Cash Economy

It appears that cash is the key principle in more and more real estate deals.  Today’s Wall Street Journal reports on a disquieting trend where lenders are turning down buyers willing to pay much higher prices, on the condition that they get financing, in order to take under-market cash prices.

In one instance, a lender turned down an offer of $179,000 contingent upon FHA financing in order to take a cash price of $133,000.  The borrower was a first-time homebuyer.

In some markets, particularly in Florida, all cash deals account for more than 60 percent of all sales.  The article also mentions that lenders are requiring 50 percent down on some condo loans.

Part of what motivates people is a sense that distressed real estate represents a better investment than equities or bonds, even after factoring in the opportunities for leverage.

Time to Pay Off your Mortgage?

This same thought may also lead many existing homeowners with plenty of stock market wealth to consider buying down or even paying off their mortgage.  The conventional wisdom is that this is a poor choice, because with tax benefits, investors can usually beat the borrowing costs with a mix of equities and bonds.  The first trade-off is that these owners give up their deduction on home mortgage interest. The payback definitely includes some peace of mind.  Living debt-free is highly appealing, and knowing that you have a secure home over your head is a great way to feel better in any recession.

Then again, doing means that a borrower with a mortgage paying 6 percent interest is probably getting an effective rate of return of at least 4.5 percent.  It’s a guaranteed return, as well.  That is hardly dramatic, but its a prospect that looks a lot better than many other investment opportunities available out there right now.