Aug202013

With depleted MLS inventory, all-cash buyers rule the market

In early 2012 lenders changed their foreclosure policies and opted for can-kicking loan modifications, most of which will fail. This dried up the MLS inventory and caused prices to bottom. Coincidentally, the low house prices and superior returns on rental homes attracted large private-equity firms to this market bringing their cash to the foreclosure sites as well as the MLS to acquire what they could.

In a normal real estate market, all-cash buyers represent about 20% of sales. Ordinarily, these are empty-nesters who accumulated a lifetime of home equity, sold their properties, and downsized to a less expensive property to live in during their retirement without a payment. Plus, many people simply don’t believe in debt, and with family help, many people live in their homes without ever having a mortgage. All-cash investors have always been part of the market as well, but not in the number seen since the housing bust.

When the inventory was cut in half, the all-cash buyers did not go away. And with the influx of the private equity funds, their share of the housing market more than doubled. Cash buyers are always at the head of the line when it comes to buying property because they don’t have to arrange financing. A seller would always prefer an all-cash buyer because the deal is far less likely to fall apart.

Report: Half of All Homes Are Being Purchased With Cash

By Nick Timiraos — August 15, 2013, 10:29 AM

More than half of all homes sold last year and so far in 2013 have been financed without a mortgage, according to an analysis by economists at Goldman Sachs Group.

The analysis estimates that around 20% of all homes sold before the housing crash were “all-cash” sales (or around 30% of sales by dollar volume). But over the past seven years, the all-cash share of sales has more than doubled, increasing by more than 30 percentage points, according to economists Hui Shan, Marty Young and Charlie Himmelberg. …

This has serious implications for the housing market.

First, all-cash buyers are not limited by financing. The affordability limit imposed on everyone else does not apply to them. All-cash buyers can easily inflate another housing bubble by pushing through the limits imposed on the rest of the market, particularly in an inventory constrained market where they make up more than 50% of all sales.

Typically, a housing bubble would be created with debt, and it’s the banks that get burned when it comes crashing down. However, if we inflate a housing bubble with equity, many all-cash buyers could find themselves bagholders with nobody to sell to. Remember, these all-cash buyers need a take-out buyer to profit on more than the meager rental returns. If they inflate prices above what financed buyers can bid, these investors will only have other investors to sell to. Once the word gets out, no investors will step up to be bagholders, and the entire house of cards will collapse back down to price levels where financed buyers can participate.

We are quickly approaching the price levels where financed buyers can’t compete, particularly in the most desired neighborhoods. The next year or two will tell us whether investors inflate another bubble or not.

The surprisingly large cash-share of purchases helps to explain why home sales have jumped over the past two years despite more muted increases in broad measures of new mortgage activity, such as the MBA’s mortgage application index.

Yes, it does. It further reinforces the argument that this housing relief rally is not built on solid fundamentals.

There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.

The Goldman analysis also estimates that around 44 cents of every $1 of homes sold currently is being financed, compared to 67 cents before the crisis.

Purchase-mortgage origination volumes have fallen from around $1.5 trillion in 2005, when the housing market peaked, to around $500 billion in each of the last two years.

The chart of originations looks at the total count, but the dollar volumes tell and even more remarkable story. We are only originating 1/3 of the dollar volume of the peak, despite the fact that prices are nearly pushed up to those levels. The only way that happens is through an artificial restriction of inventory.

While declines in the volume of homes being sold accounts for some of the decline, the Goldman economists estimate that around 40% of the decline is due to the drop-off in the amount of financing per home.

The Goldman analysis estimates that purchase-loan volumes will rise to around $750 billion next year and to $1.1 trillion by 2016.

So they are expecting a 50% increase in mortgage originations in each of the next two years. Does anyone else think that is likely? Wages are stagnant, job growth is tepid, lending standards are prudent, Dodd-Frank restrictions are due to be implemented, interest rates are rising, but somehow we are supposed to see 50% increases in origination volume? I don’t think so.

The percentage of all cash-buyers will decline over the next few years as the big REO-to-rental hedge funds stop buying. We know Carrington Mortgage has already stopped, and many others will take their cue. The result of the diminished all-cash buyer activity and weak housing fundamentals will be lower sales volumes. The restricted inventory will keep prices where they are, and they may continue to rise. The market manipulations will continue until the banks get out from under their bad loans.

The Ponzi lifestyle claims another victim

The owners of today’s featured short sale already sold the house — to the bank. They were busy keeping up with the Joneses, and in a series of refinances, second mortgages and HELOCs, the managed to spend the house they’ve owned for 23 years.

  • This house was purchased for $400,000 in 1990, at the peak of the last housing bubble. I don’t have their original mortgage balance, but it was probably $320,000 since 20% down was the norm then.
  • On 6/12/2001 they refinanced with a $275,000 first mortgage, so they were prudently paying down the mortgage for the first 11 years they had the property.
  • On 7/25/2001 they obtained a $137,300 stand-alone second.
  • On 12/4/2002 they refinanced with a $428,000 first mortgage.
  • On 2/13/2003 they obtained a $75,000 HELOC.
  • On 6/3/2004 they refinanced with a $600,000 first mortgage and opened a $150,000 HELOC.
  • On 12/14/2007 they refinanced with a $756,000 Option ARM.
  • On 5/29/2008 they obtained a $107,890 HELOC.
  • On 7/25/2008 they borrowed $101,500 from a private-party lender. I guess they needed to keep the ATM machine running.
  • They were served with a NOD in June.
  • It’s difficult to say how much they owe exactly, but they have it listed as a short sale with a $899,900 price tag, and since their original purchase prices was only $400,000, we can surmise they blew through about half a million dollars.

This is a family that should be selling their home for a huge profit and executing a move-up sale. Instead, with their credit trashed and not a penny to their name, they will quietly move into a rental. Perhaps they will contribute to housing demand again someday, but for now they, and the millions of Ponzis like them, will only be bidding up rental rates.

 

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[idx-listing mlsnumber=”OC13104470″ showpricehistory=”true”]

30942 VIA ERRECARTE San Juan Capistrano, CA 92675

$899,900 …….. Asking Price
$400,000 ………. Purchase Price
2/6/1990 ………. Purchase Date

$499,900 ………. Gross Gain (Loss)
($71,992) ………… Commissions and Costs at 8%
============================================
$427,908 ………. Net Gain (Loss)
============================================
125.0% ………. Gross Percent Change
107.0% ………. Net Percent Change
3.4% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$899,900 …….. Asking Price
$179,980 ………… 20% Down Conventional
4.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$719,920 …….. Mortgage
$178,981 ………. Income Requirement

$3,656 ………… Monthly Mortgage Payment
$780 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$187 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$4,624 ………. Monthly Cash Outlays

($958) ………. Tax Savings
($945) ………. Principal Amortization
$302 ………….. Opportunity Cost of Down Payment
$245 ………….. Maintenance and Replacement Reserves
============================================
$3,268 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$10,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$10,499 ………… Closing Costs at 1% + $1,500
$7,199 ………… Interest Points at 1%
$179,980 ………… Down Payment
============================================
$208,177 ………. Total Cash Costs
$50,000 ………. Emergency Cash Reserves
============================================
$258,177 ………. Total Savings Needed
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