Example of a dysfunctional US economy: A record 43% of all US residential property sales in the Q1/2013 were all-cash

[HomeGuy]

The cash buyers today mean that all is not well in the housing market,? said Clifford Rossi, finance professor at the University of Maryland?s Robert H. Smith School of Business. ?First-time home buyers should make up 40 percent and we?re not seeing it because of mortgage rules.?

No - you're not seeing it because the US no longer has a middle class.

The first-time home buyer is living in your basement. And until the bum moves out and gets a job and STARTS A FAMILY / HOUSEHOLD, he'll never be a home buyer.

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"All Is Not Well In The Housing Market" As All Cash Buyers Double In Past Year, Hit Record High

05/08/2014

Confirming and continuing a trend we first described a year ago, overnight RealtyTrac reported, as part of its Q1 institutional investor and cash sales report, that the percentage of all-cash buyers has soared in the past year with "42.7% of all U.S. residential property sales in the first quarter were all-cash purchases, up from 37.8% in the previous quarter and up from 19.1% in the first quarter of 2013 to the highest level since RealtyTrac began tracking all-cash purchases in the first quarter of 2011."

Curiously this is happening as institutional investors, think Blackstone, are slowly exiting the market: "Institutional investors ? entities that have purchased at least 10 properties in a calendar year ? accounted for 5.6 percent of all U.S. residential sales in the first quarter, down from 6.8 percent in the fourth quarter of 2013 and down from 7.0 percent in the first quarter of 2013 to the lowest level since the first quarter of 2012."

============ ?Strict lending standards combined with low inventory continue to give the advantage to investors and other cash buyers in this housing market,? said Daren Blomquist, vice president at RealtyTrac. ?The good news is that as institutional investors pull back their purchasing in many markets across the country, there is still strong demand from other cash buyers ? including individual investors, second-home buyers and even owner-occupant buyers ? to fill the vacuum of demand left by institutional investors.

?While the institutional investor purchase share declined in the first quarter in 18 of the top 20 markets for institutional investor share a year ago, home prices continued to appreciate in most of those markets, albeit at a slower pace in many cases,? Blomquist continued. ?There are a couple notable exceptions that could be cause for concern: Jacksonville, Fla., where the institutional investor share of purchases was down to 13.5 percent in the first quarter compared to 18 percent a year ago and where median home prices decreased 1 percent from a year ago in March after 15 consecutive months of annual increases; and Greensboro, N.C., where the institutional investor of purchases was down to 6.4 percent in the first quarter compared to 10 percent a year ago and where median home prices decreased 8 percent from a year ago in March following 14 of 16 months were median home prices increased annually.? =============

Or, in other words, the smart money is fading the market as the last flippers scramble to pick up the pieces. And while one can debate the mix composition and what it means for future trends, one thing is clear. Via Bloomberg:

============= The cash buyers today mean that all is not well in the housing market,? said Clifford Rossi, finance professor at the University of Maryland?s Robert H. Smith School of Business. ?First-time home buyers should make up 40 percent and we?re not seeing it because of mortgage rules.? =============

Actually we're not seeing it because US consumers are unable to chase home prices into the stratosphere and instead have opted to rent, as all the recent data has confirmed, and as even Jeffrey Gundlach confirmed recently with his bearish call on housing.

However, while the market reserved for the US middle class is floundering, one segment is still vibrant - that segment which allowed foreigners to launder their money with US real estate.

============= "In Manhattan, you have foreign buyers coming in and using properties as a second, third, fourth or fifth home and hedging risks in their home countries,? said Chris Mayer, a real estate professor at Columbia University Business School in New York. =============

And as long as the NAR continues to be exempt from anti-money laundering requirements, as Zero Hedge also described well over a year ago, this explicit money laundering will continue unabated. Them, and hedge fund managers still riding on the wave of Fed generosity of course:

============= In Manhattan, buyers are using cash for trophy apartments and to gain an advantage over borrowers who must depend on loans to finance a purchase. Pej Barlavi, owner of brokerage Barlavi Realty LLC in Manhattan, said three of his five current clients buying homes prevailed with all-cash offers. Barlavi said two of them are hedge fund managers who used year-end bonuses to buy the properties: a $2.2 million two-bedroom apartment in Midtown, selling for $150,000 above the asking price; and $1.5 million for a one-bedroom in Tribeca. His client in the second transaction was ?nudged higher by a foreign buyer? before being chosen by the seller, Barlavi said. =============

Bottom line: in the Miami area, 67.1 percent of sales were cash deals; New York posted 57 percent; Detroit recorded 53.5 percent; Atlanta had

53.2 percent, and Las Vegas posted 52.2 percent.

Needless to add, with risk momentum still up as the global central banks continue to pump liquidity into the system at an unprecedented pace, the trajectory of all cash transactions will keep rising until inevitably it approaches 100%, if not for the entire country, then certainly for the abovementioned key markets. At that point, US housing will be nothing but a flippers game as the ultra-rich merely flip properties from and to each other at an ever faster pace.

Just like stocks.

[gfretwell]

The rich get richer

[Pete C.]

Sounds more like buyers get more reaponsible. Purchasing things you can actually afford without going into debt is certainly a positive, not a negative.

The fact that many middle class folks who had been responsible and saved their money have now been able to buy forclosures from the irresponsible and turn those properties into income producing properties would seem to be a positive.

Of course since this means that those who were previously irresponsible and lost the properties they overbought now are back to renting this will be spun by the loony left as some sort of "social injustice", since those who are responsible, pay their bills and don't outspend their income must somehow be up to no good and "repressing" the irresponsible.

[gfretwell]

I can't speak for the rest of the country but around here (SW Florida) there are people who are buying up properties, sometime sight unseen, for cash and renting them out. They are planning on a rapid rise in value and a sale in a year or so for a big profit. They are taking all of the "starter home" type properties off the market. We may be seeing the beginning of another real estate bubble here.

[Pete C.]

I'm sure there is another bubble of sorts forming, however this one has a bit better underpinnings since it's not based on sub-prime credit. If those buyers can't flip for profit in a year they can continue to rent them for however long it takes which should not lead to any drastic bubble bursting. The lack of existing starter homes will probably help prop up new construction which of course provides jobs so overall this bubble probably isn't that bad. I recall also hearing there has been a sharp decline in the overall credit card balances in the US which again is probably a good thing.

[nestork]

Bubbles are common in every market. What creates bubbles is the confidence in buyers that no matter how much they pay for an investment, they'll always be able to sell it for even more. In that case, the brakes come off and people throw caution to the wind and drive up the price of whatever it is they're investing in.

There was a time when certain sports cards that were given out with packages of gum decades ago were worth tens of thousands of dollars. Not anymore. And, of course, the first Superman comic book was worth thousands too. But, not any more. Both of those bubbles have burst, with the people holding the most expensive assets losing the most.

It will be the same with houses once the market for them changes. As long as mortgage rates were in the 10 to 15 percent range, no one could afford a $500,000 house. And, once mortgage rates rise again, there won't be any more $500,000 houses cuz very few people will be able to afford them. The price of houses will then drop to what people CAN afford. Houses, in that respect are no different than any other commodity.

[ChairMan]

people like home boi can always *spin* a positive into a negative, it's what they do. paying cash shows exactly what you said " a positive", nobody can lose but the buyer(THE RESPONSIBLE PARTY)

[sms]

In areas with a huge surplus of properties and a lot of foreclosures the banks are not all that willing to make loans. I recall a real estate agent telling us when we were selling my late mother's house that since values were falling about 2% per month that it was hard to find a bank that would lend money unless the buyer had a huge down payment. He said, "Want a condo on the beach? $20K cash. No bank will lend you money because there are so many abandoned units that the HOAs can't function with so few people paying dues.

In my area, you have lot of buyers from Asia coming in and they think that the prices are cheap. You'd be amazed at what a 50 year old, 1500 square foot, fixer-upper, goes for if it's in the right neighborhood.

This is not really due to any dysfunction, it's the housing market coming back down to earth.

If you're a seller, all you care about is getting top-dollar. If someone qualifies for a loan and offers you more money than a cash buyer you take the larger amount of money. The cash buyers must be making higher offers than those getting a mortgage.

[HomeGuy]

Your real estate market in the US has become dysfunctional because of the destruction of the middle class and the lack of your kids forming family units because they blew your retirement on college tuition and now they've come back to live in your basement (or maybe they've never left) and you've had to forestall your own retirement to make ends meet.

Who do you think the buyers are?

Who do you think is paying cash for forclosed and abandoned homes?

Who's money do you think they're using?

When more than 40% of residential property purchases are being made with cash, in an economy that has never really recovered from a recession 5+ years ago, when your middle-class incomes and net-worth have declined to levels last seen in the 1970's, do you really think that these cash purchases are being made by your every-day 30-ish or 40-ish family buying their first home or moving up into their second home?

These cash-homes are being bought by institutions and turned into rental properties as the destruction of your middle class continues. Home ownership (a home owned by the people living in it) is in decline in your once-great but now a joke of a country. Get over it.

[HomeGuy]

No.

House prices will drop to what hedge funds can afford.

Wall Street is the new american landlord. Or didn't you know that?

Exactly.

Just ask any high-frequency trader.

Or Warren Buffet.

[trader_4]

True, but govt plays a role which almost everyone chooses to ignore. If you make $200K in salary or business income you pay a hell of a lot of income tax. If you make that in a profit on a house you live in, you pay no tax. And even if it's an investment property, it's taxed at the much lower captial gains rate, which could result in half the tax. Then factor in that real estate tax and interest are tax deductible too.

Geez, I thought we just went through that.... The huge speculative over valuations in markets like Miami, Las Vegas, CA, etc have been corrected, haven't they? That's why cash buyers are snapping them up. Which of course is the flip side of the coin that HomelessGuy won't tell you about, ie that while he makes it sound like the real estate market is a disaster, it's actually doing OK. Not great, but OK in general.

As

That was never the normal range for a mortgage here in the USA, at least not in the last century, with the brief exception of the days of Jimmy Carter. Half that was more typical.

And, once mortgage rates rise again, there

There were plenty of $500,000 houses with interest rates at 7% or so, ie more inline with historical rates. And it depends where you're talking about. In Manhattan $500,000 hasn't bought even a studio for decades. Here in NJ, it's a modest house. In some other areas of the country, it's a hell of a house. You have to look at construction costs and the declining supply of land in many urban areas. Just because interest rates go up doesn't mean that the cost of lumber, shingles (those have been hit really hard), labor, etc go down.

If you're right and housing prices haven't really corrected after what we just went through, then we really are in huge trouble.

[trader_4]

What business person or investor in their right mind would be snapping up properties in a country that's finished, as you claim the USA is? See investors flocking to buy up property in Haiti? Investors are buying property in the USA because they see it as a good value. If the view was the country is totally going to hell in a hand basket, investors would be fleeing, not investing here. You keep saying Americans have no jobs, no future, so what dummy would buy rental properties here?

I would also bet that if you look behind the sales data, you'd find that a lot of those cash sales are investors buying properties, fixing them up, then reselling them a year later for a profit.

[trader_4]

I would have to disagree there. Let's say I'm asking $500,000 for a house. It's been on the market for a few months. I get two offers, one for $490,000 but they have to go apply for a mortgage. The other is for $480,000, it's all cash and they can close in 10 days. I don't know about you, but I would try to get the cash buyer to come up a bit, but even if they didn't I'd take their offer. It's worth it to have a done deal and not find out that after 2 months of screwing around, the other party can't get the mortgage.

It also depends on the circumstances. A cash buyer is even more valuable if you're not living there, paying taxes, a mortgage, etc. Or if you're unsure about the future of the economy and housing prices. If you really don't have to sell and are willing to accept the increased risk of having the deal fall apart, holding the house for another year, possibly winding up with even less is OK, then it could be different and maybe it's worth it to hold out for another possible $10K.

[nestork]

HomeGuy;3233834 Wrote:

No, there are mortgage funds that you can buy into, but the majority of real estate on the stock market is in the form of Real Estate Investment Trusts and Real Estate Mutual Funds. There are also companies traded on the stock market like Cadillac Fairview which operates a lot of shopping centers across Canada. Neither REITs or real estate mutual funds invest in long term debt like mortgages because it doesn't give them the high returns that investors gravitate to. Reits and mutual funds invest in income producing properties, mostly shopping centers and office buildings where high rents can be collected and you don't have the continuous maintenance issues like you do with apartment blocks. When a company rents space in an office building or a retail store chain rents space in a shopping mall, then the renter renovates the property to meet his needs; the landlord doesn't have to do that. Only with apartment blocks does the landlord invest money to make improvements with the aim of attracting tenants that are willing to pay more for a renovated apartment, and that can be a risky proposition. A tenant can leave their kitchen sink running while they just pop into the stair well to have another toke, and by the time they get back you've got water damage to 6 floors. Tenants in office buildings and shopping centers tend to be straight and sober, and that makes them considerably more responsible than many tenants in apartment blocks.

RESIDENTIAL HOUSES has never been an investment until recently. It's the low mortgage rates and the 20+ year history of continually rising housing prices that have made them an attractive investment. But, all that will change when mortgage rates for up or the supply of houses exceeds the demand for them, and both of those things can happen within a couple of years.

No one sees the ugly side of the housing bubble like I do. I regularily get applications for rent from people who are selling their house so they can move into rent. I'm not stupid. I have 21 apartments occupied by tenants who are saving their money so they can buy a house and move out of rent. I know those applications are from people that are just flipping houses. They start looking for another house to buy before they even move out of their old one, and they only need a place to live until they buy another house. They're going to do some superficial improvements to the new house, like build a fence and put on a new coat of paint and flip that house too. I don't want their business because I'm looking for long term tenants. But, this is the kind of thing that happes when you have a hot market for housing. Things were never this way until recently... over the past 20 years. There will come a time when mortgage rates will rise, the baby boomers will move out of their houses into nursing homes and cemetaries, and situation regarding housing will return to normal... that is, people buy houses to live in them, not to flip or rent.

And, nothing makes less sense to me than people who buy time shares as "investments". If I can't use my two weeks, I rent it to whomever wants to rent that condo from me for two weeks. And, the $2000 he's gonna pay me for those two weeks is enough for me to turn a blind eye if he brings his dogs along with him. After all, if the dogs mess up the carpet, it's no my fault. They can sue him if they want. Come to think of it, that carpet in the time share smells to high heaven, but since none of the owners are responsible for it's condition, it just continues to deteriorate. It's the fate of the commons... none of the 24 owners of that time share want to spend money on it because they know the others are just going to wreck the place anyhow.