owner and managing broker of Second City Real Estate in Chicago, echoes this sentiment. She notes that most of her deals now involve individual investors who rely on financing rather than all-cash purchases. “If an investment property in your market costs $200,000, you can buy one in all cash or put 20% down and buy five properties with the same amount of money,” Schmidt explained. “It makes sense to maximize your capital and acquire more cash-flowing properties through financing.”
Financing a home purchase offers several advantages, including tax deductions on mortgage interest. These financial incentives can provide investors with a competitive edge. “Last year, a [Fannie Mae] program came out that allows 5% down on two- to four-unit properties if you occupy it for one year,” Schmidt said.
In the Chicago area, “house hacking” has become a popular strategy among investors. This approach involves purchasing multi-unit properties, living in one unit, and renting out the others. Once they have built equity and generated rental income, these investors typically sell the property, reinvest the proceeds into another property, and repeat the process. This strategy allows investors to maximize their capital and grow their portfolios more efficiently.
The shift from institutional to individual investors represents a broader trend in the housing market. Large institutional investors, who were once major players in the single-family home market, are pulling back. This withdrawal is easing some of the upward pressure on home prices, making the market more accessible to regular buyers and small investors.
Moreover, the current economic landscape is influencing this shift. Rising interest rates have made financing more expensive, but they have also highlighted the benefits of leveraging capital through mortgages. For many small investors, financing offers a way to stretch their investment dollars further and acquire more properties.
In summary, the decline in all-cash offers is reshaping the housing market, creating a more equitable environment for regular homebuyers and small investors. This trend is likely to continue as the market adjusts to the new economic realities and the evolving investor landscape. With institutional investors stepping back, the future looks brighter for those looking to buy homes with financing, potentially leading to a more balanced and fair housing market.
