Cash is King? Understanding Financing Risk in Housing Markets

In Los Angeles, all-cash home purchases quintupled during the last decade. Compared with an else-equal mortgage offer, a cash offer is associated with 29% shorter time-to-close and a 2-3.9% price discount, indicating a substantial amount of financing risk—the risk to a seller that a transaction may not close on time and may fail to occur again because a mortgage contingency fails. The estimated cash discount aligns well with a canonical model calibrated to the sample market. Our findings reveal that closing risk alone is insufficient to explain the cash discount. Rather, it turns on the possibility that a property back on the market may fail to sell, requiring a substantial risk compensation. The estimated cash discount is smaller during booms and in larger markets, highlighting the inseparability of financial frictions in the mortgage market and search frictions in the housing market.