ALL CASH BUYERS PREVENT HOUSING MARKET COLLAPSE
By Keith Jurow
I’ve asserted in previous writings that buyers paying all-cash for properties have been keeping some of the worst bubble markets from collapsing. Inside Mortgage Finance, which surveys roughly 3,000 brokers each month and issues a monthly report, revealed at the end of March that a record 33.7% of property purchases nationwide were all-cash.
The National Association of Realtors (NAR) conducts an Investment and Vacation Home Buyers Survey annually. The latest survey covering 2010 found that a record 59% of investors paid all-cash for their property. That figure was only 32% in 2006 and a mere 17% in 2004 according to previous NAR surveys.
For Broward County on the Florida east coast, the Southeast Florida MLS reported that a record 69% of all February property sales were all-cash purchases. Zillow.com revealed at the end of February that 54% of all sales in the three south Florida counties of Dade, Broward, and Palm Beach were purchased with cash in the fourth quarter of 2010. In California, 30% of all 2010 sales were cash purchases. According to the highly-regarded California blog, drhousingbubble.com, the average in that state over the last 10 years was a mere 12.9%.
Take a look at this amazing chart showing cash sales in Phoenix.
Notice that while cash purchases have been a substantial portion of Phoenix sales since early 2009, it reached a record 50% in January of this year.
Who are these all-cash buyers? Leif Swanson, the creator of this chart and an active Phoenix broker, explained to me that many were over 50 with plenty of liquid assets who could not stand the interest rates they were getting. This was also told to me by Jim McClelland, Sr., a major property “redeveloper” in Chicago who resold many of his foreclosure purchases to all-cash investors. Most were cash buyers who were 50+ years old and were tired of earning interest rates of 1% or less.
Can you blame these 50+ savers, especially those nearing retirement? Take at look at what has happened to their interest income because of the Fed’s policies.
A substantial number of these savers are what I consider to be reluctant real estate investors. They are being pulled into this arena by the plunge in their interest return. I strongly suspect that many have little sense of how much risk they are taking with their capital.
Consider this example from a March 1 article in the online Palm Beach Post about all-cash investors. One retired couple decided to buy a three-bedroom home for $149,000 in cash because they believed a home would bring a better return on their money than a CD or other investment. The wife said that “any kind of interest income is so low right now, we might as well put it into a house.” She went on to predict that “If prices go down any more, they’re not likely to go down appreciably.” Had she read the second issue of my Housing Market Report and its focus on Miami-Dade County, they might have reconsidered their decision to buy.
Or take this example from an early February article in the Wall Street Journal. A 62-year-old piano teacher saw a three-bedroom bungalow that was listed as a short sale last summer in Georgia. The desperate sellers had dropped the original asking price of $159,000 to $129,000 and then to $79,900. Sensing that the market was awful, she offered $50,000. The sellers accepted $52,000 in cash.
While these purchases may make good sense, they aren’t necessarily smart investments. On April 25, I spoke again to noted real estate writer, San Diego State University lecturer and investor Leonard Baron about purchasing investment properties with cash. He reiterated that these investors must do a careful due diligence analysis to see if the property makes financial sense. Link to his terrific 7-page due diligence checklist on his website for the tool to enable you to do this – professorbaron.com. On the right side of his homepage, you will see the table of contents for his book. Link to Chapter One and it will take you to the checklist. Just scroll down a little until you see it. You can print it out and then use it for your analysis. You’ll be glad you did.
Would most of these older, all-cash buyers be searching for investment properties now if interest rates had not been pushed down so dramatically by the Fed? Think about it. If you were either close to retirement or actually retired, would you be plunking down anywhere from $50,000 to $1 million or more in cash on a house or condo if the interest rates on your Treasury securities, CDs, bonds, or money market funds were at historical norms?
The vast majority of these cash buyers (excluding perhaps some foreign investors) are not speculators. If they can land a decent tenant, the investment might make good sense. Yet do they really have a good idea about the state of the housing market where they are investing their hard-earned savings? If I thought they did, I would not have launched my Housing Market Report.
On the basis of my in-depth research, it’s quite clear to me that the “normal” housing market in most major metropolitan areas is shrinking. The percentage of sales in these markets which are distressed properties – either foreclosures or short sales – is climbing steadily. Conversely, the percentage of homeowners wanting to sell who still have equity left in their property is declining. My goal is to inform readers why this will not turn around anytime soon.
For much more from Keith Jurow, see his Housing Market Report at Minyanville. Keith provides actionable data, charts, in-depth analysis and specific advice to help investors make better property decisions.
There’s a lot of anecdotal material here, so I’ll add some equally non-scientific & anecdotal material of my own. What I see are a lot of wealthy individuals and corporations buying up vast numbers of these in short sales for rentals (at least temporarily). They have deep enough pockets to sustain further intermediate term capital loss and/or can, in necessary, eventually sell at a tax loss (or on speculation of some sort of Federal bail out).
Of course, it’s foolish for the vulnerable individual to pick up these properties without due diligence (but everything in this world is foolish without due diligence). The larger issue is that there is a massive shift of wealth and independence away from the middle class and a substantial weakening of the homeowner society. We are turning into a nation of part-time workers who rent.
Walden,
True, there are a few anecdotal examples I use to flesh out with what I’m saying about the all-cash buyers with real situations. But, c’mon, be fair. The chart from Lucid Realty is hard data as are all the stats on cash buying as a percentage of all sales.
You can draw your own conclustions from the data. It looks pretty clear to me that the “normal” market for non-distressed property is slowly dying.
I agree with your article in the Northern IL area property prices have been dropping, buyers are few and far between, and the predominant sale type is a short sale.
Some deals look great but then the renters are looking for lower rents, so you could be purchasing an income property that won’t be able to produce the income you intended because your rent price expectation is too high.
The danger here is that this process of properties going from owner/occupiers to Lords contributes to he concentration of wealth.
Do we really want our communities to be composed of a few Lords with multiple rental properties and a mass of renters with no net worths?
This smacks of a much earlier form of social organization, one where the benefits of commerce and inflation all accrue to a very few.
Well, at least when the fit hits the shan, the angry crowds will know just whom to convert into pez dispensers.
If these cash buyers are purchasing the homes to live in, thats fine and they’re reducing the inventory of homes for sale. It strikes me though that many cash buyers may be purchasing the property to hopefully sell at a later date and, they hope, at a profit. If that’s the case then perhaps all these cash buyers are in actuality doing little to reduce the true inventory of unsold homes.
The largest demographic wave in our nations history has peaked and with lag so has consumer demand fueled by loose credit, inflation sputters off its lows, the dollar rallies and eventually collapses after QE^n is finished, commodities collapse, homes prices slowly erode and after the JQ Public stops listening to Crammer tell them that stock prices are more important than housing prices, stocks roll over, credit contracts to manageable levels and we start building from a solid base.
Keith:
I suggest that a large number of cash purchases are IMMEDIATELY turned into hard money loans, then cycled to conventional loans.
In WA state, there are a growing number of hard money lenders who accompany investors to auctioned properties (auctioned properties MUST be sold in cash).
Those transactions are turned into hard money loans (12+% interest, 5+ points) within a day or two, then the investor either flips the property, or turns that hard money loan into a conventional loan, since no one would want to stay in a loan at those terms.
While an investor owned property next door may not be as ideal as an owner occupant property, I think it beats an abandoned property.
Roger,
You may be right about the auction investors, but what is your point? Many of the all-cash buying is directly from the servicing banks. Did you know that 540 Phoenix sales in April were Canadians. They don’t even know where the courthouse steps are. Most of these all-cash buyers have substantial liquid assets and they are having a harder time finding renters than they thought they would. As for flipping, try doing a flip and you’ll see it isn’t so easy.
My point was that without these all-cash buyers, several major metro markets would have completely collapsed.
Keith:
My point was that a lot of this “cash” is really “borrowed” money. We can additionally throw in those borrowing from their own home equity (HELOCs).
I wasn’t advocating for flipping, nor suggesting it was easy. Not really a good idea for amateurs, or folks unable to carry the property in case of a no sale.
That part was to point out that it is generally better to have individual investor owners than it is to have no owners at all, or indifferent and distracted (bank)owners.