Housing Bubble 2.0: All-Cash Offers Increasingly Required To Compete In Overheating Markets

Tyler Durden's picture

Back in 2005, anyone with a modest amount of startup capital and a dream could become a millionaire flipping houses.  The complete disregard for the underlying risk building up in what was later exposed as one of the biggest pricing bubbles in history resulted in investors dominating a market that had previously been reserved for boring people who actually intended to purchase homes to live in them.

Alas, as the Wall Street Journal points out today, it seems that the lessons learned from the previous crash in the housing market just a few short years ago have already been forgotten as "all-cash investors" are once again crowding out entry-level homebuyers in overheating housing markets all around the country.

Meagan Freeman and her boyfriend have been looking for a midprice house in the Seattle area for six months but keep running into a hurdle: cash buyers swooping in and snatching up their properties.

 

It has happened three times, she said, most recently two weeks ago. The couple bid on a home in an unfashionable suburb they believed was a sure bet in the midst of a dreary Seattle November, when the market typically is slow.

 

Instead, the 27-year old said, a cash buyer won out yet again.  “It is definitely discouraging,” she said.

 

Many younger buyers have a hard time coming up with a down payment, much less an all-cash offer.

 

“First-time buyers drive the market, and if they are blocked out of the market then we are not building that next generation of homeowners,” said Nela Richardson, chief economist at Redfin, a national brokerage company based in Seattle.

Housing

Not surprisingly, the most competitive price range continues to be the entry-level housing markets where the overwhelming majority of Americans who can't come up with a down payment can compete courtesy of taxpayer subsidized FHA loans.  That said, their subsidized loans are no match for cash buyers who are increasingly swooping in to buy homes with dreams to making some upgrades and flipping them back to those same FHA buyers at an even higher price.

The starter-home market is especially tight. Average down payments for lower-priced homes have climbed by more than a third over the last decade, while down payments for higher-priced homes have edged up only about 2%, according to data company CoreLogic . The average down payment for a lower-priced home in September was about $18,360, according to CoreLogic, up from about $16,470 the previous year.

 

Cash sales are spreading even to sleepier markets away from the coasts, as middle-class buyers sell homes in San Francisco or Portland and move to cheaper areas. More than 20% of homes under $250,000 in the Boise area sold for cash in October, up from 15% a year ago, according to the Boise Regional Realtors.

 

Mike Brown, a real estate agent in the Boise area, said he sees a lot of out-of-state buyers. “People have sold their home at all-time highs in [places like] California, Washington and Utah and they’re bringing their cash to Idaho and buying homes,” he said.

In all, 28.8% of U.S. home sales this year have been all-cash transactions, according to Attom Data Solutions. That was down from the peak of more than 40% in 2011 and 2012, when investors were buying homes at a furious pace to turn into rentals. But the percentage of cash deals stands much higher than the 20% or so common in the early 2000s, and it has edged up from 28.6% last year, according to Attom.

All that said, we're certain this time is different...for example, 32-year-old Ward Willis who just paid $13,000 over asking for a 2-bedroom townhouse in North Carolina seems to be a pretty logical buyer...

“We lost a few because we were deliberating. All of that needs to go out the window. You’ve got just to be prepared to jump in.”

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Stuck on Zero's picture

You can secure a mortgage loan in 1 hour now.  Is that too slow to compete with someone with cash. How stupid. Just fake like you have the cash.

HarryKallahan's picture

.

 

You get a definite maybe in 1 hour.

Then the lender looks up your a$$ for the next 60 days or more.

Someone with cash can close tomorrow...a borrower will take 2 months.

.

 

EINSILVERGUY's picture

I can attest to that. Just bought a home 50 miles outside of Houston so I can get away from all of this shit.

I make over 6 figures and have a Fico over 800. It still took 4 weeks to get the loan and I had no debt and liquid.  

If it was this painful for me with all of the shit I had to provide. I can't imagine what it must be for somone not in the top 5%

I don't want to have to go through this shit again

Dancing Disraeli's picture

If your new area is 90%+ White, you have just done one of the best things you will ever do in your life.

I know.

techpriest's picture

If it was this painful for me with all of the shit I had to provide. I can't imagine what it must be for someone not in the top 5%

The danger for those not in the top 5% is dealing with people who specialize in loaning money to them. If you are good for the loan the lender makes money by the interest on the loan. If you aren't good for it, the lender makes money by charging fees, foreclosing in a few years by creating an unsustainable situation (ARM anyone?), and flipping the property to the next sucker. Granted, you see this a lot more in cars, but it can happen in certain housing markets also.

In this case, the main threat is bad information, fed to you by a loan shark in a suit. My dad was in the home construction business for 25 years (until 2008), and he pointed out that the market swells with this type during boom periods.

PS: It sounds like we had the same home-buying experience. The big cities in TX are crazy these days.

Ajas's picture

I just bought 2 years ago in Seattle and I can tell you for a fact it has nothing to do with pre-approval and everything to do with closing date.

Nobody cares what loan you were approved for since there is always a cash-only offer equal to it in no time. Bid over asking and the cash will match it.

The loan documentation requirements are also much stricter now than in the bubble days. This makes the cash-only preference much more prevalent, as loans are more likely now than ever to be delayed or rejected by underwriting.

So I'm curious why this implies a bubble, since the borrowers are more qualified than ever, and the aggregate loan-to-value is lower than ever because of all the cash buyers.

If it is a bubble it's of a completely different nature than 2007

JRobby's picture

Could there be a down voting mortgage broker in here?

Truth hurts. No more big paydays in that biz anymore? I thought they all ran over to "merchant funding" which is an even filthier abusive criminal racket?

canisdirus's picture

Lenders are faster than that. You can easily close 2-3 weeks after putting in an offer if you prequalify. Total time might be 4-5 weeks, similar to the time it takes to get into a rental. Credit pulls, review, checking references/employers, etc. In my experience, the slowest member of the whole process is the escrow company.

MoreFreedom's picture

Perhaps there's a lot of want to be buyers, who can't qualify the for loan they want.  And if I recall correctly, getting a loan commitment letter, is continguent upon providing the documentation to back up that offer. 

A buyer who's motivated to sell, could lose a pre-qualified buyer if he waits for someone to get an inspection (which might have contingencies to repair things first), get an appraisal (all to protect the lender on the loan), and find out the offered price is higher than the appraisal making the loan fall through (which makes the loan riskier for the lender than planned).  

A smart buyer, will get pre-approved for a loan greater than necessary to assure the buyer.  Giving those who live more within their means, an advantage.

DJ Happy Ending's picture

pre approval don't mean squat in terms of time to fund or disqualifying contingencies.

pre approval isn't a guarantee of anything other than your credit score looks ok.

the first bank that can offer a true pre approved loan will take the market from the rest, but when you can borrow money for free and lend it at 4%, there is no true competition and therefore no incentive for any bank to offer this.

bigluck's picture

Wow.  You know nothing of the industry.  

Bigly's picture

Define overheated. You mean Sillycon Valley, or tech areas? Include Chinese money laundering areas? Where else, as 99%ers, American citizens, generally do not pay 100% cash.

shankster's picture

My friends in the real estate biz are telling a different story than this. There are only a few places in the country where people can plop down cash for a house..many are renting instead of buying in most areas.

buttmint's picture

Shankster....
Amen!
Most Americans out there cannot come up with first/last/damage deposit.

buttmint's picture

Shankster....
Amen!
Most Americans out there cannot come up with first/last/damage deposit.

Proctologist's picture

Here in SE MI we’re right back to pre-2008 levels.

Insane and absolutely unsustainable.

buttmusk's picture

In the context of other asset prices they don't seem unreasonable.

thedespised's picture

LOL So, everything is fucked then lol.  

Bay of Pigs's picture

I did loans in Seattle. Its a fucking Clown Show now.

JRobby's picture

This is a repeating theme that sometimes goes unnoticed.

Misallocated capital flows for much too long.

pitz's picture

Nobody cares about whether the 'offer' is cash or not.  Credit spends the same way as cash.

CNONC's picture

All offers requiring financing are contingent on the buyer actually recieving the financing.  That means both buyer and property have to "qualify" as defined by a series of decisions made by third parties.  Cash offers usually don't even have inspection contigencies.  I have bought many houses for cash, and my offer usually includes an earnest money deposit equal to the purchase price.  The only contingencies I include are that I choose the closing attorney, that the property be transferred by warranty deed, and that the closing agent or attorney offer title insurance.  I can close as soon as the title work is done.  Compare thagt to a financed offer, which is implicitly or explicitly contingent on a third party appraisal, a search of various police and insurance company data bases, the ability to obtain homeowners insurance, the buyers credit not falling during the contract period, and a typical closing date 30 days or more out.  And maybe $1000.00 in earnest money if the buyer just decides to walk away. 

You have been opining about real estate on this board for years, but sometimes you say shit that suggests you don't know a damn thing.  I can't imagine any even slightly experienced real estate hand making the comment you just made.

pitz's picture

You done trolling?

CNONC's picture

You done pretending to know anything about real estate?

pitz's picture

I know a lot more than you do about RE.  

Blano's picture

 Your words above betrayed you. 

BarkingCat's picture

He's not trolling. His comment was 100% accurate while yours was just plain ignorant.

pitz's picture

He claimed he put down a deposit of 100% of the purchase price.  That's trolling.  He claimed that buyers were putting deposits of $1000 in the case oif conditional offers -- also trolling.    Also he claimed that I didn't know anything about RE which appears to be a completely untrue and unwarranted personal attack given the information I have brought to the table given the Vancouver RE market.  He's butthurt that Vancouver RE is dominated by highly leveraged buyers, not mythical and practically non-existent Asian cash buyers.

CNONC's picture

I said nothing about Vancouver.  In fact, I suspect you are closer to right than wrong in that regard.  That Asian money is present and a significant factor in Vancouver is true, but, and I know from experience, locals chasing quick profits are more than sufficient to drive a market into bubble territory. 

For those of us who were serious about buying houses with cash in a tight market, earnest money of 100% was an attention grabber.  It proved that I was serious.  Since I intended to close in three days, it cost me nothing.  In the market I was active in, Atlanta GA, earnest money of 1% was common.  I built hundreds of houses.  I rarely received earnest money greater than $2000, even on 350k houses.  That was a reflection of the frequency of deals failing, even with well vetted buyers.  Nobody, not the seller nor the buyer. wants to get into a protracted fight over keeping someone's earnest money in those events, so earnest money was kept low. And that is the point.  Deals fail frequently, and for bizzarre and flambouantly stupid reasons.  When I offer 100% earnest money, I have already made the decision to purchase.  There will be no question that my offer is the superior offer, even if someone else offers a little more but with contingencies.  None of this is trolling.  It is how the business works. 

I am not a troll.  Is the claim that I am not an unwarranted personal attack?  Unless your experience in real estate is exclusively with levered buyers, if you were, say a mortgage broker or loan officer, I still fail to see how you can believe that a cash offer is not seen by the seller as a far superior offer to any financing contingent offer.  I stand by my comment that, unless you overstated your position, your real estate experience is limited or one dimensional.   

techpriest's picture

Thanks for the insightful posts.

JRobby's picture

I wonder why you are getting hammered with down votes?

MoreFreedom's picture

You're exactly right CNONC.  Though I wonder why you want to "choose the closing attorney" and how/why that's different than choosing the title company. 

CNONC's picture

Depends on the state.  "Closing Agent" is probably more accurate.  In Georgia, for instance, only lawyers can sell title insurance.  In Missouri, title companies can sell the insurance.  I choose the closing agent based on my trust of their title research and the soundness of the title insurance they sell. 

Singelguy's picture

I concur. In Florida you can use a title company but many are not very good. I had a few experiences where the title company totally screwed up the paperwork. After that, only my attorney handled my closings.

bigluck's picture

Silly comment.  Of course it matters.  The quesion becomes if the seller is willing to burn time and accept risk for an offer with financing vs (most probably) a lower offer for cash.  That is the typical dillema.  

buttmusk's picture

Doesn't even make sense. Assuming the buyer can quickly qualify for a mortgage there is zero advantage to accepting a cash offer. Why is this even relevant?

HarryKallahan's picture

A cash offer can close tomorrow.

A financed deal could take two months to fall apart, then the seller is back to square one.

buttmusk's picture

Part of the agent's job is assessing the creditworthiness of the buyer. You shouldn't have any issue with that unless you are at the very low end of the market. Last time I sold a property it took about a week for the buyer to be approved. Cash buyers are usually just trying to take advantage of desperate sellers to get a better deal.

CNONC's picture

Pre approvals are not approvals.  The property must be appraised, "termite letters" obtained, inspections performed, and final credit checks done.  It is common for deals to blow up at the closing table because the buyer's credit score dropped 8 or 9 points between the pre approval and the closing, or for properties to fail to appraise for the contract price, or defective products like polybuylene, or LP siding, or lead based paint, or asbestos, or dozens of other defects to be found that make the property ineligible for either the insurance carrier issuing the hazard insurance or the lender writing the loan.  With cash, if the seller provides a clean title and a warranty deed, the closing is going to happen.  

EINSILVERGUY's picture

Just went through that. Just closed on a house but the one before didnt appraise and the seller wouldn't negotiate.  I walked away after paying 1250 in inspection and apprisals.  I wasnt going to give the sellet 20K more for the house and walked away. The house we eventually went with was a better deal all around so the $1250 was well spent but not everyone has that to burn. 

BarkingCat's picture

I have been looking at real estate for the last few months as I want to get the fuck out of Seattle and have seen number of houses go on the contract and then return back to the market. Some of them multiple times. My assumption is that something happened in the inspection or financing.

Cash buyers are also more experienced and will not walk away from a deal because of minor issues that come up during an inspection but sound like huge problems to an inexperienced buyer.. 

techpriest's picture

I think this is something that really has to be drummed into kids' heads in schools.

Cash and credit are different, because unless the lender gets his money back, he is looking at a potential loss. If its a bank, the bank is betting on the borrower with borrowed money, aka your savings account. They can't risk losing the money they borrowed in order to lend to you.

Because of this, as you said, the bank has to get all of the pieces in place before it feels safe enough to approve the loan and disburse funds. I just went through this last year - it takes time, and they need to ensure that the buyer won't run into trouble (including house trouble) and mail in the keys.

And speaking of time, something I'm grateful to have learned as a part of my engineering degree was engineering economics, in particular the time value of money. If an investor buys a house for $100k, puts in $20k of improvements, and after 6 months sells it for $150k, then if the deal is fast he makes $5k a month (I'm using numbers to make the math easy - provide realistic ones if they're off). If it drags a couple of months, his pay falls to under $4k a month, a 20% loss. And if the deal falls through because the bank gets cold feet and the process restarts, the per-month value of the project falls to an unsustainably low pay rate, not to mention incurred property tax, etc.

Blano's picture

 Again, it's about timing. 

Three days vs. one or two months. 

This is a no brainer. 

buttmusk's picture

Btw a cash offer is meaningless when 95% of them are just sharks hunting for desperate people trying to get 25% off the market value to quickly flip.

Truthoutthere's picture

Can one not get a pre-approved loan in the US?

DJ Happy Ending's picture

pre approval does not mean the loan is unconditionally approved.

a very misleading term to the unwashed.

JRobby's picture

Thank you for pointing out basic business logic.

 

alpha-protagonist's picture

No one has to sell the loan on a cash offer and there's no chance of foreclosure.

Anteater's picture

"Hello, I'd like to schedule a showing for the 666 5th Avenue property you're listing."

"Umm, do you have cash? I'm kinda busy."

"What? We haven't even seen the property yet."

"I have three cash offers on it. Call me if you have cash."

--

This is moar R/E bubble bullshit. The realtor represents the SELLER, not the

Buyer. They're using anecdotes of cash buys to shake out the lookie-lou's.

Americans move every 3.5 years. Realtors charge 5%-7% per transaction.

Even in a flat market, do the math. Houses must inevitably become rentals.

alpha-protagonist's picture

I remember back in 2005 here in SoCal how those snot-nosed fucking realtors would stand at the doorstep of a McMansion and hold an auction. Idiotic buyers looked like ducks waiting to be fed bread from a kid. OH! ...and the realtors had a "wtf can you do for me" attitude!