30% of Home Purchases This Year Were Paid for in Cash

In today's housing market, buyers who can't pay cash are at a clear disadvantage.

There's a reason the mortgage industry exists. Most home buyers don't have enough money to cover the entire cost of a new home -- especially in today's housing market, what with home prices being so inflated.

But actually, a lot of buyers are skipping the mortgage process this year and are buying homes in cash instead. In fact, 30% of all U.S. home purchases in 2021 were cash transactions, reports Redfin. That's an increase from 2020, when 25.3% of home purchases were done on a cash basis.

Why are buyers paying cash?

Paying cash for a home has its drawbacks, even for those who can afford it. When you buy a home in cash, you tie up a lot of money in an asset that's fairly illiquid.

Liquidity speaks to how easily and quickly you can get your money back on an investment. Stocks, for example, are fairly liquid. You can sell a stock and get cash for it almost immediately.

Selling a home, on the other hand, can be a lengthy process. You need to create a listing, have buyers come see it, evaluate offers, and then wait for a real estate transaction to close, which could take weeks or even months.

It's for this reason that so many buyers take out mortgages to purchase a home, even when paying cash is an option. But this year, the housing market has been starved of inventory, and what few homes have hit the market have largely wound up in bidding wars. By offering to pay cash, buyers give themselves an advantage over their competitors -- namely, those who need a mortgage to finance a home.

Sellers tend to favor cash offers over offers from buyers who need a mortgage because there's less risk with cash. If a seller accepts an offer and a buyer's mortgage falls through, that seller may have to wait weeks to get that property sold. Cash offers are more of a sure thing.

How to compete with a cash offer

While cash offers may have grown popular this year, you may not be in a position to make one. If that's the case, one of the best things you can do is get a pre-approval letter from a mortgage lender.

A pre-approval letter technically doesn't guarantee you a mortgage. But what it does do is show a seller that a lender has looked into your finances and determined you'd most likely qualify to borrow a certain amount, as indicated on that letter.

Another way to give yourself an edge over cash buyers? Offer to pay more. Cash buyers may not have much flexibility to make an offer above a home's asking price. On the other hand, if you're mortgaging the bulk of your home's cost anyway, you may have the leeway to go higher than the asking price. (But be careful not to go overboard because you don't want to pay way more for a home than it's worth).

Though cash offers may be more common in today's housing market, it doesn't mean everyone's paying cash. If you need a mortgage to purchase a home, don't stress about it. Instead, do everything you can to give yourself an advantage over the competition.