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

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.


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.”