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Want That House? You'd Better Pay in Cash

The Wall Street Journal. logo The Wall Street Journal. 12/5/2017 Laura Kusisto, Christina Rexrode

a group of people in a field with a mountain in the background © Michael Beiriger/Alamy Meagan Freeman and her boyfriend have been looking for a midprice house in the Seattle area for six months but keep running into a hurdle: cash buyers swooping in and snatching up their properties.

It has happened three times, she said, most recently two weeks ago. The couple bid on a home in an unfashionable suburb they believed was a sure bet in the midst of a dreary Seattle November, when the market typically is slow.

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Instead, the 27-year old said, a cash buyer won out yet again.

“It is definitely discouraging,” she said.

Five years after the housing market hit rock bottom, mortgage credit is finally returning to the healthy levels of the early 2000s, before the boom-bust cycle began. But all-cash deals remain well above normal levels, even as prices in many markets have pushed to record highs.

In all, 28.8% of U.S. home sales this year have been all-cash transactions, according to Attom Data Solutions, a data provider. That was down from the peak of more than 40% in 2011 and 2012, when investors were buying homes at a furious pace to turn into rentals. But the percentage of cash deals stands much higher than the 20% or so common in the early 2000s, and it has edged up from 28.6% last year, according to Attom.

Cash deals are attractive to sellers because they don’t need to wait around for a bank to make a mortgage. Closings are quicker, and risks are lower. Many sellers choose all-cash offers over higher offers that come with a mortgage attached.

Economists said the decision to tie up so much liquidity in a home is puzzling at a time when mortgage rates are near all-time lows.

But many younger buyers have a hard time coming up with a down payment, much less an all-cash offer.

“First-time buyers drive the market, and if they are blocked out of the market then we are not building that next generation of homeowners,” said Nela Richardson, chief economist at Redfin, a national brokerage company based in Seattle.

Housing inventories are so low that buyers even in historically calm markets such as Boise, Idaho, and Minneapolis are facing bidding wars, prompting them to dig deep into their coffers to win deals.

Agents say cash buyers span many categories, from investors and wealthy foreigners to downsizing baby boomers, people moving from pricey coastal markets to cheaper ones and millennials getting gifts from parents.

The starter-home market is especially tight. Average down payments for lower-priced homes have climbed by more than a third over the last decade, while down payments for higher-priced homes have edged up only about 2%, according to data company CoreLogic. The average down payment for a lower-priced home in September was about $18,360, according to CoreLogic, up from about $16,470 the previous year.

Cash sales are spreading even to sleepier markets away from the coasts, as middle-class buyers sell homes in San Francisco or Portland and move to cheaper areas. More than 20% of homes under $250,000 in the Boise area sold for cash in October, up from 15% a year ago, according to the Boise Regional Realtors.

Mike Brown, a real estate agent in the Boise area, said he sees a lot of out-of-state buyers. “People have sold their home at all-time highs in [places like] California, Washington and Utah and they’re bringing their cash to Idaho and buying homes,” he said.

Lindsay Ross, 28, of Boise, who works in construction sales, said she and her husband heard from agents there were “cash buyers all over the place” when they were looking for another home in the area. They lost out on three offers before buying a three-bedroom home that her husband never saw because they had to move so quickly. They turned around and sold their house to a cash buyer from Minnesota.

As some buyers pool all their assets to make cash offers, however, they are finding themselves strapped for cash.

Bank of America Corp. is promoting a product for those buyers, allowing them to take out a loan of up to 80% of their home’s value soon after they purchase it in cash.

Ann Thompson, the bank’s divisional sales executive for Northern California, said executives saw that cash buyers were continuing to make up a significant chunk of the market because of tight competition and that the bank was missing out on that business.

“Oftentimes, it’s people who have lost out on two or three bids already and they say, ‘By golly, I’m going to make a really good bid this time,’” she said.

The online lender Better Mortgage Corp. is testing a product that would underwrite mortgages within a day, allowing would-be buyers to better compete against cash offers.

Company chief executive Vishal Garg started the company after he got outbid for his first home by a cash buyer several years ago. The other buyer offered 8% less, Mr. Garg said, but the seller didn’t want to wait the weeks that it would take a typical bank mortgage to close.

Madison Ward Willis said she and her husband bid on a dozen properties in the spring when they were looking for a home in Raleigh, N.C. She said they didn’t know why they lost out on all of them, but agents told them one factor was investors who were buying starter homes in cash and flipping them.

Roughly 22% of homes in Raleigh were to cash buyers in 2004, according to Attom. Today, that has nearly doubled to 42%.

Ms. Ward Willis, 32, said they eventually won out by paying $13,000 over asking price on a two-bedroom townhouse and agreeing to pay the difference if the appraisal came in too low.

“We lost a few because we were deliberating,” she said. “All of that needs to go out the window. You’ve got just to be prepared to jump in.”

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