How rich homebuyers are avoiding high mortgage rates

The all-cash deal is back in vogue for homebuyers, a shift that favors the wealthy.

Luxury housing markets in New York and Florida are boasting near record-high shares of transactions paid in cash, according to first quarter data from real estate appraisal and consulting firm Miller Samuel Inc.

That represents a sharp reversal from more mortgage-dependent deals during the pandemic, when interest rates were considerably lower.

“These people have the privilege and the leverage,” said Jacky Teplitzky, who leads a Douglas Elliman brokerage team that serves the New York City, South Florida, and Hamptons luxury housing markets.

“They are saying to themselves, ‘OK, I’ll buy cash and when interest rates go down, I’ll refinance and take my money out.'”

Well-heeled buyers are just as averse to today’s higher mortgage rates, currently above 7%, as everyday home seekers. They simply have the means to circumvent rates more often than those with smaller budgets.

Read more: Mortgage rates top 7% — is this a good time to buy a house?

All-cash transactions are on the rise across all price points. The share of all-cash purchases in the US in the first quarter of the year was a monthly average of 31%, according to data from the National Association of Realtors (NAR). That matches the highest monthly average for any full year since 2013.

But the numbers are considerably higher in places like Manhattan, one of the nation’s best-known luxury markets. In the first quarter, 63.4% of Manhattan sales were all cash, the third-highest share in a decade, according to Miller Samuel. Meanwhile, the share of mortgage transactions was the lowest on record.

A normal Manhattan market, where the average sales price for luxury homes was $7.5 million in the first quarter, would be “50% cash and 50% finance,” said Jonathan Miller, president and CEO of Miller Samuel Inc.

The story is similar in some of Florida’s ritzier markets.

All-cash sales made up 85.7% of all transactions in Royal Palm and Boca Raton, Fla. — above the decade average for the first quarter. The average sales price there was nearly $10.9 million.

In the Florida coastal towns of Manalapan, Ocean Ridge, and Hypoluxo Island, 92.9% of all sales — with an average sales price of $9 million — were in cash, the second-highest share in a decade.

And in Miami Beach, the all-cash market share for luxury condos — sold on average for $6.5 million — hit a fresh high in the quarter.

“Cash isn’t exclusive to the wealthy, but the probability increases as you move higher in price,” Miller said, “because of equity withdrawals from the booming stock market and other assets that they can leverage to make the purchase.”

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And in the first quarter, the S&P 500 did boom, jumping just over 10%.

In a different market, these well-off homebuyers may have tapped a line of credit backed by their stock portfolios to make a purchase, Teplitzky said, a transaction that would still be considered all-cash by the seller.

But that’s become less palatable with higher interest rates — along with taking out a mortgage.

In a lower-rate environment, others may have paid all cash, but refinanced soon after to capitalize on a tax or other wealth strategy, Miller said.

“They buy a $10 million apartment and then they get a $1 million or $1.5 million mortgage after they close because their advisers told them to,” he said. “That’s very common, but you’re not seeing that as much either because of where rates are.”

But there are some advantages to buying now with cash. Both Miller and Teplitzky expect prices to continue to go up, especially if mortgage rates moderate, so buyers now are getting a better deal than waiting for later.

Buyers with cash may also get a better deal. A recent study from the University of California San Diego Rady School of Management found that all-cash buyers pay 10% less on average than mortgage buyers.

All-cash offers also stand out in a bidding war, Teplitzky said, because bids that depend on financing are not a sure thing.

“But if it’s an all-cash deal, you’re basically guaranteed that you’re going to get to the closing table,” she said.

While affluent buyers are more likely to have the financial wherewithal to pull off an all-cash deal, these types of…