“The rates are great but the underwriting is brutal. They hang these people upside down and shake them till they see what falls out of their pockets. So people are buying with cash and maybe they’ll ‘refi’ later.”

-Henry Schlangen, Pacific Union International real-estate agent in Napa Valley, Calif.

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The agent quote above estimated that “95% of his deals last year were all-cash, up from about half in previous years.” And in South Florida (perhaps not the ideal example) Cash buyers represented more than half of all transactions in the Miami-Fort Lauderdale in 2010 (data via Zillow.com). In Q4 2006, they were just 13% of deals.

Is the jump in cash purchases of mostly distressed real-estate “another sign of the revival of animal spirits in the U.S. economy” ?

That is what the author of the WSJ article Cash Buyers Lift Housing suggests this morning.

Only, not exactly. I reach a different conclusion based on why cash is being used. The use of all cash signals not the revival of animal spirits, but excessive caution on the part of lenders, and other structural difficulties in the residential market.

There are many reasons, and not all of them are positive, to use all cash:

-5% to 10% discount for cash
-A surge of Buyers from China
-Difficulty appraising homes in a foreclosure heavy areas
-Return of speculation to the condo market
-Challenging environment for credit, especially jumbo mortgages.
-Bargain hunting renters with ready cash

Certain areas more than others are showing increased cash deals. The correlation between the extent of the drop from previous peak prices and foreclosures is fairly significant. The Journal notes that “the harder a market has been hit, say economists, the higher the percentage of cash deals.”

And credit remains difficult: “Some of the cash purchases reflect a tight lending environment, where even people with good credit and ample down payments are sometimes turned away for conventional borrowing.”

Meanwhile, downtown Miami prices rose 15% in 2010 from a year earlier, according to the Miami Downtown Development Authority.

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Source:
Cash Buyers Lift Housing
S. MITRA KALITA
WSJ, FEBRUARY 8, 2011    
http://online.wsj.com/article/SB10001424052748704570104576124502975117950.html

Category: Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “What Do Cash Buyers Mean for RE Market?”

  1. VennData says:

    Looks like there were a lot of people that didn’t get swept up in the phony, ibank-and-gov’t-debt-fueled prosperity of the era of total GOP control of the Federal gov’t …and have the cash to prove it.

    Ironic how so many who got caught up in that phoniness then, say that we’re NOW in an era of phony prosperity.

    I wonder if they’ll continue to listen to the people who put these ideas in their heads – who have also been wrong every step of the way during the last two years of once-in-a-lifetime gains?

  2. Jim67545 says:

    To the reasons for cash buying let me add another. The “NINA” (No verification of income or assets) loans were originally designed for that segment of customers who could not or did not want to verify these things. This might sound really bad but along with those engaged in unsavory or illegal businesses many small business owners so seriously underreport income that when it comes time to get a mortgage they seem not to have sufficient income. In other cases income is just irregular or largely based on liquidating assets. Of course, in the lead up to the housing crisis this morphed into mortgages for those who actually had no income or assets.

    The NINA products have evaporated. So those many potential buyers who fall into this group have little choice but to pay cash.

  3. KidDynamite says:

    when I read about the preponderance of cash purchases, I didn’t read it bullishly. To me, it reeked of increased speculation – bottom fishers hoping to profit from housing-as-investment – but that’s not what you need to halt the housing downward spiral – you need real buyers (or at least real renters for these speculators’ newly purchased houses!)

  4. DebbieSmith says:

    The rather significant increase in cash purchases in Las Vegas has done nothing to improve the housing market. Las Vegas has seen among the greatest realignments in real estate prices among major U.S. cities. The median house price has dropped an average of nearly 60 percent since 2005 and in the month of December alone, one in 76 homes were added to the list of foreclosures. As shown here, some house prices have dropped in value by over 75 percent from their peaks 4 years ago:

    http://viableopposition.blogspot.com/2011/01/las-vegas-one-hurting-real-estate.html

    Apparently, cash is not always king in the housing market except when prices are REALLY cheap.

  5. Petey Wheatstraw says:

    These folks are catching a falling knives. The double dip in house prices is upon us. While it’s true they’ll always have equity, the RRE asset they buy today will most certainly lose value. OTOH, maybe inflation/currency debasement would have destroyed the value of their cash holdings faster than falling house prices.

  6. b_thunder says:

    people are betting that the prices reached the bottom, and yes, they pay 100% in cash, but i think that the bottom won’t be reached at the very least until the interest/mortgage rates return to their historic levels and stay there for a year or so. BR is right , cash is not an indicator of everything WSJ implies.

    so, i’m considering buying in FL for cash. but unless we hit a hyper-inflationary patch the home/condo values won’t rise much, while maintenance and taxes will draw additional cash. and if we do have hyper-inflationary episode, then i’d rather pay higher (but current, still pre-hyperinflation) mortgage rates but leverage my own cash as much as possible.

  7. overanout says:

    converting cash into housing for speculation means buying a deflating asset that needs constant maintenance and high target for local tax revenue.

  8. bulfinch says:

    Well, I’ve held my fire for about ten years now and continue to rent and save. Unfortunately, I came-of-age professionally at exactly the same time that the last credit bubble was gaining steam; I doubled my pay in the span of 18 months, and then trebled in a span of three years, and so on, but when it came to buying a place the goal post just kept getting moved.

    Houses are still priced too high and part of that is that the perception of values is out-of-whack. It wasn’t until/after the housing bubble that a quarter million dollar home was considered a starter home.

    I still won’t go near most markets with a barge pole; they’re not done correcting to the mean in most places, and the annual rent you could fetch from most of the houses I’d be willing to plunk down my savings on (read: NOT EQUITY) would not positive cash flow.

    I’m guessing that many of these all-cash gimpers have something like muscle memory when it comes to investment. Everybody needs a pit to throw his/her money into and they tend to stick it in the same places, kinda like how a dog buries a bone.

    Meanwhile, I continue to sit on my cash. And buy guitars.

  9. Expat says:

    I’ve plenty of stories over the past three years about cash buyers. Each time it was a signal that the market was turning because speculators and investors were back in. Yahoooooo!

    My view is that cash buyers think it ‘s a bottom…again. They jump in hoping to flip or think they will get a great deal they can rent out at a profit until the market turns.

    Reality: house prices are still too expensive on average for non-cash buyers. Screw lending, screw interest rates, screw demographics. Frickin’ houses are still too frickin’ expensive. And unemployment is still over 17%. Gimme a break with the cash buyers.

    I think, if anything, a jump in cash buyers is a dreadful sign.

  10. bulfinch says:

    B-Thunder:

    Most parts of Florida are still ridiculously overpriced. South and Central FL were two of the epicenters for mortgage scam shenanigans.

  11. wally says:

    There could be reasons related to loan standards, etc., but to buy with cash you’ve got to have the cash.
    To me, that very strongly proves that the difference is the identity of the buyers, not the details of the loan market.
    Speculators, bargain-hunting savers… definitely.

  12. Whither those animal spirits? Such a quaint idea, that animal spirits lift the economy. Which animal’s spirit is supposed to be inhabiting our bodies such that the good times get rolling again? Or is it our own animal spirit that is otherwise subdued when the economy falters? Are fear and euphoria not spirits regularly inhabiting the human economic animal?

    I read this article while taking my first coffee this morning. It’s not reporting. It’s cheerleading. They described a retired (and apparently very successful) salesman that cashed in some paintings to purchase three condos in Miami, each in the $1.5-2.0 million range. He planned to live in one, let his son live in another, and put his dog (?) in another. In other words, he apparently believed that Miami condos offer a better potential return on investment than does art work. Maybe it does, but in essence he’s doing nothing more or less than chasing yield that cheap money makes so elusive. It’s just another marker on the way of understanding how resources are again becoming impossibly misallocated due to effectively negative interest rates.

  13. BennyProfane says:

    Furcryingoutloud, the guy they featured in the article was 68 years old, and the wife looked the same. Hey, I’m the biggest housing bear you know, but, c’mon, there comes a time when you have to enjoy the money before the final bell rings. Look at the smile on his face. He’s going to do just fine in this fairly priced brand new beautiful Miami condo, and, he’ll let his kids or his dogs worry about whether or not it was a good “investment” in twenty years.

  14. forwhomthebelltolls says:

    Not sure that Henry Schlangen is a particularly good sampling.

    Looks like he only did a handful of deals last year ( http://www.pacunion.com/agents/HenrySchlangen/recentsales )

    of which, 95% (???) were cash.

    Not disputing theories on what cash buyers could mean, just questioning avidence which I think can still only be described as anecdotal.

  15. rip says:

    Negative interest rates make cash purchases desirable.

    Boomers are coming into their empty nest phase and looking to buy that last house or condo.

    Why finance? And let cash sit and earn .1%. Play the market as a retail guy? Don’t think they’re dumb enough to get fleeced yet again.

    They’ll locate in senior friendly states with favorable taxes, alter their portfolio accordingly since they are beyond their high earning years when mortgage interest deductions were a big deal and lead the good life.

  16. bulfinch says:

    If your bucket list includes buying condos…you’re not doing something right…

    Aged boomers would be better off with an Airstream or two.

  17. whskyjack says:

    Barry

    Investment buying, Cash works well because you can refinance later for the appraised value rather that the fire sale price you paid. Makes for a good business model Because by the time you are ready to finance it, it will be income producing property. That way you aren’t caught with a lot of property that you owe money on and have no income to pay the bills.

    as to the credit situation, we have had no problem getting loans on our properties.

    Jack

  18. RandyClayton says:

    Would like to see the raw data for this and plot the total number of sales and number of cash sales. Don’t we know that total number of sales is way, way down? Therefore, isn’t it possible that the rise in cash purchasers is due (at least in part) to the drop of mortgages and not some groundswell of smart buyers with cash rushing in to snap up a bargain?

  19. tradeking13 says:

    I have a co-worker who buys rental properties for “cash”, but that “cash” comes from his HELOC on his primary residence. After closing, he mortgages the property.

  20. Greg0658 says:

    I wonder if someone is taking the DryMark Counterfeit Detector Pen to the all the greenscratch?
    Yellow/Light – Currency passes test … Dark/Black – Currency is suspect

  21. rfullem says:

    raw data plot? fire sale price? Anyone heard of economics making for “fire sale prices.” Crimes do. nice to see a plot of white collar crime vs. housing bubble. On cash deals, this is simply a transfer of a large chunk of one persons wealth to someone else irrespective of their talent, productivity, etc. Yeh, good system.

  22. TraderMark says:

    What is awesome is the last quote in the story says the guy who bought the 3 condos was using the 3rd for “his older dog and guests”

    Yep, sounds like average Joe homeonwer.

  23. rktbrkr says:

    I think a lot of northerners sold their homes which are down 20% from peak and bought their retirement villas which are down 50% from peak, the decline in the number of transactions gooses up the % of all cash deals.

    Recent price increases the past few months in FL are illusory resulting from the distortions of foreclosure freezes.

    Why go thru the mortgage financing briar patch if you don’t have to? It’s never been a pleasant experience and you’re probably treated more like a crook than a customer now to boot.

    I think buyers are getting more than a 10% discount for cash purchases on forced sales too. In a declining market the seller doesn’t want to wait a couple months for a buyer and then get the bad news about no financing, time is money in a declining market.

  24. I understand a lot of Canadian buyers are looking south for deals right now. In Alberta they were buying in BC but with the great deals down south and favorable exchange rate, many are looking south for property. Arizona is usually a top purchase location.

    With that said I don’t know if Canadians can get loans down south so that could be another reason so many cash deals are happening

  25. Arequipa01 says:

    I know of a property* purchased last year for cash by a guy with tons of money. Initially he approached his bank (one of the TBTF), with which he had maintained both personal and business accounts- sizable accounts. They offered him a usurious rate and a shyte-flavored cupcake. He countered with an emphatic f-u, wrote out a very big check to the owner and bought the property lock, stock and barrel. And then closed out all his accounts and took them to a smaller, local option.
    The unquantifiable risk of involving banks in a RE transaction should give everyone pause. If you buy through their conduit, you do not have full assurance that upon fulfilling the mortgage the property title will pass to you. The contingency of residential real estate ownership is an under-explored facet of our current reality. MERS was a ‘solution’ in which ‘ownership’ was re(dis)solved.

    *A property owned continuously since WWII, no liens, and purchased directly. Lawyers and local govts still got to clip the coin for providing a clerk’s value-add.

  26. rip says:

    @grego658: In Eugene there were so many bogus $100s, they publicized a new test. The old test did not work.

    Hold it up to the light and see if the Abe Lincoln watermark shows up. They bleach the ink off. The silk stripe is still there. But you can’t eliminate the watermark. Seems to be an increasingly popular way to get a large return on your investment. Beats GS.

    @Areq: Thanks for the scary thought. Just closed in December with USB who claimed they held most of their mortgages. Yeah I thought to ask. But just got a letter I am not a new mortgagee of Freddie Mac.

    At least they have some legal obligation at this point. Guess they won’t be getting an endorsement from me.

  27. Arequipa01 says:

    USB?

  28. louis says:

    It means the agents will be pushing the FHA loan buyer so they can bank more commission.

  29. rip says:

    ooops. Meant to say “now” not “not” a Freddie Mac mortgage.

    I did ask a local bank, but they wanted to take too long.

    @Areq: USB: US Bank, based in MN supposedly. But probably like most other big US banks. Now owned mostly by Arabs of some sort. The dirty little secret. The reason for TARP? DUH. It was either the Arabs (most likely Saudi) or the Chinese. Certainly not us.

  30. Arequipa01 says:

    @rip- thanks, brain stopped working. appreciate the items on them.

  31. MinnItMan says:

    Many REO sales require cash purchasers so that inventory can be reliably cleared without buyer financing contigencies. In my experience, true cash purchasers are rare, and broker data will not be accurate. Neither will property tax reports. These “cash” purchases are overwhelming funded by short-term “hard money,” that is, loans that are not federally insured. They rarely have notes longer than 1 year, and are frequently 6 months or less. The hard money is expecting to get paid back on a quick flip.

    But the point is, these deals can’t accurately be called “cash,” even if they appear that way at closing and in the tax records.

    Unless I wanted to live somewhere a long time, I wouldn’t be using my own cash until there is a hard money crunch, and you could be relatively sure that what is reported as a “cash” deal actually is cash more often as not. That will signal being pretty close to the bottom.

    As someone said above, I would also wait until interest rates are quite a bit higher.

  32. olddogDALTX says:

    So that’s how drug dealers launder their money.

  33. Estragon says:

    Common Man is almost certainly right noting that Canadians may also be a big factor in the apparent rise in cash transactions.

    I’d add that the number of tranactions overall are down significantly from recent years, so even if the number of cash transactions stayed the same or rose only slightly, we’d see an apparently impressive rise in the percentage of cash sales. That little fact gets in the way of the “animal spirits are back” slant to the story though, so forget I mentioned it.