Home prices on the rise nationwide and in Dallas-Fort Worth, but cash is kingMay 27, 2014
Nationwide, all-cash deals change the game in real estate//
By Dina ElBoghdady
(c) 2014, The Washington Post.
A growing number of home buyers are bringing an unusual tactic to the negotiating table: an all-cash offer.
Cash purchases traditionally make up about a quarter of home sales, but they've soared to about 40 percent nationwide, according to the research firm CoreLogic.
And more of these buyers are individuals, not the institutional investors who plunged into the housing market when it collapsed, then pulled back when home prices rose.
Wealthy people, foreigners and retirees are transforming markets across the United States with these all-cash deals, helping make up for an alarming shortage of first-time buyers who are struggling to save for a down payment or qualify for a loan, a cause of grave concern about the long-term health of the market and its prospects for a true recovery.
"It's the investor and the wealthy individual that's keeping the market alive," said Mark Zandi, chief economist at Moody's Analytics. "The wealthy buyers in particular are fully engaged now. The stock market is up and times are good for them."
Tatyana Baytler, a real estate agent at Lagert Real Estate in Rockville, Md., said foreign buyers tend to offer cash in part because they're wealthy, but also because they have not lived in the country and built the credit history needed to secure a mortgage.
"Every fourth client I have now is an all-cash purchaser," said Baytler, a Russian speaker. "I had a client from Russia in February who purchased a house in Washington, D.C., for $850,000 all cash. They want to leave [Russia] because of political unrest."
John Denninger, a business owner in New York, didn't want to plunk down that kind of cash when he bought a vacation home not far from West Palm Beach, Fla. But he didn't want a mortgage, either, now that he has paid off the loan on his primary residence.
"I've invested wisely all my life and I have a pretty good job, so paying cash for a condominium didn't seem like a stretch," said Denninger, 55, who bought the condo three years ago for $70,000 and sank an additional $30,000 into upgrades. "I use it quite a bit now, and I never, ever rent it. I keep it to myself."
The potential yield from rents is what attracted investors to the housing sector once the market hit bottom in late 2011. In areas where home prices plunged, investors began snapping up foreclosures and other deeply discounted properties, betting they could rent them for a tidy profit. The buying frenzy helped clear the excess supply of homes on the market and boost prices. It also frustrated first-time buyers who could not compete because their offers included financing contingencies, appraisals and inspections.
That still happens, said Richard Bridges, a real estate agent at ERA Blue Diamond Realty in Woodbridge, Va. Two weeks ago, Bridges listed a condominium in Woodbridge for a client. Four offers immediately rolled in, all at or above the $160,000 asking price. One was from an investor.
"My client took the cash offer, even though it was lower than the others, to ensure it would close quickly and without problems," Bridges said.
But with prices on the rise and the foreclosure supply shrinking, investors are starting to retrench. Rental income does not necessarily go up when housing values rise. The largest institutional investors, some of whom bid on hundreds of homes a day, purchased about $400 million worth of homes a month in the first three months of the year, down from $520 million in the same period a year ago, according to a Morgan Stanley report.
Blackstone Group, which has invested $8.6 billion to buy 45,000 homes in the past two years, scaled back its purchases by about 70 percent since last summer, the company said in a statement. It now buys $30 million to $40 million worth of homes a week.
"Since the supply of distressed properties has thinned out, we expected the all-cash sales would be falling, but that's not the case," said Lawrence Yun, chief economist of the National Association of Realtors, which recently released a survey showing the share of investors has dropped from 24 percent in 2012 to 19 percent last year and the first quarter of this year. "It implies that there's plenty of cash sloshing around."
Yun says seniors who have a lot of equity in their homes are probably helping sustain the all-cash market. CoreLogic data show that the share of cash sales remains high among non-distressed properties, which are not popular among investors.
"It's truly a national phenomenon," said Sam Khater, CoreLogic's deputy chief economist. "The share of cash sales is higher than normal in many parts of the country that never had a housing bust, like the rural heartland states of Oklahoma or Missouri."
Fran Kormann, a real estate agent who specializes in selling homes at the Potomac Green senior community in Ashburn, Va., said every transaction she has handled recently has been a cash deal, perhaps because she is working with an older demographic than usual, buyers who are 65 or older and have accumulated more savings than clients in their 50s.
"I thought the all-cash deals would have stopped because the prices went up to $600,000, but they didn't," said Kormann, an agent with Keller Williams Realty. "I just sold a property to a lady in Boston who is coming here to be near her family. She's paying all cash, and she's keeping the home in Boston and renting it out."
But all-cash deals do not necessarily mean all cash, even if they're registered that way in the public record. Buyers sometimes tap into alternate forms of financing that count as cash, which is what Lori Pearce did to purchase a condominium in downtown Seattle.
Pearce, a retiree, already owns a more spacious condo nearby that she's selling. She said she's borrowing against her stock holdings to finance the purchase of the new condo, and she will pay off the loan with the proceeds of the sale from the old unit.
Since the start-up she joined went public in the mid-1990s, Pearce said she has never taken out a mortgage to finance a home, including a place in Hawaii where she spends part of the year.
Her real estate agent, Kirk Russell of John L. Scott Real Estate, said it's rare that buyers have all the cash they need on hand. Instead, they leverage their assets to buy second homes for themselves or starter homes for their children, who may not have the credit scores or down payment needed to qualify for a loan.
"If you don't have to get a loan, then don't get one," Pearce said. "But this must be incredibly hard for most buyers."
NEW YORK (CNNMoney) -- U.S. home prices remain on the upswing at the start of 2014, as a slow recovery from the bust that led to the financial crisis continues.
In the first three months, prices rose 10.3% on an annual basis, according to the S&P/Case-Shiller report. In March, an index of 20 large housing markets gained 12.4% year-over-year.
The year-over-year gains are likely to moderate, according to Stan Humphries, chief economist for Zillow, because current prices are being compared with months when many markets were at or near their post-bust bottoms. Coming comparisons will be against less depressed prices.
There are several other factors that continue to boost prices, however, including unusually low mortgage rates and the diminishing number of foreclosures and short sales on the market, which tend to sell for less. Those factors will take time to disappear.
"We're still several years away from a housing market driven purely by fundamentals like income growth and rising household formations," said Humphries.
Prices remain about 18% below their peak, which was reached in the summer of 2006.
Trends in the housing market have been mixed, with a bounce back for housing starts in April and better new home sales. Buyers have been able to take advantage of very low mortgage interest rates, but tight loan underwriting still keeps many potential homebuyers out of the market.
Even though price gains have moderated, all the cities in the 20-city index recorded gains year over year, led by Las Vegas at 21.2%. Prices in San Francisco, San Diego and Los Angeles also rose faster than average.
On a monthly basis, New York was the only city with a decline in March.
In the Dallas-Fort Worth market, the index was up 1.2 percent from February and was up 10 percent from March 2013.
The price increases will have a positive impact on mortgage borrowers, according to Bill Banfield, Quicken Loans vice president.
"While the increase in home prices is slowing, homeowners have still gained a significant amount of equity in the last year, " he said.
That will push some of the 9 million borrowers who are still underwater on their loans, owing more than their homes are worth, above water for the first time in years. That will make them less likely to lose their homes to foreclosure and help stabilize prices.