With mortgage rates above 7%, home buyers are still getting outbid by all-cash offers

With mortgage rates above 7%, home buyers are still getting outbid by all-cash offers, per MW.

During the pandemic housing boom, homebuyers reluctantly accepted the intense competition, especially from buyers impressing sellers with cash offers.

Many aspects of the housing market have changed since then, but the power of cash buyers, who can purchase without a mortgage, has only increased.

In April, cash buyers dominated the shrinking home sales market, commanding the largest share in nearly a decade. As the spring selling season began, those needing financing were often thwarted by rising interest rates, according to a report from Redfin this week. Cash buyers accounted for 33.4% of transactions in April, significantly higher than the approximately 25% seen over most of the past decade.

This data indicates that cash buyers are clashing with borrowers more than ever. The problem has worsened because the decrease in available homes is outpacing the slowdown in demand, Redfin reported.

On Thursday, Redfin noted that a 25% drop in new listings has reduced the total number of homes on the market by 5% year-over-year, the lowest levels for early June since they began collecting data in 2015.

The result: Some homebuyers are exiting the market even if they could handle the borrowing costs.

"Cash offers used to be an occasional nuisance, and now they're becoming disruptive to the market," said Debra Shultz, vice president of mortgage lending at CrossCountry Mortgage.

Shultz, based in New York City, shared a story with Insider about a potential borrower who made offers on several properties over a few months, only to be outbid or to lose out to cash offers each time.

"His last email to me was, 'I think I'm done with this market,'" she said. The customer expressed frustration, saying, "People are offering 20% above and all cash?!?"

Shultz is fighting the perception that cash offers are unbeatable. As long as the buyer is well-qualified and can assure the seller of a quick close, there should be no difference in the quality of that bid compared to a cash bid, she said.

In general, that's true, said Deanna Kory, a broker with the Corcoran Group in Manhattan. In New York City, sellers typically accept buyers who are clearly qualified for a loan as often as they accept cash buyers, she said.

From a seller's perspective, "the cash buyers are thrown in with the pool of people financing, and they have maybe an ever-so-slight edge," said Kory. She noted that a cash bid made a difference in one of her two most recent sales in Manhattan. In May, about half of all Corcoran's Manhattan sales were cash, which is higher than usual, she said.

This advantage for cash buyers may grow in the coming months as banks tighten credit, Kory said. Due to stricter underwriting, some banks have informed her clients to expect closings to take up to eight weeks, up from the usual four to six.

Shultz mentioned she's helping borrowers compete with cash buyers through CrossCountry's "fast-track approval," which completes all underwriting before an offer is made, leaving only the appraisal to be done before closing.