Cash Purchases for Homes Hit 20-Year High as First-Time Buyers Struggle

For the first time in 15 years, homebuyers are paying for their new homes in cash more often than with a Federal Housing Administration (FHA) loan. The shift is making it even more difficult for first-time buyers to enter the housing market.

Since the COVID-19 pandemic, buyers have flocked to the housing market. Home sales have grown increasingly difficult as supply chain issues hinder new builds and the Federal Reserve continues to raise interest rates, sending average 30-year fixed mortgage rates skyrocketing to more than 7 percent according to Bankrate, as compared to under 4 percent in 2020. Paying cash for homes makes the market even more competitive, as it lowers the risk for the seller and leads to more eagerness to close on a cash deal. The atmosphere has challenged new buyers regardless of their income sector, even if they are equipped with FHA loans, which are insured by the government and require a lower down payment for homebuyers.

A report from the National Association of Home Builders (NAHB) showed that 9.5 percent of new home purchases in the third quarter of 2022 were made with cash, whereas FHA loans were only used for 7.5 percent of new home purchases. Nearly 80 percent of buyers financed their homes through a conventional loan, with a sparse amount financing through a Veterans Administration (VA) loan.

David Logan, NAHB director of tax and trade policy analysis, told Newsweek in an email that he isn't surprised new home sales financed with FHA loans declined while conventional loan shares increased. However, he described the "precipitous" drop in the number of FHA-backed new homes as eye-opening.

FHA loans dropped by 20 percent from 2020 to 2021 and again by half from 2021 to 2022. Now, for the first time since 2007, cash purchases have outnumbered FHA-backed purchases. NAHB's blog on the topic showed the median price for cash-purchased new homes was $494,200, the second-highest median price on the list. Conventional loan purchases topped the list. The median price for FHA loan purchases was much lower at $340,300.

Logan attributed the skewed financing for new homes to the record appreciation of home prices and the surge in mortgage rates. He said the factors have nearly evaporated a starter home market, with only 11 percent of new homes priced under $300,000 in 2022 compared to 38 percent in 2020 and roughly 50 percent in 2015.

However, Logan said income isn't the dominating factor in the home market. Instead, current homeowners, regardless of income, are leading the sales.

"Record home equity has benefitted owners across the income spectrum," he said. "The evaporation of the starter market, however, is preventing many middle-income households from reaching the first rung of the homeownership ladder, thus significantly slowing churn in the market."

Logan said it isn't a "pretty picture" for prospective first-time homebuyers. And although numbers didn't single out middle-income buyers more so than high-income ones, Logan compared the situation to inflation, saying the market hit buyers who can least afford it.

"But it's one worth watching," he said. "As it will improve as lingering effects of the pandemic fade."