From the WSJ:
When cash is trash, the housing market is happy.
That was the case during the mid-2000s boom when lenders required little or no money down. It is also true today, but for different reasons: Not only has unprecedented central-bank stimulus kept mortgage rates artificially low, it has pushed record numbers of financial investors to buy into housing.
More recently, interest rates have risen since talk began in May that the Federal Reserve could “taper” its bond-buying activity. Combined with rising prices—they are up about 12% year over year on average nationwide—it has helped push a measure of housing affordability developed by the National Association of Realtors to a five-year low.
Higher rates usually hit home sales with a lag, making data on pending home sales from the NAR—the next reading is due Monday—a key tool in gauging buying momentum. With the proportion of homes being sold for cash rising, it is now a more reliable housing barometer than weekly data on mortgage applications.
A report this summer by Goldman Sachs estimated 57% of residential-home sales through 2012 and early 2013 were paid for in cash compared with just 19% in 2005. That is despite the fact that the average 30-year mortgage rate so far this year is nearly two percentage points lower than back then.
Interestingly, the surge in cash buying hasn’t blunted a steep drop in pending sales. They fell in September for a fourth consecutive month to the lowest level since last December.
The NAR sees home sales next year staying at about this year’s level while mortgage rates end 2014 about a percentage point higher than today and two points higher than this past spring.
Based on recent trends, it may have to trash that forecast.