Mortgage Rates Soar, Cash Buyers Score: The New Homebuying Playbook

BY Benzinga | AGENCY | 01/30/24 03:15 PM EST

Rising mortgage rates in 2023 drove the number of U.S. home loan applications to 28-year lows ? but not all potential buyers were put off by rising costs, as cash sales became increasingly popular.

The average 30-year mortgage rate rose to 6.69% in the week to Jan. 25, according to data from mortgage brokerage Freddie Mac. That was up from 6.6% in the prior week.

Having dropped steadily from October’s 7.79% high on hopes of Federal Reserve interest rate cuts in the first half of 2024, mortgage rates have risen in three out of the last four weeks as doubts have begun to creep in about the timing and depth of anticipated rate cuts.

Also Read: Homebuilder Shares Hang In Balance As Credit-Stretched Consumers Await Rate Cuts

Cash Sales Growth

Therefore, for those who possess or can secure it, cash has grown to be a favored method for purchasing a home.

Property data provider ATTOM, said that the national average share for cash sales rose to 38% in 2023. That was up from 36.1% in 2022 and from 33.5% in 2021.

ATTOM said: “This upward trend reflects a broader shift in the real estate market that could be attributed to several factors, including a post-pandemic economic recovery, and a significant influx of investors into the housing market, or possibly a response to tighter lending standards.”

Nevertheless, 2023 was a mixed year for housebuilders. D.R. Horton (DHI) reported last week that it sold more homes than in 2022 and its revenues were higher, but this top-line growth came at the expense of margins and earnings as the company increased sales incentives and discounts.

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Indeed, buying in cash is usually one of the most discounted payment options for large transactions.

Shares, however, performed well as investors noted increased sales and growing homebuyer activity. The iShares U.S. Home Construction ETF (ITB) whose top holdings are D.R. Horton (DHI), Lennar (LEN) and Pulte Group , gained an impressive 67% over the year.

Homebuyers Stretched

But it was a difficult year for most homebuyers ? notably, those who don’t have the cash to buy outright.

In addition to high mortgage rates, house prices ? before discounts ? rose to near record levels in 2023, while short supply meant increasing competition for houses on the market.

The data on cash sales compiled by ATTOM showed that the metropolitan area that enjoyed the biggest share of cash sales, at 61.5%, was Macon, Georgia, closely followed by Naples, Florida with 58.9%.

Now Read: Why Builder D.R. Horton Shares Are Diving Today Why Builder D.R. Horton (DHI) Shares Are Diving Today

Photo: Shutterstock

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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