Jeremy S. sent me a fun statistic this morning. I love fun statistics. Yes, call me a geek. I’m good with that.
According to Pew, huge numbers of people are paying cash for houses, rather than taking out a mortgage. 59 percent of homes purchased in the state of New York were purchased with stacks of green. 56 percent of the homes in Alabama were purchased with cash. That New York number is even scarier than the Alabama number, when you consider that the average house price in New York is $513,000. Alabama’s average house price is $127,000.
Do you have $513,000 in liquid cash in the bank? I don’t.
This trend of paying cash for home is a nation-wide phenomenon. “Nationwide, nearly 43 percent of all home sales in the first quarter of 2014 were all-cash purchases, up from nearly 38 percent in the fourth quarter of 2013 and 19 percent in the first quarter of 2013. The figure for the first quarter of 2014 is the highest since RealtyTrac began tracking all-cash sales in 2011.”
Who’s doing all this buying? According to Pew, it’s investors or people purchasing second homes.
Apt. 11d 
Around here, it’s apparently an Asian thing (both SE Asian and E Asian) – when we bought our house, our mortgage broker very earnestly asked us to not pay it off within 3 months, as she wouldn’t get her commission. This is a typical asian-heavy neighborhood – most are employed in various tech companies, with a sizable minority being doctors.
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I don’t they still do it, but in the initial wave of Hong Kong-ers in Vancouver BC, legend has it that they were literally paying for houses with suitcases full of cash.
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Still happens. It’s a way of “managing” huge amounts of cash – buy a house with cash and then take out a mortgage.
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It doesn’t need to be liquid cash. If we move again, it will be to trade down in retirement, at which point we would use the proceeds from the equity in our current apartment to pay all cash for something smaller.
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Right. Downsizing (either size or geographically) is one explanation for cash sales.
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It’s primarily Asian money here in Vancouver too. There’s a huge demand for investment advice from the banks here in Canada – too much cash and not enough places to park it.
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Wow, that number is really high. The article goes through all the categories, foreigners, downsizers, investors, retirees, vacation homes. Foreign buyers are probably looking to park cash in what they see as a stable investment, and probably are used to paying cash. I wonder if people parking cash in homes suggests a general distrust of the stock market?
One problem with parking cash in real estate is that real estate costs money to keep — maintenance of the property, but, also property taxes.
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Yes, distrust of the stock market (or just a desire to diversify) is a possibility.
If I had a totally gratuitous $100,000 and had the stomach for landlording, I would buy a house here and rent it out for $1,000-$1,200 a month or thereabouts. The 2% local property tax and maintenance on an older home takes some of the fun out of that, but it’s a very reasonable move.
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This doesn’t surprise me. It’s pretty common in the rust belt for investors to snap up foreclosed homes and/or homes left behind by elderly folks who’ve died or gone to an old folks’ home. Almost all of ’em become rental property (that rents for 2-3 times what a mortgage on comparable property would be). Renters here are people who can’t afford to buy (see also: “the high cost of being poor”).
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Anybody who can’t do a $5k-$10k repair on a house without breaking a sweat has no business owning a house.
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Really? Even when renting is two to three times as expensive as owning? There are an amazing number of people out there for whom $5-10K requires breaking a sweat. But sure, let’s restrict home ownership only to the UMC and wealthy.
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j,
A serious HVAC repair could easily cost several thousand dollars (if not more) and a roof replacement could easily cost $10,000. What happens to your low-income barely-making-ends-meet homeowners if they need a $10,000+ roof repair and they don’t have any savings at all?
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Well, sometimes you don’t have a lot of other options. I’m not talking about barely making ends meet. I’m talking about a divorce, a tenure denial, a move, a primary custody of kids, a decent (if decreased) income, plenty of savings to put down on a house, but nowhere near enough to afford rent in the new area. So I bought. Do I currently have $10K in savings? No. It is going to take several years to build back a decent savings account given the circumstances. Was it much smarter to buy instead of rent? I literally could not afford to rent (especially since the child support I get isn’t legally enforceable).
I just think that this group of commenters has blinders on at times – there are plenty of people who are above barely-making-ends-meet, but who for a variety of reasons (not having to do with bad money management) will actually break a sweat to come up with $10K. Even when I have much more than that in savings, it would have really hurt to have to spend that.
(I have a huge amount of credit, access to a HELOC if I needed it, but before that parents who would help out. I’ve already successfully dealt with a furnace that needed to be replaced, etc. on my own. I bought sensibly in an excellent school district with excellent home sales if I needed to sell; my mortgage is under $1K, and rents are over $2K.)
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j said:
“Well, sometimes you don’t have a lot of other options. I’m not talking about barely making ends meet. I’m talking about a divorce, a tenure denial, a move, a primary custody of kids, a decent (if decreased) income, plenty of savings to put down on a house, but nowhere near enough to afford rent in the new area. So I bought. Do I currently have $10K in savings? No. It is going to take several years to build back a decent savings account given the circumstances. Was it much smarter to buy instead of rent? I literally could not afford to rent (especially since the child support I get isn’t legally enforceable).”
I’d like to hear from you in a few years to see how it turned out for you. Your situation is very concerning. I would even encourage somebody like you to (if you have a tenure track job now) to wait until after tenure to buy, even if it involved using some of your “plenty of savings” to do it.
Although I wouldn’t cheerlead somebody like you buying a house, the bad scenario I’m thinking about is somebody who is just barely getting by as it is, has no savings at all, has no family more solvent than themselves, and then has a series of house disasters (i.e. “normal first years of home ownership). The dryer stops working, the fridge stops working, the microwave stops working, the roof is a ticking time bomb, the HVAC goes out, the septic system fails, etc. Not to mention medical expenses, property tax increases, having your hours cut, losing your job, having to move for some other reason, etc. And the problem with looking at those things as meteorite-like rarities is that the whole cycle is going to keep coming–you have to be continually rebuilding the house as it stands. The roof is going to need to be totally replaced every 20 years. The siding will need to be painted every 10 years. The appliances will need to be replaced on a fairly predictable schedule.
“I just think that this group of commenters has blinders on at times – there are plenty of people who are above barely-making-ends-meet, but who for a variety of reasons (not having to do with bad money management) will actually break a sweat to come up with $10K. Even when I have much more than that in savings, it would have really hurt to have to spend that.”
My husband and I had been married 15 years and he’d had tenure for around 9 years and we’d been doing Dave Ramsey for 6 years and we had three kids (10, 8 and 0) before we ventured to buy our first house one year ago. Given all of the “unexpected” expenses we’ve faced since then, I thank my lucky stars we didn’t buy a minute earlier. We’ve had about a year of being house poor, even following all “the rules”. I’m sure things will get better, but I have had a year of wondering, “Where’d all the money for fun go?”
Here’s the Dave Ramsey Baby Steps that we followed:
http://www.daveramsey.com/new/baby-steps/
(Home buying or other major purchases can be done as Baby Step 3B.)
“(I have a huge amount of credit, access to a HELOC if I needed it, but before that parents who would help out. I’ve already successfully dealt with a furnace that needed to be replaced, etc. on my own. I bought sensibly in an excellent school district with excellent home sales if I needed to sell; my mortgage is under $1K, and rents are over $2K.)”
That’s great (except for the “huge amount of credit” and “access to a HELOC” part).
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I think it depends how much you are risking. I’m thinking of the numbers you’d need for a house in an unfashionable, but still safe area here. It’s about $80,000 to get something liveable now, so maybe $500 a month including property taxes. You can’t find anything to rent in an area that isn’t dangerous for close to twice that. While buying a house without a reserve is still a gamble, on those numbers it seems a reasonable gamble to make so long as the bank lets you make it without too big of a down payment. You aren’t in it for that much if a catastrophe happens. Plus, you can generally half-ass a great deal of home repair for a couple of years and saving while paying the higher rent is going to be hard.
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Amy,
Unless a tree came through your roof or there are actual gaping holes, undone roof repairs can be lived with. As MH points out, you can half-ass a lot of home repairs so needing to come up with $10k right this minute for the house doesn’t really happen that often.
Also, just because Dave Ramsey advocates something that doesn’t make it right for everyone or mean that people who don’t follow him are headed for doom. He is very very conservative and doesn’t address situations like J’s in which renting is much more expensive than buying.
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I should not have put a bunch of personal details in my response, because seriously, I can do without your concern. I’m not going to put a bunch more about my financial picture in now, aside from saying I am not dumb enough to actually use credit or a HELOC to finance something unless it were a true emergency in the next year or two, but it helps to have stellar credit in case it comes to that.
It isn’t like smart people don’t run the numbers, Amy. Take a very stable housing market, an extremely affordable house that has been recently updated in many ways already, that is small and energy efficient enough that we’re not talking $5K or $10K repairs to begin with, a very attractive school district, and the tax benefits of being able to deduct mortgage interest and local taxes. Add in rents that are ridiculous, and rental properties filled with college students instead of families with small children. Sure, one can rent in that environment, but you end up using your savings up cushioning the rental costs. Even if you lost your 20% or more down on your mortgage if you have to sell in 3 or 4 years, that is less than cushioning the rental price for the same amount of time.
It is the “without breaking a sweat” language that is incredibly disturbing. I’ve made enough money where $5K could be paid very easily; hell, I’ve made enough money where I’ve saved ten times that in a year above retirement. But I really hope I never think of $5K as something not to blink at.
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It might also reflect people who’ve been mobile during their careers or who had some sort of housing arrangement settling down in one place when they get older or retire. For instance, a military family might leave the military with enough cash to buy a house. A minister who had a parsonage throughout his career might do the same.
Speaking of houses and money, I’ve started hearing a radio ad that makes my blood run cold. It’s some sort of finance company offering refis, and one of their client reenactments has a guy talking about how happy is to have taken “100 grand” out of his home equity and he should have done it earlier. Wow–haven’t we seen this movie before?
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