Cash Crash: All-Cash Offers Tumble As Housing Market Shifts

Remember the crazy housing market during the pandemic when investors with bulging wallets swooped in, buying houses with piles of cash?

Now, things are starting to cool down. Investor cash purchases dropped to 64% in the first quarter of 2024, according to a recent Realtor.com report. That's a big change from late 2021 when 69.7% of investors paid in cash to win bidding wars, and it's the lowest share of cash buyers since 2008.

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This is great news for regular homebuyers. With fewer all-cash offers pushing up prices, the market might be fairer for ordinary people. This could mean more opportunities for buyers who need mortgages and maybe even an end to those crazy bidding wars.

Despite rising interest rates, the shift toward financing among investors is largely driven by the increasing dominance of small-scale investors. Small investors – those with 10 or fewer home purchases since 2001 – accounted for 62.6% of investor purchases in the first quarter, according to Realtor.com. This marks the highest proportion of small investors in the dataset's history, indicating a significant change in the investor landscape.

G. Brian Davis, a real estate investor and co-founder of property management software SparkRental, believes the rise of individual investors is a positive development.

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"It's better for everyone involved that institutional money is withdrawing from the single-family home space," Davis said. "It creates less artificial demand among buyers, therefore reducing some upward pressure on prices. It also leaves room for mom-and-pop investors to operate."

Brie Schmidt, owner and managing broker of Second City Real Estate in Chicago, reports that most of her deals now involve individual investors who rely on financing rather than cash purchases.

"If an investment property in your market costs $200,000, you can buy one in all cash or put 20% down and buy five properties with the same amount of money," Schmidt said. "It makes sense to maximize your capital and acquire more cash-flowing properties through financing."

Financing a home purchase offers several benefits, including tax deductions on mortgage interest. Financial incentives also can provide investors with a competitive edge.

"Last year, a [Fannie Mae] program came out that allows 5% down on two- to four-unit properties if you occupy it for one year," Schmidt said.

In the Chicago area, house hacking is a popular strategy among investors. They often purchase multiunit properties, live in one unit and rent out the others. Once they've built equity and rental income, they typically sell, reinvest the proceeds in another property and repeat the process, Schmidt said.

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