Is Buying a House with Cash Bad?

The Washington Post reported today that the increase in January home sales was driven mainly by an increase in all‐​cash sales. Whereas I would have thought increasing sales, especially driven by cash buyers, was a sign of market strength; the Post and the National Association of Realtors portrayed this as a bad thing. NAR chief economist Lawrence Yun went so far as to call this portion of the market “unhealthy.”


Of course, what NAR and the rest of the real estate lobby were complaining about was that home sales and prices were not being driven by easy credit. For the housing industry, it would seem that the “correct” house price is the price that is propped up by loose credit. 


Yun goes on to say that “investors are taking the advantage of conditions to purchase undervalued homes.” I used to work with Yun, he’s a smart guy, but I don’t think anyone is smart enough to say that the homes being sold are “undervalued.” Consider that most non‐​industry forecasters are projecting further price declines.


More cash sales actually means less future foreclosures, because the cash buyers start out with 100% equity from day one. They are very unlikely to walk away, regardless of the future path of prices. Cash buyers also pay prices that are closer to reflecting the fundamentals of supply and demand, which are ultimately driven by income and demographics. 


What the high percentage of cash borrowers, at 37 percent, says to me, is that there is a significant demand for housing that isn’t dependent upon massive taxpayer subsidies to the mortgage industry.