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This, I Don't Believe

posted by Bob Lawless

My friend, Frank Venis, sent me a link to a Planet Money/NPR story that 42.1% of home purchases are now in cash. I have been meaning to write up a quick post on the story since the story appeared, but my day job kept interfering.

The graph from the story is key. It is not my graph, so you will have to click through to see it. I just don't believe the data, which are from RealtyTrac. The jump in (what appears to be) July is too dramatic and out of character with the rest of the moves in the data series. The RealtyTrac report attributes the rise to increasing interest rates, but according to the same report interest rates on 30-year fixed mortgages are at or below what they were at the beginning of the time series in January 2011. Previous moves in the 3o-year fixed rate have not been associated with changes in the percentage of cash sales of the same magnitude.

The simplest and probably more likely explanations are a discontinuity in the data series. Was there a change in how the data in cash sales were collected or was there a change in how that variable was defined? RealtyTrac normally does a reasonably decent job of collecting and reporting data. The company's report does note a change in how short sales were defined but nothing about cash sales.

Comments

30 year rates may be below what they were January 2011, but they are far above where they were in mid 2012 (when they bottomed out at about 3.25%).

Something strange is going on, that's clear. Interest rates have risen, but are still very low from an absolute level--it still makes a lot of sense to finance a home purchase intended for a long-term residence, especially as the Fed pulls back its support of the economy and rates rise. If cash sales went from 20% to 42% of the market, one would expect to see falling home prices (unless there were lots of offsetting factors). That doesn't seem to have happened yet, although we do get home price data with a lag.

I would be curious to know what percentage of the "cash" sales end up with a mortgage on the property. I imagine many investors initially pay in cash and then get a loan to replenish their cash reserves for a subsequent purchase.

Also, props to Julia Zhu for incorporating a Wu-Tang reference into a real estate finance article.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, visit http://listserv.uiuc.edu/archives/bankr-l.html and click on the link for "Join or leave the list." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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