Cash sales have been the hallmark of the investor. With all-cash offers for REOs and short sales, investors get discounts and an advantage over owner-occupant competitors whose offers are contingent upon their financing being approved. In fact, many assume all cash sales are investor purchases though large numbers of owner-occupants are turning to cash bids in hot markets.
In some quarters, all-cash sales have come under fire because they have been such an effective tactic for investors competing with owner-occupants, unfair not only to first-time homebuyers but also minority buyers. The National Association of Hispanic Real Estate Professionals has been the most vocal, urging that auctions for foreclosures be ended and that government agencies like FHA adapt “First Look” policies to give owner-occupants a chance to compete against all-cash buyers. (See “Hispanic Real Estate Professionals” Attack Investor-Favored Policies).
Asked what is preventing Hispanics from becoming the new generation of first-time buyers, Gerardo Ascencio, 2012 NAHREP president, said “It is not the credit crunch or the lack of financing, a general idea about the Latino potential homeowner but the obstacle is really the lack of inventory and the unfair conditions Hispanics are facing in the bidding process against large cash investors.”
While some resent market place power cash sales have exerted in recent years, others are already growing concerned that cash sales may be on the decline.
“While cash sales heavily contributed to their stabilization and recovery in the residential market, the cash-sale share has peaked and is currently receding. Going forward, for the market to continue to recover, trade-up and first-time homebuyers have to replace the declining number of cash buyers in the market,” writes CoreLogic Deputy Chief Economist Sam Khater in the current issue of Market Pulse.
The cash share of sales fell to 39 percent in May and has been down on a year-to-year basis for 19 months. The trend is more evident among non-distress sales, where on a year-over-year basis the cash share is 39 percent, down from 41 percent a year ago, Khater wrote.
Khater lists the important by relatively unchronicled roles cash sales have played in the housing economy in recent years:
- Cash sales helped provide a bottom for the real state market in 2009, as cash sales recovered and increased faster than mortgaged sales. As a result, without the cushioning effect of cash sales during the housing bust and a much higher increase since the trough relative to mortgaged sales, overall sales today would be much lower.
- The serious price declines of the past three years would have been worse than they were because cash sales provided demand that otherwise would not have been there.
- Additional demand from cash buyers has helped improve prices dramatically in several boom-bust markets.
However, Khater concludes that, from an economic perspective, cash sales are a double-edged sword.
“The rapid rise in home prices will soon lead to a lower presence of cash sales as investor activity returns to moderate levels. In order for sale volumes to rise next year, the presence of traditional and new home buyers will need to increase to replace the cash buyer…What remains to be observed is the impact of the recent rise in mortgage rates,” Khater wrote.
As my mother used to say, “Cash buyers. Can’t live with ‘em, can’t live without ‘em.”