Cash is King
If you’ve been paying attention recently to the drivers of the real estate market, you may have noticed that there is a decided uptick in the number of ‘Cash Purchases’ taking place throughout the country. Some estimates put the actual number of cash transactions at over 100,000 monthly across the U.S. This development though has raised some interesting questions among industry experts as to whether or not this is a good thing. Some actually want to place blame on cash buyers, who are overwhelmingly investors, for driving the values of real estate down. Others see cash buyers as providing needed capital and resolve to purchase, but are not happy with the discounts given to these buyers. In the end, I believe, there are too many different ‘problems’ in the real estate market for any one solution to fix and placing blame on cash buyers for contributing to the lingering crisis is silly. The long-term solution to the housing crisis encompasses fixing two main problems:
- Eliminating excess inventory
- Allowing for prices to stabilize and increase under normal market conditions
The federal government has been slowly and very calculatedly releasing plans to sell large tranches of REO properties. These transactions are going to be sold to large buyers who are closing within 96 hours of accepted price point and the deals will be valued between .43 cents on the dollar and .47 cents on the dollar. (Which dollar they are using for calculation is a whole different topic!) Suffice it to say, the dollar value that will be attached to these properties before discounts will not be top value and will most likely reflect present day value.
If that is in fact the way the government chooses to dispose of the REO inventory they currently have, which amounts to near 50% of the total number of U.S. homes in REO status, then those homes will be sold to cash buyers at significant discounts compared to today’s pricing which is already depressed after years of stagnation. Do not expect this to increase any home values anytime soon. That is the main argument that many industry experts are using when they argue against such a plan.
They would rather see these homes sold very slowly and the highest price possible and would like the government to offer some sort of financing option for new buyers. This slow approach, while possibly slowing down the slide in real estate values, will actually prolong the recovery and keep prices depressed for years to come.
What is the real ‘Fix’?
Today, investors are accounting for 1 out of every 3 transactions occurring. Out of that 30%, nearly 3 out of every 4 are transacted with cash. The simple fact remains that investors are ready to enter the real estate market in a big way and the cash to do so is simply sitting on the sidelines waiting to be put to work. There is no possible way to eliminate cash buyers without prolonging the housing crisis into 2017-2020 or beyond. There is not enough demand for securitized mortgages for private mortgage holders to get back in the market in a large scale way and the government clearly does not have the appetite to continue to underwrite U.S. housing. Without underwriting in place – and discouraging cash buyers either directly or indirectly by not discounting – the housing crisis will absolutely drag on and easily could extend into and beyond 2017-2020.
On the other hand, discounting pricing – even at the .42-.47 cents level – attracts more cash buyers and even the institutional buyers who can purchase thousands of properties at a time. Being pro-active on reducing the inventory and clearing up the back-log of vacant REO properties will lead to an eventual stabilization of pricing. While it will be bad for current home values, when the REO sales are gone, they will no longer be calculating into the values of homes and pricing will be able to naturally increase as demand increases.
When I read that real estate industry experts are bemoaning the number of cash buyers and the downward pressure they put on pricing, it makes me wonder whether they really grasp the enormity of the REO problem and exactly how damaging the slowdown in processing and selling excess REO’s has been. The faster we clear excess inventory, the quicker banks can re-establish a lending standard and the real, long-term solutions to the housing crisis can begin.