Jul202013
Is California cash buying slowing down?
Ever since the May/June mortgage rate increases how did it impact the sizable California cash buyer, if any. A cash buyer doesn’t have to worry about mortgages except when these rates affect the larger housing market. DataQuick’s monthly report has noted the comparison of between the June and May cash purchase sales and there was a 14.5% drop in the cash purchases or in the form of down payments. That’s a pretty significant change in just one month. Some people say it’s seasonal but let’s examine the data.
Southland Home Sales Drop; Record Yr/Yr Gain for Median Sale Price
Southern California home sales fell in June amid a still-tight supply of homes for sale, rising mortgage rates and a letup in investor buying. The median sale price rose at a record year-over-year pace to the highest level – $385,000 – in more than five years, a real estate information service reported.
A total of 21,608 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 6.2 percent from 23,034 sales in May, and down 2.1 percent from 22,075 sales in June 2012, according to San Diego-based DataQuick.
Last month’s year-over-year sales decline was the first for any month since last September. June sales were 20.9 percent below the June average of 27,315 sales since 1988, when DataQuick’s statistics begin. Over the past seven years Southland sales have been below average for any particular month..
…In a sign of continued market confidence, Southern California home buyers continue to put near-record amounts of their own money into residential real estate. In June they paid a total of $4.7 billion out of their own pockets in the form of down payments or cash purchases. That was down from May’s all-time high of $5.5 billion, and up from $4.1 billion a year ago….
Cash transactions have been has been large part of the housing market since the bubble collapsed. In 2012 there was huge increase in cash purchases. This increase was combination of investors, hedge funds, and foreign purchases. Now that tide might be ebbing affecting the demand side of the housing market. And it’s not just the amount of cash that has decreased in the percentage in the total number of sales.
Buyers paying with cash accounted for 30.2 percent of last month’s home sales, down from 32.7 percent the month before and down from 32.3 percent a year earlier. The peak was 36.9 percent this February, and since 1988 the monthly average is 16.1 percent. Cash buyers paid a median $320,000 last month, up 34.5 percent from a year ago.
It’s still a significant part of the housing market, but early signs show cash buying is retreating from it’s peaks in the first half of the year.
I also found something interesting in the report. The year over year percentage change on the median price on a county per county basis.
| Sales Volume | Median Price | |||||
| All homes | Jun-12 | Jun-13 | %Chng | Jun-12 | Jun-13 | %Chng |
| Los Angeles | 7,619 | 7,342 | -3.60% | $325,000 | $425,000 | 30.80% |
| Orange | 3,351 | 3,350 | 0.00% | $453,000 | $545,000 | 20.30% |
| Riverside | 3,832 | 3,536 | -7.70% | $206,500 | $269,250 | 30.40% |
| San Bernardino | 2,565 | 2,436 | -5.00% | $158,000 | $204,000 | 29.10% |
| San Diego | 3,756 | 4,048 | 7.80% | $335,500 | $416,500 | 24.10% |
| Ventura | 952 | 896 | -5.90% | $365,500 | $450,000 | 23.10% |
| SoCal | 22,075 | 21,608 | -2.10% | $300,000 | $385,000 | 28.30% |
This is an observation I causally notice with this data, so don’t put a lot of stock into it. Orange County median sale price increased 20.3%, while Riverside and San Bernardino 30.4% and 29.1% respectively. When the lower income counties home values appreciate greater than the higher income counties, it might indication that this is the peak of the market. Of course sale volumes are low, so it could the mix of homes sold in the Inland Empire compared to Orange County. However, I noticed this trend occurred in the last bubble in 2007. When properties got too expensive in Los Angeles and Orange County investors ran out the Inland Empire and drove up the median price in that area.
I believe that just like purchase applications for new homes we are seeing a decrease in cash buyers. Larry, also discussed the potential impact on home prices due to the Tapering by the Federal Reserve. We are entering a time of much greater volatility in the housing market. I also think that some people are underestimating the impact of increased mortgage rates on home values. Yes, the media is report the year over year increase in home values, but it only takes a few months of reporting the month over month decrease (if mortgage rates climb just a little higher) to the change mood in the housing market again.
Mike
‘the lower income counties home values appreciate greater than the higher income counties, it might indication that this is the peak of the market.’
That is not what is going on. What we are seeing is a bias into the market from the new mortgage regulations.
These new regulations are a government out of control. I have a large family, and in the early 90s, when I was in my 20s, I was able to purchase a few homes with low down mortgages. Today, a family in my same situation would be barred from picking up homes in CdM and NB. Now, I would be forced into the inland empire where real estate returns are dismal. The new mortgage laws would lock a young family into less than investment quality zip codes. This is freedom being destroyed by the government.
The data right now shows that the Infland Empire is appreciating faster than Orange County. Of course, it was much more undervalued, so the percentage change is being measured off a smaller base. In absolute terms the gains in OC are larger.
It’s not the lack low-down mortgages that keep young families out of the best OC markets, it’s the prices. Your right that families are basically barred because they can only borrow $729,750 with an FHA loan, but it’s not that private money and the free market is unable to provide larger, low down payment loans, it’s that they are unwilling to do so because it carries too much risk.
On a bigger picture level, I agree with you that all the government meddling and manipulation is destroying the housing market. The prices are being controlled like Soviet Russia with a Central Bank setting mortgage rates, the government guaranteeing over 90% of the mortgage market, and a oligopoly of too-big-to-fail banks controlling and limiting the for sale inventory. If the government were to really get out of the picture, interest rates would rise, the banks would fail, and house prices would crash hard. But at least then we would be back to free-market capitalism.
I wonder, if the situation ever presented itself that you reference here, what would the price of a home on the Laguna hillside actually be? Say 2200 s.f. with ocean views. $400 per foot? $350? 300? Could you get one of these for $500,000? And, how quickly would that rise with actual free markets? Wouldn’t you foresee a mad rush into these properties and a steep incline invalues?
Who would madly rush into them? If financed buyers are borrowing at 10% rates, it certainly wouldn’t be them. Prices would simply fall to the new equilibrium of what the private market would finance. If the risk/reward demanded 10% mortgage rates, prices would fall to whatever loan balance plus 20% a 10% mortgage rate would be leveraged to. The equilibrium price would depend almost entirely on what price the market establishes for money. I don’t know that that value is, but I do know that 4% is well below the risk-adjusted return a free market would mandate.
I would venture at those prices, a lot of cash would move in…especially international cash.
If interest rates hit 10%, we would have a major inflation problem, and it is likely the prices of real estate would be rising.
So long as incomes rise accordingly…
Yes, Jimmy, but the rise would be in nominal prices, not real prices. Real prices and opportunity cost is all that matters. The biggest bubble in US real estate history will take decades to “bottom’ in REAL terms from the 2006/2007 highs.
Actually, when you finance real estate, nominal prices are all that matters, especially when your cost of funds is lower than inflation.
If we were to keep government out of mortgages, you very likely would not have ever been able to get a mortgage at all. There is simply too much inherent risk in lending money for homes for 20 to 30 years, especially at low interest rates.
The only reason most families are able to get home financing with extremely low down payments, and the only reason that many people can get 30 year home loans, is because of “government meddling”. Were it not for government efforts, from the 1930s forward, to make financing available by forming the GSEs and the FHA to begin with, no more than half the population, if even, could get financed to buy a house without at least 50% down.
So what’s wrong with that?
Nothing.
I happily support pulling ALL government intervention in the housing market (and other markets). All government intervention in housing has accomplished is to inflate housing prices beyond affordability for most Americans, turn our population into debt serfs, destroy our older cities and turned some of their finest older neighborhoods into slums, develop thousands of miles of unsustainable suburban sprawl that has baked unsustainably high energy consumption per capita into the cake, and destroyed our financial system.
My reply was directed to “jimmy”, the poster who complained that “new mortgage regulations” are keeping him from buying with a low down payment, to which I say, were it not for government intervention, you would NEVER be able to buy with less than 40% down.
Which would be good.
It would be good because it would force people to save, keep house prices affordable and prevent the formation of housing bubbles. Additionally, a higher savings rate would make for a much more resilient population that could better weather economic downturns and whose savings would supply the “patient” money that invests in things that have a multi-decade payback of investment, like heavy industry and large infrastructure. You will notice that, while a stock offering in something as idiotic as Facebook can scare up $10B practically overnight, that there is “no capital” for investment in heavy industry and in new, risky, ground-breaking technologies because, in this financial environment, there is too much business uncertainty and too much risk, with too little promise of quick returns, to justify the risk.
Prices and interest rates would settle at market levels and realistic risk compensation. There would be no. “should or shouldn’t prices or interest rates be this or that, or this person should or shouldn’t be able to buy”. My guess is that many more people would be able to buy because less money/productivity would be spent trying to manipulate prices or should or shouldn’ts.
Great comment Laura. Exactly what I would say, if I weren’t too dumb and too lazy to put into words.
Come on, how many people ( and I mean individuals not major league investment house) actually have the true cash sitting there to buy a house? I can guarantee you its not as many as there are being portrayed. aLLA cash buyer means is I have cash. Doesn’t matter how I got it its cash. I bet if you start digging down a lot if these cash purchases were funded by leveraging another property or some retirement fund and personal cash loan or 4-5 people got together each with some cash or a combo of all listed to raise funds. Basically someone leveraged somewere to come up with all cash, and if you dig down even more I bet a lot of them were refied as soon as that so called equity showed up from the pumped up housing prices to pull most If not all the initial cash used to purchase the house in the first place to minimize the risk. Now some other lender is basically taking the risk while the “investor” sits back and tries to sell the house as a flip with minimal risk to their cash or rents it out again with minimal risk to their cash. If I were to do a all cash purchase and was willing to take that much financial risk that’s what I would do. But at one point and time someone will be left holding the egg basket. It’s inevitable. It’s a matter of WHO will be holding that egg basket? Average American Family or investors/flippers?
Lots of these houses are not being bought by AAF to live in at least not initially. Hell even if AAF does buy is taking HUGE risks by buying the overpriced houses these investors or flippers are selling. Why? Because someone says buy now or forever be left in the dust and AAF panics and just buys? BS. When I see a house being bought and 2-3 months later its back on the market with a 120k premium completely remodeled (by the lowest labor and materials possible and im sure its all been inspected right?) and again back in two months for more money. That’s when finally AAF is basically given the chance to buy it with some FHA or true 20% down and assume ALL the risk that brings with it its after all the banks investors and flippers got to take a bite out of it by pumping the price enough to make the ROI.
I think the cash buyers are only slowing down because the prices are pumped up to overflowing reaching saturation. . The ONLY thing left now to keep promoting/pumping higher house prices is to start doing risky loans. Granted if there is a way around the you can’t do those loans ARM anymore I am positive some banker/lender will figure a way around it and call it creative financing.
Nice comment.
There is a company offering buyers with proof of funds for 15% down that they will buy the property all cash, and the buyer has 5 years to get a loan to buy out the investor. The buyer must pay rent to the investors during the five year period. It’s kind of a hybrid REO-to-Rental and Rent-to-Own model. I don’t know how many transactions they’ve done, but variations of this are going on in the market, and it probably explains some of the all-cash deals.
Obstinate seller refuses to lower WTF price. Nobody showed up for the open house on Saturday. Phone didn’t even ring. Property sits on the MLS without offers
Realtor becomes impatient. Seller loses her job. Layoffs everywhere. No solid job prospects. Uses severance pay to barely keep up with the mortgage payments. Property goes into disrepair. Neighbor avoids eye contact with seller. Shame. Price lowered 10%. 30 days. Nothing. Missed association payment last month. Certified mail: notice of lien on property for missed payment. Weeds are growing. Southern California Edison cut the power. Account past due. It’s either the mortgage or groceries. Severance money is gone. Unemployment benefits kick in. Ramen noodles. Bank won’t return calls. Game over.
And that is how a seller’s market begins to shift into a buyer’s market. Just a matter of time.
Heh; the secret is to like Ramen noodles.
I was very stupid with money through my late 30s, ending up with ~$76K in consumer debt, coupled with losing a condo to foreclosure that I’d stretched way too far to buy. (See, I needed to buy _anything_ in 1989 because otherwise I’d be priced out forever 🙂 ). Then I fundamentally changed my relationship with money and zeroed out that debt in four years, which involved substantial lifestyle changes. By the time I got rid of all that debt, I had much better spending habits, and though I started spending more, I really liked how quickly my savings were growing.
I purchased a nice little house a couple of years ago with 20% down and at 16% DTI, which is now down to 14%. I still eat a couple of Cups-o-Noodles for dinner every couple of weeks, mostly for the convenience. With regards to food and most of my entertainment, I’m blessed with low standards…
“I’m blessed with low standards”
The vast majority of self-made millionaires are blessed with low standards. That’s how many of them get there. A while back I really enjoyed reading Thomas J. Stanley’s portrait of wealth accumulation as a mental attitude. A great read, if you like statistics.
I am experiencing this with a property in OC as we speak. Overpriced as hell, prop had a family of 6 living in something that can’t hold more than 4 and the agent keeps emailing my agent saying our floated unofficial offer is too low and to submit a real offer.
Prop still has no other offers. It’s beginning.
This would make a good “Ponzi borrower” story:
http://www.nytimes.com/2013/07/16/nyregion/a-connecticut-estate-yoked-to-a-tale-of-the-american-west.html?ref=realestate&_r=0
OMG! That is a great one. I may use that for a post.
We hit peak Ponzi. This is the top of ponzi equity withdraw. What do have to show for it?
[…] 2012 have evaporated in just two months. Again this is new home sales. Existing home sales just had huge year over year increase in prices in orange county. But existing home sale prices tend to more sticky when values drop, this is due to sellers still […]