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How Wealthy Home Buyers Are Avoiding High Mortgage Rates
The all-cash deal is back in fashion for homebuyers, a change that favors the rich.
The luxury real estate markets in New York and Florida are seeing near-record percentages of transactions paid in cash, according to first-quarter data from real estate appraisal and consulting firm Miller Samuel Inc.
This represents a sharp reversal from more mortgage-dependent businesses during the pandemic, when interest rates were considerably lower.
“These people have the privilege and the advantage,” said Jacky Teplitzky, who leads a Douglas Elliman brokerage team serving the luxury real estate markets of New York City, South Florida and the Hamptons.
“They’re saying to themselves, ‘OK, I’m going to buy money and when interest rates go down, I’m going to refinance and get my money out.'”
Waterfront properties are shown by luxury real estate agent Bonnie Heatzig on Saturday, Jan. 8, 2022. (Michael Laughlin/South Florida Sun Sentinel/Tribune News Service via Getty Images) (Sun Sentinel via Getty Images)
Affluent buyers are just as averse to today’s higher mortgage rates, currently above 7%, as those who look for a home every day. They simply have the means to skirt fees more often than those with smaller budgets.
All-cash transactions are increasing across all price ranges. The share of all-cash purchases in the US in the first quarter of the year was a monthly average of 31%, according to data from the National Association of Realtors (NAR). This corresponds to the highest monthly average for any full year since 2013.
But the numbers are considerably higher in places like Manhattan, one of the country’s best-known luxury markets. In the first quarter, 63.4% of Manhattan sales were all cash, the third-highest share in a decade, according to Miller Samuel. Meanwhile, the percentage of mortgage transactions was the lowest on record.
A normal Manhattan market, where the average sale price for luxury homes was $7.5 million in the first quarter, would be “50% cash and 50% finance,” said Jonathan Miller, president and CEO of Miller Samuel Inc.
The luxury supertall condominium tower, 432 Park Avenue, is reflected in a window in midtown Manhattan on May 16, 2022, in New York City. (Spencer Platt/Getty Images) (Spencer Platt via Getty Images)
The story is similar in some of Florida’s most upscale markets.
Cash sales accounted for 85.7% of all transactions in Royal Palm and Boca Raton, Florida – above the decade average for the first quarter. The average sales price was almost $10.9 million.
In the Florida coastal cities of Manalapan, Ocean Ridge and Hypoluxo Island, 92.9% of all sales – with an average sales price of $9 million – were cash, the second highest percentage in a decade.
And in Miami Beach, the all-cash market share for luxury condos – selling on average for $6.5 million – hit a new record in the quarter.
“Cash is not exclusive to the rich, but the probability increases as the price rises,” Miller said, “due to withdrawals of shares from the booming stock market and other assets they can leverage to make the purchase.”
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And in the first quarter, the S&P 500 grew, jumping just over 10%.
Condominium buildings are seen on April 5, 2016, in Miami Beach, Florida. (Joe Raedle/Getty Images) (Joe Raedle via Getty Images)
In a different market, these wealthy homebuyers might have tapped a line of credit backed by their stock portfolios to make a purchase, Teplitzky said, a transaction that would still be considered all-cash by the seller.
But this has become less palatable with higher interest rates – along with taking out a mortgage.
In a lower-rate environment, others may have paid all in cash but refinanced shortly afterward to capitalize on a tax or other wealth strategy, Miller said.
“They buy a $10 million condo and then get a $1 million or $1.5 million mortgage after they close because their advisors told them to,” he said. “That’s very common, but you also don’t see it as much because of where the rates are.”
But there are some advantages to buying now with cash. Both Miller and Teplitzky expect prices to continue to rise, especially if mortgage rates moderate, so buyers now are getting a better deal than waiting later.
Buyers with cash can also get a better deal. A recent study from the University of California San Diego’s Rady School of Management found that cash-only buyers pay an average of 10% less than mortgage buyers.
All-cash offers also stand out in a bidding war, Teplitzky said, because bids that rely on financing are not guaranteed.
“But if it’s an all-cash deal, you’re basically guaranteed that it will make it to the closing table,” she said.
While affluent buyers are more likely to have the financial resources to complete an all-cash deal, these types of transactions are also becoming more common in lower price ranges.
The current level of all-cash purchases last reached this level in 2011 and 2013, when foreclosures and short sales accounted for many of the all-cash transactions investors made, said Lawrence Yun, an economist. head of NAR.
This is far from the case now. Distressed sales accounted for just 2% of all sales in the first quarter and the number of investors in the market is “kind of normal — nothing exceptional,” Yun said.
Today’s cash-only buyers are “of course, high-income, high-net-worth people,” Yun said.
But in the more mid-priced markets, these are retirees who are moving from a high-cost market to a more affordable market and bringing money to the table by selling their previous home, which has seen an increase in value throughout the year. . last four years.
They are also younger buyers who can turn to other sources of money – family or retirement savings – to increase their chances in multiple-offer situations.
“People have to be creative to win the bid and part of that creativity comes with money,” Yun said.
“But it’s frustrating for people who can’t compete with money.”
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Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.