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The housing market is in a notably bizarre place right now. With mortgage rates hovering around the highest levels in years, some home buyers have opted towards all-cash purchases. Is now the time to sell your house?
Well, it depends if you’re willing to endure a potential dip in home value. As housing demand continues to weaken, looking ahead, a downturn in home prices seems increasingly inevitable. Yesterday, 30-year fixed mortgage rates climbed over 6%, the highest level since the 2008 housing crisis. This is in some ways akin to pouring gasoline on an already burning building.
Largely in response to higher lending rates, home demand was already at a multi-year low, as reflected in dwindling mortgage applications and home sales. For mortgage rates to go up even more is a foreboding sign that housing hasn’t quite seen the end of its slump.
Indeed, mortgage rates have been a focal point this year, more than doubling since the start of 2022. Since then, demand for mortgages has plummeted almost 30%.
The notion of even higher mortgage rates has scared some homeowners into selling to avoid getting caught in, what could be, a brutal pullback of home prices. This may be the right time, given a surprising new trend in all-cash home purchases picking up steam at the moment.
Housing Market in Flux as Homebuyers Avoid Lofty Mortgage Rates
As scary as a mortgage-induced housing demand slump may be for sellers, it’s perhaps even more troubling for buyers. Using an imaginary $400,000 home with 20% down, those who enter a 30-year fixed-rate loan today face an extra $550 per month in mortgage payments. This reflects the difference between the 3% loans available at the start of the year and the current 6% level. Over the duration of the mortgage, this adds up to a whopping $205,000 premium in interest payments. With that in mind, it’s kind of a no brainer that more Americans are looking to buy homes in cash.
However, the recent spike in cash purchases may very well be for reasons even beyond the long-term savings. In fact, buying homes in cash presents a slew of advantages over the tried and true mortgage.
Firstly, those who pay in cash are more likely to win a bidding war on a house. Organizing a mortgage with a bank is all well and good. That is, right up until another rival offer pushes the price up more. The borrowing party will likely have to revisit their bank, renegotiate terms for their loan, sign some new documents and more, which takes both time and effort. Paying in cash, however, means that as long as the new price is within budget, someone paying in cash can simply raise their bid. Easy.
The rise in cash buyers may also have something to do with the kinds of people looking for homes: investors. While mortgage rates have priced out many would-be homebuyers, for wealthy investors looking to rent out properties and earn some passive income, now’s practically as good a time as any. Roughly 75% of investor purchases are made with cash, according to Redfin (NASDAQ:RDFN).
Are Cash Offers Reason Enough to Sell Your Home?
So, is now the time to list your home, while investors are still having a feeding frenzy? To that, the answer is still relatively unclear. The future of home prices remains a point of debate amongst economists. If you can endure a cold streak in the market, real estate almost always goes up eventually. Unfortunately, though, not every household is able to tolerate a loss of home value until “eventually” arrives.
Additionally, it’s worth noting that, while there has been an uptick in cash offers, the market is still undoubtedly stagnating. Home sales have forced record numbers of home sellers to lower their asking prices. Although the idea of a cash offer seems tempting, the chances of getting any offer are lower than in years past.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
