Heading through the holidays and the balance of the year, expect sales and prices to do their usual year-end fade as a result of depleted inventory quantity and quality. It’s important to note that the declining sales and prices have more to do with our bare shelves than a lack of demand.
Although October price per square foot was down 3% compared to last year in Washtenaw County, it was up 3% and 11% in our Southeast and Northwest markets. Across our Michigan markets, half of October new pendings were under contract in 10 days or less and over half of our October closed sales were at or over full price.
Shift Toward Cash Transactions
In recent years, the real estate market has experienced a noticeable shift with an increase in the percentage of cash sales. This trend has been particularly evident in Metro Detroit and surrounding Michigan markets. The change in buyer behavior and financing strategies has been a response to various market forces, including fluctuations in mortgage rates, inventory shortages and competitive bidding.
Initially, through 2020 there was a slight decrease in cash sales, likely due to general economic uncertainty due to the pandemic. However, this trend quickly reversed, with a marked increase in the percentage of cash sales since January of 2021.
Driving Forces Behind the Increase in Cash Sales
The surge in cash sales can be attributed to several key factors. The fluctuating mortgage rates play a significant role. As rates increased, buyers turned to cash purchases to circumvent the unpredictability and high costs associated with mortgages. Cash sales surge when the cost to borrow rises. Furthermore, the competitive market, spurred by limited housing inventory, has made cash offers more attractive to sellers who are looking for quicker closings and less risk of the deal falling through due to a low appraisal or other mortgage complications.
Market Implications
This trend creates an advantage for a buyer who can close with cash and a challenge for a buyer who must rely on financing. When offer prices are equal, the cash buyer has the advantage. To compete, a buyer who is relying on a mortgage may have to come in with a higher price or do something different to sweeten their offer or reduce risks associated with mortgages. Appraisal gap guarantees are often used to lessen the risk of a low appraisal, but they are limited by the buyer’s access to additional cash besides that which they were planning to use for their down payment.
Understanding this trend towards cash sales is vital for real estate professionals. It’s not just about adapting to the current market conditions but preparing for a potentially long-term shift in how real estate transactions are conducted. For professionals advising clients, whether they are cash buyers or not, recognizing and adapting to this trend is essential. Sellers are sitting on a record level of equity now and those making a move toward downsizing can tap into both retirement funds and their current homes equity giving them power in the market.
Take Away
The rise in cash sales is a significant market development. It’s been brought about by broad changes in economic conditions and buyer and seller strategies. Real estate is dynamic. As the market evolves, real estate professionals must remain informed and flexible, adapting their approaches to meet these new challenges and opportunities. Although at times it feels like cash offers are the only way to win, 78% of closed transactions still rely on mortgage financing.
