Why Are So Many Houses Bought with Cash?

Question

You hear these numbers about cash home purchases. This one jumped out to me. In April of 2024, 64% of homes sold in Manhattan were paid for entirely in cash.

We know that cash is king, but that is a big kingdom.

Where does all the money come from?

Yes, there are a lot of people who spend less than they make and have a surplus.

There are others who are inheriting wealth from others

But there is another subset that we often forget: those who have equity in their homes.

Much of the equity has built up due to a runup in home values since 2020, which allows these people to use a HELOC to purchase a home for cash.

When rates were low there was a group of people who were using Hard money to purchase and rehab buildings and then refinancing at the end this was the BRRR strategy.

Hard Money is not an option these days since the cost of refinancing at the end of the project is too expensive.

So when we see people paying cash, it is often pent-up savings and HELOC money that people use, and not as often Hard Money.

Scott Trench · Answer

I think it's just math.

I bought a house this year, and I bought in cash. My interest rate, if I had financed it would have been +7%+, unless I did an ARM.

If I put the money in the stock market, and got a 10% return, well, after tax on the gains, that return is more like 7.5%. A .5% post-tax "spread" between highly volatile projected stock market returns, and the guarantee of a 7% return (by not having a mortgage payment) just makes no sense, to me.

I'm not bold enough to buy real estate at negative leverage - few deals in my area (and I presume, Manhattan), are trading at "Cap Rates" greater than 7%.

But, I am willing to buy real estate all-cash. It's a good long-term store of value, and produces tax advantaged income. As I build my cash position, I may buy another, all cash, property in the next year or two. I will lever it lightly with assumable debt, or not at all, and keep this conservatism going until cap rates are ~100bps above interest rates on property of reasonable quality and nearby where I live and operate my business.

If that happens next year, I’ll cash out refi to a moderate debt level and buy! If that happens 30 years from now, I’ll build wealth very slowly for a few decades.

Robin Simon · Answer

I would also say that markets like Manhattan are not super representative of most markets in the US - a lot of foreign investment I'd imagine in NYC, Miami etc - I'd guess a lot of these cash purchases are more about exchanging unstable or risky foreign assets/currencies for perceived stability/safety of US top metro residential real estate

I think in a lot of other markets where this isn't relevant - I think most are cash offers being "king" as not having appraisal or other contingencies that might sabotage the sale after 30 days or so and make people re-list (sellers will take less to avoid this risk and downside)

Max Ferguson · Answer

Interesting. Obviously HELOC would make more sense now. I have never needed to implement one but we now have enough equity to make use of it. Any recommendations on education for what to look for in a HELOC?

Why Are So Many Houses Bought with Cash?

Why Are So Many Houses Bought with Cash?

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