Cash buyers starting to dominate the housing market

The housing market is on a glide path to recovery, more or less, and I have proof of that in a key metric from the National Association of Realtors.

The key reasons for the housing crisis can be boiled down to speculative lending and overbuilding. While no one knows the exact number, it’s possible that up 10 million too many homes were built during the bubble.

It will take a while to recover from that excess. Thankfully very few new homes were actually built during the last six years. That lack of new construction actually starts the healing process, as natural population growth can now eventually soak up the excess supply.

In the midst of that process, some unusual things are going on: People with money are sensing that we’re at an inflection point in the housing market and they’re buying with all cash.

The National Association of Realtors reports that of all homes purchased in December 2011 — either owner occupied or as an investment property — a full one-third were paid for 100% in cash.

Now, you may be sitting there thinking, “Cash? Who has cash?!” But historically, about a third of all homes were owned free and clear without a mortgage payment. So people with a lot of cash have always been part of the equation.

What you have is a situation where there are a lot of average folks sitting on the sidelines with their cash earning 1% in a bank somewhere. They want a piece of the action. Same thing for more traditional real estate investors. They both know the smart long-term benefits of buying real estate at today’s depressed prices.

It’s another sign that the turnaround of the market is happening in so many places, and a self-fulfilling prophecy as the new wave of cash buyers help to start bringing supply and demand into sync.

Editor’s note: This segment originally aired Jan. 31, 2012.