From Forbes.com…
Mortgage interest rates have increased by over two and a half percentage points from their low in early 2021 to recent quotations. Higher mortgage rates have historically dampened sales of housing. Could the increased number of cash buyers make home sales less sensitive to rising mortgage rates in this cycle? Actually not. Cash buyers have less of a “hair trigger” from rising mortgage rates, but they respond to rising interest rates similarly to borrowers.
Who are the cash buyers? The largest group seems to be institutional buyers, who fall into two categories: companies buying to rent out the houses, and companies facilitating transactions for people who will eventually finance their sales.
Traditionally, most renters occupied apartments and most owners occupied houses, with a little ownership of multifamily units through condos or co-ops and a small number of houses for rent by individual investors. After the 2008 housing collapse, however, a number of large companies bought thousands of single family homes to rent out. And some companies built new subdivisions with all rental housing.
These companies typically do not obtain traditional home mortgages for their properties. Instead, they finance the business with some equity through stock sales and debt through long-term bonds. Bond interest rates tend to rise and fall along with home mortgage rates. (See this example.)
The relationship between the two interest rates varies, as the securities have many differences, but generally they move up and down at the same times. When mortgage rates rise, monthly payments go up and some would-be borrowers no longer qualify for a loan. Companies face a similar constraint from the bond market, but they usually are not skirting the very edge of qualification.
The higher the overall level of interest rates, including mortgages and corporate bonds, the less attractive it is for companies to purchase houses.
The second kind of institutional buyer simply facilitates a typical family’s purchase of a house. The company collects a fee and in exchange, it stands ready to buy the house if the regular buyer cannot secure financing or is delayed in obtaining the loan. This business, like the long-term investors, will have finance its activities with a mix of stock and debt. When interest rates rise, they need higher fees to make a profit. Thus, total home purchases through these companies will decline with higher interest rates.
