Record two in five homes sold for cash in Santa Cruz County in 2023

A record share of houses sold for cash in Santa Cruz County in 2023, underscoring the struggles first-time homebuyers face in a challenging real estate market that prefers those with deep pockets.

Last year, nearly 40% of homes went for cash in the county, up from around 26% five years ago in 2019, according to figures provided to Lookout by property-data service ATTOM. Last year marked the highest percentage of cash purchases recorded in ATTOM’s data going back to 2005, the earliest year of available information. 

Cash purchases have grown at a faster pace in Santa Cruz County than the state overall since 2019. Some 32% of home sales across California were cash purchases in 2023, up from 23% in 2019.

The share of cash sales is rising in Santa Cruz County even as overall home sales are declining in the county, in large part because of the limited inventory of houses available, said Carol VanAusdal, president of the Santa Cruz County Association of Realtors and a real estate agent with 24 years of experience. She said sales of single-family homes in Santa Cruz haven’t been this low since 1992.

There were just 2,019 listings and 1,481 sales in the county last year, down from 2,736 listings and 2,149 sales in 2019, according to the local realtor association. Building new homes is slow, and homeowners are unlikely to sell because of how desirable it is to live here.

“That’s just the seller’s market we are in,” VanAusdal said. “You don’t just put up houses overnight.”

Cash buyers often purchase more expensive properties, local realtors say. Homes that sold for cash in Santa Cruz County fetched an average of $1.24 million in 2023, according to ATTOM data, compared to $1.14 million for financed purchases. 

Realtors say a number of factors are driving up cash purchases in Santa Cruz County even as its real estate market faces an overall slump.

High interest rates are making mortgages more expensive for buyers who require financing. That is creating a major barrier to buying a home, which realtors say is inflating the popularity of cash purchases because mortgages are often unaffordable.

“I have a lot of friends that want to be able to make that purchase happen, and just with high interest rates right now and some more cash offers being made out there right now, it’s very tough,” said Nick Bailey, a third-generation agent with Bailey Properties, which sells homes across the county and manages vacation rentals. 

The interest rate barrier

Inflation, job creation and whether the economy is growing or shrinking all shape the cost and availability of mortgage credit, but the federal funds rate set by the Federal Reserve, the central bank of the United States, strongly influences the rates lenders charge by effectively making loans more or less expensive.

To tame inflation following the pandemic, the Fed left rates unchanged at 5.25% to 5.5% in January after raising them in July to the highest levels in more than two decades. In March 2022, rates stood between 0.25% to 0.50% before they were raised nine times to current levels. The Fed signaled it would cut rates this year if the downturn in inflation that started late last year continues. 

The uptick in rates in recent years is presenting hurdles for homebuyers. Just a 1-percentage-point increase in mortgage rates can add $200 to monthly housing costs based on the price of an average home in the U.S. That figure goes even higher in California, which has some of the priciest homes nationwide, said ATTOM Chief Executive Rob Barber.

For example, he said buying a median-priced $695,000 home in California in 2023 with a 10% down payment and a 6.5%, 30-year mortgage would result in principal and interest of about $3,950 a month. At 7.5%, that rises to around $4,375 and results in $5,100 more spent over an entire year.

“Since most of the mortgage payments early in a loan go to paying interest instead of principal, a cash purchase can free up money that otherwise would have done little to build up equity,” Barber said. “For cash buyers looking to rent out the homes they buy, that can mean the difference between a profit and loss.”

What are the advantages of buying a home with cash?

The challenging market presents opportunities for wealthy people and troubles for first-time homebuyers.

In Santa Cruz County’s competitive real estate market, cash bidders have an edge: Homes bought for cash don’t require loans, appraisal or inspection from banks, insurance rules are laxer and a deal can close in as little as a week. Thanks to those advantages, cash bidders often get deals cut down by $10,000 or more.

“When I represent a buyer and we know that there are cash offers, the clients always say, ‘Well, we don’t have a chance,’” VanAusdal said.

The competition between cash and mortgage bidders presents realtors with deals that force them to weigh their sympathy for less-wealthy, often first-time homebuyers against the reality of what is in the best financial interests of their client selling the home. The cash offer usually wins out.

“You almost always, and sellers almost always, want a sure thing,” said Benjamin Strock, who leads an Aptos-based real estate team.

“We would love to have a young family to be in that property because it would help our community and build our community, yet at the same time, we have to present it in a fair light, which is: ‘Hey, look, even though we would love to have this, it probably in your best interest still to go with the cash buyer due to simplicity and guarantee,’” he said.

Cash bids are so advantageous that some lenders have started offering loans that are structured so homebuyers can offer cash up front in order to better compete with all-cash buyers. Still, realtors say these sorts of arrangements represent a small fraction of the cash sales that are registered in Santa Cruz County.

Who is buying homes with all cash? Look to Aptos.

Aptos, the county’s hottest real estate market, was the only area to notch more than half its home sales in cash in 2023, according to ATTOM’s ZIP code data. It reached around 53% cash sales in 2023, up from 44% in 2022. The 95003 ZIP code accounted for 168 of Santa Cruz County’s 739 cash home sales, or 23%.

“The term in real estate is ‘cash is king,’” said Strock.

Second-home buyers and primary-home buyers in the higher end of the Aptos market are the main people paying all cash, realtors say. They are typically couples in retirement age coming from wealthier parts of the state, mostly Silicon Valley, Strock said. He said it is often a “lateral or downsizing move,” where people sell their paid-off homes and pay cash for a new house.

“They are almost all [people from] higher-wealth areas that are moving here,” Strock said. “When somebody sells here, they are often moving and leaving to go to a less expensive area.”

Aptos is also attractive to second-home buyers because of its popularity for vacation and short-term rentals, Bailey said.

“Aptos particularly has a lot of second homes, especially in those beach neighborhoods,” he said.

What will cash sales be like in 2024?

Realtors say cash could loosen its grip in 2024 and 2025 if the Fed slashes rates.

“We’ll see this all-cash number go down,” said VanAusdal. “There’s a lot of pent-up demand out there.”

Bailey, however, said he doesn’t think cash will lose much of its share. He said he expects the percentage of cash purchases to remain at similar levels in 2024 because it is unclear what the Fed might decide and how inflation might change. 

“I don’t foresee a large change there at least this year,” he said.

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