In LA, more than 20 percent of homebuyers pay in cash

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In the Los Angeles metro area, where median-priced homes sell for more than $600,000, and residences in the priciest parts of the region routinely command eight-digit prices, nearly one-quarter of all homebuyers pay in cash.

Across the LA region, 23.5 percent of homes sold during the second quarter (April to June) of this year went to all-cash buyers, according to real estate data tracker Attom Data Solutions

The share of buyers paying in cash has gone up slightly over the last year: 21.1 percent of homes sold to cash buyers in the second quarter of 2017.

A high rate of all-cash deals can inflate the value of homes in an area because buyers with the financial means to pay upfront can outbid those who must borrow money from a lender, says Oscar Wei, senior economist for the California Association of Realtors.

“From the standpoint of a buyer, when more people are offering all cash, that means they are at a disadvantage,” he says. “There’s no question about that.”

Part of that is because sellers often prefer cash offers, which result in quicker sales and have less chance of falling through during the escrow process.

But even though the share of buyers making all-cash purchase is up year-over-year, Wei says it is down significantly since the early months of 2013, when more than one-third of buyers were paying purchase prices out of pocket.

As the Los Angeles real estate market recovered from its recession-era collapse, investors and foreign buyers flooded the market at this time looking to capitalize on bargain basement prices.

“Cash was king back then,” says real estate agent Cricket Yee. “It was raining foreclosures, and people that had been saving their cash just for this opportunity were buying everything they could.”

Wei says investor interest has cooled since then, and cash offers aren’t making the same impact on the market today.

“As prices began to increase, investors started backing out,” he says. “They always look at it from a profitability standpoint.”

Yee agrees. She says in recent years she’s noticed a decline in the number of foreign buyers and parents purchasing homes for their children—two common sources of all-cash offers.

Still, the percentage of cash buyers is now nearly four times higher than it was in the second quarter of 2005, when buyers took out loans to pay for almost 94 percent of homes purchased in the LA area.

In the decade prior to the recession, Wei says, all-cash sales accounted for only around 11 percent of purchases.

But the fact that that percentage has more than doubled since then doesn’t necessarily mean there’s been a major uptick in well-heeled buyers. Rather the total number of buyers not paying in cash may have dropped.

Following the 2007 mortgage crisis, banks tightened up lending requirements for prospective buyers to avoid strings of defaults on risky loans like the ones that led up to the financial collapse. Wei says that, while those restrictions have been loosened since then, it’s still tougher to get a loan in 2018 than it was in the years leading up to the recession.

Mortgage interest rates are now on the rise as well, driving up monthly costs for homebuyers taking out loans.

“That really put a wet blanket on the market,” says Yee. Buyers have had to adjust expectations for what’s affordable, she explains, meaning that there’s less competition for homes in the upper price tiers.

But cash buyers don’t have to worry about lending requirements or mortgage interest rates. Wei says higher interest rates may actually make the market more appealing for buyers able to pay full price, since home shoppers worried about their monthly payments will be less likely to bid them up.

That means, barring any new taxes on real estate investors or a global economic meltdown, the share of buyers paying in cash probably won’t drop back down to pre-recession levels. But thanks to record-high prices, it might not rise much either.

“We are certainly not seeing properties at a bargain level,” Wei says.

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