Freddie Mac: Competitive Housing Market Yielding More Cash Sales

A limited supply of houses has created a highly competitive housing market–which in turn is keeping cash sales significantly above historical norms and dampening mortgage originations, reported Freddie Mac, McLean, Va.

“Usually, not many people like to invest a lot of cash into real estate, which is illiquid and has high transaction costs,” Freddie Mac Chief Economist Sean Becketti said. “However, in the current, highly competitive housing market, a cash offer is an effective way to gain an advantage over other bidders. In a cash sale, the seller doesn’t have to worry about the buyer’s ability to obtain a mortgage or the chances that an appraisal will come in below the agreed sales price.”

Becketti noted that each cash sale “means one less mortgage origination.”

Cash sales accounted for nearly 18 percent of all home sales in June, below the peak, which was 35 percent, but still well above the 10 percent historical average. “If cash sales remain around 20 percent, that would translate to $172 billion less in mortgage originations than would occur if the cash share returned to its historical norm,” Becketti said.

With mortgage rates expected to stay below 4 percent for the remainder of the year, home sales should reach 6.2 million units for 2017, a 3 percent increase over the 2016 pace, Becketti said. “However, home sales would be much higher if inventory was not so tight.”

Housing starts were lower than anticipated during the second quarter, the Freddie Mac Monthly Outlook for August reported. “While starts should improve in the second half of 2017, expect them to remain well below their long run average at around 1.24 million,” the report said.

Due to the high demand and low inventory, house price appreciation could average 6.3 percent for full-year 2017, the Monthly Outlook report said.