Daily Gains Letter

What the Big Increase in “Cash Purchase Rate” for Homes Means

By for Daily Gains Letter |

Cash Purchase RateIt wasn’t all that long ago that first-time home buyers were responsible for fuelling the housing market. They’d buy starter homes and fix them up; this helped sellers move to bigger homes, and so on. Then the housing market crisis began, and everything became topsy-turvy.

Today, first-time home buyers are competing with well-heeled individuals and investors looking to snap up distressed houses at bargain prices. This simple shift could undermine the long-term growth of the still-struggling U.S. housing market.

The most recent data shows that more than half of all homes sold last year and so far this year in the U.S. have been paid for in cash. Before the housing market crisis, just 20% of all homes were purchased with cash; since then, the all-cash purchase rate has more than doubled.

Why the huge increase? Even though mortgage rates continue to hover near record low levels, many first-time home buyers have been locked out due to tighter lending rules. They’re also getting outbid by well-heeled investors and institutions looking to add real estate to their portfolio. Many homeowners cannot trade up to a larger home because their homes have, since 2007, lost so much of their value—which means many homeowners are staying put.

A 2012 poll of homeowners, conducted by the National Association of The Remodeling Industry, found that more than a quarter of respondents (26%) said they plan to stay in their homes for an additional 16 to 20 years, because their home’s value decreased so much during the recession. On top of that, 23% said they were going to stay put for an additional six to 20 years.


(Data source: https://www.jchs.harvard
.edu/remodeling -gains-expected-continue-2014)

Home improvement spending trends, as evidenced by the above chart, show that remodeling activity has been rising since the beginning of 2013, and is expected to strengthen into at least the first quarter of 2014.

That’s music to the ears of any company operating in the housing market and remodeling industries.

Home improvement retailer The Home Depot, Inc. (NYSE/HD) is up roughly 20% year-to-date and provides a quarterly dividend of two percent. Lowe’s Companies Inc. (NYSE/LOW) is up 22% year-to-date and sits on a quarterly dividend of 1.60%.

A manufacturer and supplier of structural and related building products, Builders FirstSource, Inc. (NYSE/BLDR), is down more than 12% year–to-date, but is hovering near a strong support level around $5.00.

Where remodeling was about increasing the resale value of a home, for some, it’s now about maintenance. At the same time, with housing market prices on the rise in some areas, other homeowners are starting to take on remodeling tasks they put off when the housing market crisis began. Finally, the strengthening of the housing market and all-cash sales is also translating into increased spending on home improvement projects.

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