Is the Fed’s Low Interest Monetary Policy Resulting in More Cash Purchases?

March 5, 2012 (Shirley Allen)

You would think that with mortgage rates hovering near their all-time record lows for the last four months, more home buyers would be taking advantage of the low rates and finance their new home purchases instead of paying cash, but evidence points to the contrary.

One of the consequences of the Federal Reserve’s low interest monetary policy is that it also results in a low rate of return on money deposited in the various types of saving accounts available at banks.

Saving accounts can pay as low as 0.01 percent interest, while a six month Certificate of Deposit typically pays only about 0.45 percent interest and even a one-year Certificate of Deposit typically only pays around 0.75 percent interest.

With such a low rate of return on money, it has now become advantageous for some home buyers to forego today’s low mortgage rates and shop with cash according to the latest results of the monthly Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.

The survey found that the percentage of current homeowners who were looking to either downsize, upsize or who were relocating, and who used cash to purchase a new principal residence, increased from 25.8 percent in October to 29.0 percent in January.

Ironically, the increase in cash purchases began to occur right around the same time period that the Federal Reserve announced that its low interest monetary policy would remain in place for the next several years.

Thomas Popik, research director for Campbell Surveys, stated, “”Both mortgage rates and certificate of deposit rates have been very low for some time now. But when the Federal Reserve explicitly said that bank rates will remain low for several more years, I think a lot of affluent homebuyers just threw in the towel and decided to use all cash.”

By contrast, cash purchases by both investors and first-time homebuyers have remained flat during that same time period. Campbell Surveys estimates that if the current rate of cash purchases remains, almost 50 percent of current homeowners will use cash to purchase homes by the end of 2012.

And more cash purchases could also have a negative effect on home prices. Recent surveys have suggested that all-cash buyers can obtain higher discounts compared to buyers who have submitted offers with mortgage financing contingencies, especially when it comes to buying distressed properties.

Additionally, in the latest survey, the HousingPulse Distressed Property Index reports that through the end of January, distressed properties accounted for 46.8 percent of home purchases using a three-month rolling average. It was the 25th consecutive month that distressed property sales had accounted for over 40 percent of all sales.

Tags: distressed properties, REO, move-in ready, damaged, foreclosure, short sales, cash purchases

Source
Campbell/Inside Mortgage Finance