The cracks in the housing market are growing larger. But beware the all-cash buyer

What’s behind the cracks? For one, nearly 7% of home sellers dropped their asking price in the four weeks ending Nov. 5, which is the highest share on record (tied with the four weeks ending Oct. 29), according to Redfin. In an average month, 3.6% of homes lower their prices. 

Sky-high prices and what seems to be higher-for-longer mortgage rates are to blame. Home prices rose substantially during the pandemic-fueled housing boom, and the average 30-year fixed rate has more than doubled, making it increasingly difficult for the average person to buy a home. Sellers are taking notice as buyers pull back, and are lowering their asking price in response.

But there are other factors at play. Last week, the Federal Reserve decided against another interest rate hike after aggressively raising rates in an attempt to lower inflation. That’s partly helped bring mortgage rates down from their more than two-decade high of 8%. 

“Though rates are more than double pandemic-era levels and some homebuyers are still priced out of the market, rates going from 8% to 7.4% shaves a few hundred dollars off a monthly mortgage payment in many areas,” Dana Anderson, Redfin’s data journalist, wrote in the report published Thursday. 

That slight relief is coupled with the share of new listings rising. Inventory overall is still low, and that’s not likely to change substantially in the near future given that many sellers have locked-in historically low mortgage rates they don’t want to lose. But there has been an “unseasonal uptick” in the total number of homes for sale, which is now at its highest level since the start of the year, according to Redfin’s report. New listings rose 1.5% from a year ago during the four weeks ending Nov. 5, just the second increase since July of last year. 

Potential buyers might not want to celebrate just yet. It’s unclear if these areas of relief for buyers will continue into next year, as markets tend to soften in the fall and winter as demand cools and competition lessens.

Higher mortgage rates mean more all-cash buyers

And what little relief the average buyer may start to see could be usurped by wealthier buyers. With mortgage rates still above 7%—after hitting 8% for a short period— just over a third of homebuyers are paying all cash to avoid costly interest payments as of September. That’s up from 29.5% a year ago and the highest share in nearly a decade, according to a separate Redfin report by Anderson published Wednesday.

Those who can “afford to pay cash are more apt to buy homes in such an expensive housing market, when the income necessary to buy a home is higher than ever before, and elevated mortgage rates make buying a home in cash and avoiding interest altogether more attractive,” Anderson wrote. 

To wit: overall home sales are down 23% year-over-year in the metros included in Redfin’s analysis, versus an 11% decline for all-cash sales during the same time period. First-time buyers and other average Americans are more likely to be on the losing end of that equation.

“Affluent Americans are the only ones who can avoid the sting of high mortgage rates; plus, they’re spending less on housing and keeping more money in the bank because they’re avoiding interest payments,” Sheharyar Bokhari, Redfin’s senior economist, said in the report.  “Meanwhile, those who are sidelined by high prices and rates not only can’t afford a home now, but they’re not building wealth through homeownership for the future.”

The last time all-cash purchases were this common was back in 2014, according to Redfin, when affluent buyers and corporate investors were leading the housing market recovery from the subprime mortgage crisis. Would-be first-time homebuyers, on the other hand, were still suffering from the effects of the Great Recession.