Who are the majority of the all-cash buyers in your market?
- Foreign investors. (72%, 18 Votes)
- U.S. investors. (20%, 5 Votes)
- Buyer-occupants. (8%, 2 Votes)
Total Voters: 25
California boasts the lowest share of all-cash buyers in the market, according to a recent Zillow report.
As of the first quarter (Q1) of 2015, the share of all-cash buyers relative to the entire homebuying population is:
- 34% in Los Angeles;
- 32% in Bakersfield;
- 30% in Riverside;
- 28% in San Francisco;
- 26% in Sacramento;
- 25% in Modesto;
- 24% in San Jose; and
- 23% in Ventura.
On the other end of the spectrum, the highest all-cash share is found in the fellow sand state of Florida, where more than half of buyers use all cash. Relative to California, Florida homes are cheaper and thus more cash-accessible.
Further, the markets with the highest share of cash buyers within California — Los Angeles, Bakersfield and Riverside — are all markets where low-tier home sales dominate. Naturally, it’s easier for a buyer to come up with an all-cash offer when the selling price is lower.
2015’s share of cash buyers is down from recent years. Buyers with cash — by and large investors and market momentum-reliant speculators — peaked across most of California in 2013. At that time, notoriously dubbed “the year of the speculator,” cash buyers made up nearly half of all California homebuyers.
The (dis-)advantages to all-cash
Sellers often prefer non-contingent cash to financed offers. That’s because cash usually allows for a quicker and less complicated closing. However, large sums of cash are hard to come by for most homebuyers — unless they’re of the investor variety. Therefore, when the homebuying market is tipped heavily in the way of cash purchases, it’s clear that investors are vastly outbidding buyer-occupants. This occurred in 2012-2014 but is not the case today.
For sellers, the downside to all-cash offers is that they’re often smaller than financed offers, usually around 10% lower. Buyers with cash know that their finance-free offer gives them distinct advantages, so they feel comfortable leveraging that advantage with a lower offer.
For the vast majority of homebuyers reliant on financing, the knowledge that they’re competing in a bidding war against a cash offer is terrifying. However, it’s not always a lost cause.
Some sellers loathe the thought of an investor purchasing their home for the purpose of a long-term revenue stream. A thoughtful letter from an owner-occupant buyer may sway a seller confronted with a more attractive cash offer, humanizing their less desirable offer and making their case. Likewise, leaving out extra contingencies from the offer can also help a financing-dependent buyer compete against all-cash contenders.
The good news
Is it a good or bad market indication that California has the lowest share of all-cash homebuyers in the U.S.?
It’s definitely a good sign. Markets saturated with cash-heavy investors are inherently unstable and prone to burst. The speculator exit has benefited California housing market by making room for:
- home prices to gradually slow their rate of increase to a more stable pace;
- home sales volume to increase, instead of decreasing like it did in 2014; and
- end user buyer-occupants to compete with each other for homes, rather than with speculators intent on flipping or investors looking for a ripe business opportunity.
Today’s share of cash buyers in California is at a healthy level, which is a sure sign that a full housing recovery is on its way. However, one complication looms on the not-so-distant horizon: rising mortgage rates, expected by mid-2016. This will dampen home sales volume and in turn prices. Once homebuyers adjust to the new normal ushered in by increased interest rates, the housing market will see another boom in sales and prices, to begin toward the end of this decade.