Housing starts charted lower than anticipated during Q2, according to Freddie Mac’s [1] August Outlook [2]. which is putting a strain on the preferred home-buying route and forcing buyers to pursue alternative avenues.
The report examines how today’s limited supply of homes has resulted in an amount of cash sales in lieu of traditional originations, a number that sits above the historic norm.
“Usually, not many people like to invest a lot of cash into real estate, which is illiquid and has high transaction costs,” said Sean Becketti, Chief Economist at Freddie Mac, which opens up homeownership to millions by furnishing mortgage capital to lenders. “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. And each cash sale means one less mortgage origination.”
With Freddie Mac's prime mortgage market survey interest rates expected to remain under 4 percent for the rest of 2017, home sales should hit 6.2 million units for the year, a 3 percent jump over 2016, Freddie’s report says. That number would reach even greater heights, however, if inventory weren’t so hard to come by, it notes.
Due to the intense demand and scant supply, house price appreciation is poised to average 6.3 percent for full-year 2017, the Outlook says.
For comparison’s sake, in June, cash sales represented about 18 percent of all home sales. While that was sizably less than the high of 35 percent, it was still well above the historical average of 10 percent, Freddie Mac reported.
So what impact might today’s mad dash for cash have on the mortgage market? If cash sales hold tight around 20 percent, the report maintains, that would translate to $172 billion less in mortgage originations than if the cash share reverted to its historical norm.