Roughly one-third (31.2 percent) of U.S. home purchases were paid for with all cash in December, according to a new report from Redfin.
That’s up from 28.8 percent a year earlier but down from the eight-year high of 31.9 percent in November.
The share of homes bought with cash remains above pre-pandemic levels because mortgage rates are high, averaging 6.36 percent in December, according to Redfin. Buyers who can afford to pay cash are motivated to do so because it means they don’t need to pay high interest on a loan.
The typical monthly mortgage payment is up about 25 percent from a year ago, when rates were around 4 percent.
All-cash purchases are common when mortgage rates are high and when the housing market is competitive, motivating affluent buyers to pay cash to entice sellers to accept their offer. The latter explains why the prevalence of all-cash purchases shot up in late 2020 and remained elevated throughout 2021.
Nearly one in six (15.6 percent) mortgaged home sales nationwide used an FHA loan in December, up from 12.5 percent a year earlier and the highest share since May 2020.
VA loans have also become more common, with 7.1 percent of homebuyers who took out a mortgage using one in December. That’s up from 6.2 percent a year earlier and the highest share since July 2020.
FHA loans—and VA loans, to a smaller extent—became increasingly prevalent in the second half of 2022 as the overall housing market cooled considerably due to rising mortgage rates and buyers gaining more negotiating power, Redfin data shows.
That came after use plummeted in 2021 amid the ultra-competitive pandemic housing market. The share of mortgaged home sales using an FHA loan fell to a record low of 10.4 percent in April 2022, while VA loan usage bottomed out in March and April 2021 at 5.5 percent.
FHA-financed buyers are more likely to get their offers, which tend to include small down payments, accepted in a cool market where there is little to no competition from buyers with higher down payments and perhaps more desirable financing terms, Redfin said. In a hot market, sellers often choose all-cash buyers or those using conventional loans because they believe those deals are more likely to close quickly and efficiently.
“Buyers are successfully using FHA loans more often now because sellers are eager to jump on any offer they get when their home sits on the market and gets just one or two showings a week,” Redfin Senior Economist Sheharyar Bokhari said in a release. “That means buyers with less money in the bank are finally able to win homes. But it’s not all good news for FHA buyers: Their loans are getting accepted because the market is slow, and the market is slow because high rates and prices make it unaffordable for a lot of people.”
Conventional loans remain the most common type by far, though other loan types are cutting into their share. Just over three-quarters (77.3 percent) of December’s mortgaged home sales used a conventional loan, down from 81.2 percent a year earlier and the lowest level since June 2020.
The use of FHA loans increased in 33 of the 40 metros in this analysis. It increased most in Riverside, Calif., where 26.3 percent of mortgaged home sales used an FHA loan in December, up from 16.3 percent a year earlier. Next came Phoenix (18.2 percent, up from 9 percent), and Las Vegas (21.8 percent), up from 13.6 percent).
FHA loans were most common in Riverside, Detroit (25.1 percent) and Cleveland (21.9 percent) in December. They were least common in expensive parts of California. Just 1.1 percent of mortgaged home sales in San Francisco used an FHA loan, followed by 2.3 percent in San Jose and 3.6 percent in Anaheim.
VA loan usage has also increased in 33 of the metros in this analysis, with the biggest upticks in San Diego, Virginia Beach, Va., and Jacksonville, Fla., all home to major military bases. Those are also the places VA loans are most prevalent (Virginia Beach: 43.1 percent; Jacksonville: 20.7 percent; San Diego: 19.5 percent).
The prevalence of all-cash purchases rose in 30 of the metros in Redfin’s analysis. The biggest increase was in Riverside, Calif., where 35.4 percent of homes were bought in cash, up from 22.3 percent a year earlier. Next came Cleveland (43.6 percent, up from 32 percent) and Philadelphia (35.9 percent, up from 26.2 percent).
Overall, all-cash purchases were most common in Florida. Over half (52 percent) of West Palm Beach purchases were made in cash, followed by roughly 45 percent in both Jacksonville and Miami.