More Than Ever, Cash is King.
November 16, 2023
The Gap Widens.
All-cash buyers have always had a varying level of advantage when competing against home buyers that are financing their purchase through a bank. All-cash offers have the inherent benefit of having one less party in the mix between the offer and the close (the bank), and they are able to close escrow much more quickly, since there is no bank involved. That helps with the overall risk factor of a contract coming to a successful closure — if a bank is not involved, the issues with appraisals, underwriting, and of course, interest rates are removed from the equation.
When I use the adjective “varying” to describe the degree of advantage an all-cash buyer has in this market, I'm really referring to the other advantage that cash buyers have in this market: Price.
When the Federal Reserve was doling out money to banks for free, home mortgage interest rates were running between 2% and 3%, so the advantage that an all-cash offer may have had over a bank financed offer was almost negligible. Buyers with loans were coming in aggressive on their price, were always non-contingent (risk factor averted) and could often times close in 15 days. All-cash buyers quickly discovered that they couldn't come in 5-10% below their competition just because they were paying cash. Sellers would happily wait an extra week or two to get an extra $100K.
But in this current market where interest rates are running between 7% and 8% and buyers are especially skittish, all-cash offers carry much heavier negotiation power. First, the higher rates have driven a significant portion of the buying competition to sidelines, making it less competitive, which in turn keeps prices in check. Second, after hearing horror stories about bank-financed buyers backing out of deals — even at the last minute — home sellers are suddenly placing a LOT more value in all-cash offers, and they are even willing to make price concessions in exchange for a low-risk, quick close of escrow.
Because of these conditions, the value of all-cash offers is probably at an all-time high. Redfin issued a report recently that claimed that 43% of all “luxury home” purchases in Q3 of this year were all-cash buyers. They define luxury homes as the top 5% price range for a given metro area. I've seen other reports that pin this number at 30%.
Either way, cash buyers are taking full advantage of the higher interest rates that most home buyers are suffering through right now. But that advantage won't last forever. Home mortgage interest rates will come down — it's not a matter of “if”, but “when”. And while we'll probably never see 2%-3% loan rates again in our lifetime, the huge advantage that cash buyers have now will definitely be diminished.
So if you're fortunate enough to be a cash buyer in this market, strike while the iron is pleasantly hot in your favor, because it's not going to stay that way forever.