In a dwindling market, cash really hurts appraisal business

BY LEW SICHELMAN, CONTRIBUTOR, NATIONAL MORTGAGE PROFESSIONAL MAGAZINE

Like the old grey mare, the mortgage business ain’t what she used to be. High interest rates — above 7% at this writing — and ever rising housing prices — a median of $396,000 in May — have seen to that. Both have forced would-be sellers as well as wanna-be buyers to the sidelines: sellers because they balk at paying a higher rate then they have now and even if they were willing, there isn’t much to buy. According to Redfin, fewer houses were for sale in May then at any other time since 2012.

The impact has been severe. Numerous lenders have shut down, sold out or cut their workforces to the bone. According to the latest Bureau of Labor Statistics report, the bloodbath that followed resulted, at last count, in some 50,000 poor souls who have lost their jobs in just the last 12 months.

At the same time, property data provider ATTOM reports that lending in the first quarter was down 70% from the same period two years earlier. Lending was at its lowest point in Q1 since late 2000, and it was down, although not evenly, in every facet, from purchase money mortgages to refinancings.

But there’s another factor besides high rates, high prices and low inventories at play here: cash buyers.

Things Not Needed

Of course, everyone is a cash buyer at closing, whether they have financing or not. But true cash buyers, those who don’t need a mortgage, now account for roughly a third of all transactions. And when you don’t need a loan, you don’t need title insurance, mortgage insurance and possibly not even an appraiser.

According to the Census Bureau, 11% of all new home sales were for cash in last year’s fourth quarter. That’s the highest share since 1990 — 32 years! And according to the latest from the National Association of Realtors, 78% of 2022’s existing home buyers financed their deals, down from 87% the previous year. That leaves 22% who went commando.

“I talk to agents (from all over the country) every single day,” says Denise Lones, a sales trainer based in

Bellingham, Wash., “and they all are saying the same thing: ‘There’s an awful lot of cash these days.’”

There’s good reason to pay cash. Because there are no lenders involved, it puts you at the head of the line, as in cash buyers are gold. But at the same time, it might not be such a smart idea to put everything you’ve got into a illiquid asset that cannot be traded like stocks and bonds. And as long as the financed buyer does his homework, like obtaining a preapproval and passing on a laundry list of contingencies, he should be just as solid.

This isn’t to debate the pros and cons of buying with cash, though. Rather, it is to take a deeper dive into the impact cash sales have had on companies and people all along the mortgage food chain.

First, however, there seems to be some disagreement on the impact of cash deals on overall lending. While some — like Lones — say it has been severe, others saying the same. “The data from the Realtors Confidence Index is directly from a member survey,” says Jessica Lautz, second in charge of NAR’s economics department. “They are reporting higher shares” of cash sales.

Pushing aside this ongoing debate, let’s look at the impact all-cash deals have had on the mortgage food chain:

Mortgages — If the above figures from ATTOM don’t resonate, here’s this from the Mortgage Bankers Association’s first quarter performance report, courtesy of analyst/advisor Joe Garrett: The loss per loan was 67 basis points. That’s down from a 99-tick loss in last year’s fourth quarter. But lenders are still losing money when they write a mortgage.

Refinancing is all but gone! Not as many people are buying houses! And a third of those who do buy pay with cash! “It’s a triple whammy,” says Michael Isaacs, CEO of Columbus, Ohio-based discount the affect. “Nothing major in the overall scheme of things,” says ATTOM CEO Rob Barber.

Doubled But Down

While cash deals have doubled, they’re only responsible for about 20% of all transactions, which have declined substantially, Barber believes. In hard numbers, he believes the actual quarterly number of cash sales has declined by half, from 500,000 to 250,000. So, while cash money is “helping somewhat” to drive down lending, he says, “it doesn’t look like a major factor.”

Redfin’s latest figures seem to confirm that. While cash deals were down 35% year-over-year in April, overall sales were off 41%. But a a third of the places that did sell went for cash, the highest share in nine years. And NAR’s members are

GO Mortgage, which has actually grown its business by adding loan officers picked up from other companies. “That’s just one more customer we don’t have.”

Meanwhile, a small survey by payroll data company Everee of just 314 commission-based industry professionals — managers, loan officers, processors and underwriters, half of whom had been in the business for more than five years — found that 60% are living from paycheck to paycheck. Moreover, a third of them plan to exit the field in the next 12 months while 15% more haven’t made up their minds.

Mortgage Insurance — The type of home buyer who needs private mortgage insurance is not typically the type who pays with greenbacks. First-timers who have trouble scraping a few nickels together for a downpayment need mortgage insurance, while move-up buyers taking a passel of equity with them from the sale of their former residence are the most likely to pay cash.

Of all the loans purchased using private MI last year, 62% supported first-time buyers, reports Brian Berry, a spokesman for the US Mortgage Insurers trade group. Consequently, the MI business doesn’t slump much when cash buyers proliferate. And that’s why the MI business enjoyed its third best year ever in terms of colume in 2022.

At the same time, though, a surprising 6% of all first-timers paid cash in 2021, NAR reported in May of that year. And it’s likely a similar number are currently paying cash, if not more. So the business has been impacted, if only minimally.

Title Insurance — It’s hard to get a handle on title insurers. The American Land Title Association has no economist on staff, so the group does not produce much in the way of statistics. But spokesman Jeremy Yohe told me he doesn’t think all-cash sales have had much of an impact. “I don’t think it is any greater than during the run-up to the Great Recession,” he said. “Nominal.”

Because title practices vary from state to state, cash deals have had little to no affect in places like Texas where sellers have traditionally paid for the buyer’s coverage. But in markets where buyers pay, title companies usually get two shots at the brass ring — once for the lender’s policy and once for the buyer’s. And when someone pays cash in those places, insurers lose at least the lender-policy share.

Chrissy Ziccardi of SingleSource Property Solutions, the Pittsburgh-based settlement firm, says her company has seen an increase in business recently, largely because it can close deals far more quickly — 16–20 days vs. 30–45 days when