Is cash really king? It looks that way in the Palo Alto real estate market.

Between January and the end of May this year, 133 properties were sold in Palo Alto, and 56 (42%) were sold for cash.  The same period a year ago, 38% of home sales were to cash buyers.  This rising trend is mirrored throughout Silicon Valley – and throughout the United States, although to a lesser extent.

Why get a mortgage when you’ve got the cash?

Since the real estate market recovery began in earnest in 2012, $3.8 trillion in home value has been returned to owners, who are using the equity to pay cash for new homes.  Data from Bloomberg shows that 29% of non-investment home buyers in the U.S. bought with all cash, which is the highest percentage on record for any year’s first quarter.

But while there is some parallel in cash buys between Palo Alto and the rest of the country, there’s one trend this city isn’t keeping up with: a great increase in the number of homes on the market.

For example, comparing April 2014 with April 2013, here’s what’s happened in some U.S. metro areas:

  • Buffalo-Niagara Falls, N.Y.: inventory up 78.9% over 2013
  • Orlando, Fla.: up 78.2
  • Orange County, Calif.: up 70.3%
  • Bakersfield, Calif.: up 66.5%
  • Chattanooga, Tenn.-Ga.: up 66.4%

In April this year, the inventory of homes in Palo Alto was up 28.26%.  And with more all-cash buyers moving into the market, the available inventory isn’t lasting long.  In fact, only three of the 61 homes sold here in April 2014 sat on the market for more than 60 days.  Two of the homes were sold within 24 hours.

Where the cash is coming from

So who are all these cash buyers?  Within the country as a whole, the majority are retiring baby boomers, according to the National Association of Realtors.  This huge generation is now beginning to retire and using the equity they’ve built up in their homes to relocate, downsize or purchase second homes.  The number of Americans over 60 has jumped from 46.6 million in 2000 to 61.8 million in 2012.

In Palo Alto – and Silicon Valley, for the most part – a big influx of cash buyers are also foreign investors and relocaters.  The majority of these are from Canada and China.  And with the healthy tech industry here, we’re seeing many newly promoted and newly hired top-level executives who have the money to pay cash for many of the homes on the market.

Increasing numbers of cash buyers make it more challenging for buyers who carry loans, because sellers very often – but not always – prefer offers that involve only cash.  As more baby boomers move into retirement, there will likely be more all-cash home buying: nearly 60% surveyed in this the largest generation in history said they plan to move out of their current home at one point (i.e., their current home will not be their retirement residence).

That coupled with Palo Alto already being a highly desirous community and a hot target for single-family home investments could keep the all-cash trend moving strong for years to come.

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