All-Cash Buying Signals Demise of "Normal" Housing Market
Is the growth of all-sale purchases by investors a positive development for housing markets, or a sign that "normal" home sales by owners with equity in the property is shrinking?
Back in May, I posted an article on Minyanville asserting that all-cash buyers have kept several major housing markets from collapsing. (See All-Cash Buyers Preventing Collapse of Housing Markets.) With new evidence in to support this claim, now is a good time to revisit this important issue and broaden the examination.
In major housing markets such as Las Vegas, Phoenix, and Miami, investors have played a growing role in the past year. In July, Inside Mortgage Finance (or IMF) reported in its monthly Housing Pulse Survey report that 75% of investor purchases nationwide in June were all-cash transactions. These investors focused their attention on what IMF calls “damaged REOs.” The June survey revealed that 59% of damaged REO sales were to investors.
In its annual Survey of Vacation and Investment-Home Buyers, the National Association of Realtors reported in March that 59% of all investors surveyed had paid cash for their property in 2010. That was up from only 17% in 2004.
Some analysts have claimed that the growth of all-sale purchases by investors is a positive development for these major housing markets. Are they right? Or is it a sign that “normal” home sales by owners with equity in the property is relentlessly shrinking?
All-Cash Buying Spreads to Other Metros
Recent articles have indicated that all-cash buying is picking up in markets beyond the three I’ve mentioned. The New England real estate news website, Banker & Tradesman, reported in mid-August that in the first half of 2011, nearly 37% of all purchases in Massachusetts were all-cash deals. More than 53% of sales in Cambridge were to all-cash buyers as were 50% of purchases in Edgartown and Provincetown as well.
At the end of August, the Herald Tribune reported that nearly 60% of all transactions in the Sarasota, Florida, area were to all-cash buyers. The author told the strange tale of one woman who had recently completed a short sale on her property. Hoping to make up for the loss in selling her home, she plunked down $408,000 in cash on another home with the idea of renting it out for five years while it appreciates in value. She was confident that the bottom had been reached in her market.
Right after Labor Day, I spoke with a San Francisco all-cash investor who had purchased 25 properties in three western states since 2001. Having purchased two of them since early 2010, he was clearly not concerned about falling prices. In our conversation, he pointed out that had he not paid in cash, the properties might be throwing off a tiny positive cash flow. I wonder whether he realizes how much his properties had declined in value since the time of purchase.
Older Americans Sucked Into Real Estate Investing by the Fed
I reported in my previous article on all-cash buying that many foreigners have been investing in residential properties in major metros such as Phoenix, Miami, and Las Vegas. This has been fairly widely reported in the media.
What is less known is that large numbers of older Americans have been reluctantly drawn into real estate investing. The negative impact that the plunge in interest rates has had on the incomes of these savers has compelled them to look for higher rates of return. Take a look at this chart which reveals this collapse in interest rates.
In early March, an online article in the Palm Beach Post focused on the growth in all-cash buying by investors. The author described a retired couple who decided to invest in a three-bedroom home for $149,000 in cash because they believed it would bring a better return on their money than a CD or other investment. The wife was quoted as saying that “any kind of interest income is so low right now, we might as well put it into a house.” She went on to explain that “If prices go down any more, they’re not likely to go down appreciably.”
Would a retired couple such as this have taken $149,000 from their retirement savings to purchase a property in Florida as an alternative investment if Chairman Bernanke and the Fed had not pushed short-term interest rates below 1%? Extremely unlikely. Because so many retirees are very dependent on their interest income, the action seems one of desperation.
Had this couple read my Housing Market Report which discussed the enormous shadow inventory overhanging the Greater Miami housing market, they would have realized the risks they were taking with their money. Older savers throughout the nation are plunging into all-cash housing investments with little idea of how or why they are putting their hard-earned retirement capital in jeopardy.
The Morgan Stanley Study of All-Cash Buying
In April of this year, I posted an article about strategic defaulting. (See Strategic Defaults Revisited: It Could Get Very Ugly.) In it, I discussed the excellent 2010 report by Morgan Stanley analyst Oliver Chang. In March, Chang published an important new report on all-cash buying in 10 major metros. Let’s take a good look at what it tells us about these markets.
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