Following the Money

Unknown-2On the trail of all those cash offers that have become such a common feature in our real estate market over the past few years… to a degree never really experienced or even thought possible in Santa Cruz County before. This isn’t your Mother’s sleepy-little beach town real estate market anymore. But then, it hasn’t fit that description for quite a while now has it?

What’s behind this unprecedented rise in the use of cash? Even when people have it, why use so much of it to buy homes? Seems like, if they have huge chunks of cash in the first place, most ought to qualify pretty easily for loans with more modest amounts of cash down.

Wouldn’t they rather maximize the use of other people’s money (OPM)? Specially when interest rates are this low? Don’t some of them want to take advantage of the best incentive and outright gift that American Homeowners/Taxpayers ever got – the mortgage interest deduction on their primary residences?

Hasn’t the key strategy for building long term wealth always revolved around leveraging OPM to buy appreciating assets while fully utilizing accompanying tax advantages? That’s what Rich Dad says in all those books. Poor Dad’s the other guy.

All-cash offers made a lot of sense when the distress market was in full swing back in 2011-12 and more than 40% of real estate transactions were short sales, REOs or pending defaults where people had to or wanted to get out quick.

Median Prices were down 35-45% from the peak and cash often allowed hardcore investor-types to hammer purchase prices down even lower. In many cases cash was also the only thing that could cut through the mind-numbing, transaction-killing red tape that bank processes subjected both buyers and sellers to in those distress transactions.

If you were flipping a short sale or buying a foreclosure on the courthouse steps, you paid cash. If you could get an amazing deal but you had to close in 10 days, you paid cash – there was no way the loan process was up to the task. If people wanted to avoid the temporary chaos created by new appraisal regulations, they offered all-cash.

But that was then. This is now. The distress market has waned. Residual distress properties make up only about 5% of total sales. Prices are back up. Not quite to 2005-2006 levels, but almost. Loans are easier to get and going through the process doesn’t feel like a Guantanamo water-boarding experience anymore. The appraisal system has steadied itself. Most of those quick flip artists have migrated elsewhere. To greener pastures where their cash can access better margins of return.

Without all those distress properties haunting the market, the inventory of available homes has steadily shrunk for the last 3 years. And it’s low inventory that has continued fueling the high percentage of all-cash offers.

Showing Us The Money!

Unknown-1Picking up where we left off last week.   (Go to to grab the thread.)  The big question hanging, call it the $64,000 question or the $640,000 question, (or just keep adding zeros) :  Where are all those all-cash offers coming from?  The one’s the market has been experiencing at an unprecedented clip for the last two or three years?

Who has that kind of money?  Didn’t everything implode in 2008?  Wasn’t everyone hammered by the Great Recession? Where’s all the dough coming from?

Is it funny-money people were stashing under their mattresses or in shoe boxes? waiting to cash-in on just the right rainy day market? Are more people selling their comic book collections? Are a growing number of Doomsday Preppers digging up their backyard coffee cans full of gold kruggerands, sensing that now may be the perfect move-up market for a spacious Post-Apocalyptic bunker to hunker down in for the rest of the world’s dystopian future?

Or are all these cash Buyers someone else? Some new breed of Buyer that’s evolved out of the rubble of 2008?  Homing instincts genetically altered by events radiating out from our bubble blast from the past?  Driven by a different set of needs and desires? And strategies for getting what they want?

I tried asking a few mortgage brokers where all the cash is coming from.  They watch money closely so I figured they might have a good feel for the question.  But unfortunately, mortgage types don’t get the chance to interact with many all-cash buyers, since all-cash people aren’t in need of any loan services.

So I’ve turned to Realtors who are right there, stationed in the trenches and I’ve been going Agent-to-Agent, collecting as many different all-cash client origin stories as I can.  Hoping to create some kind of over-arching  composite profile that helps explain where all those mysterious cash buyers are coming from.

I could probably just say all-cash offers are coming from rich people and leave it at that.  We love to say it’s the rich people these days.  But here in Coastal California, in a County that resides right next door Silicon Valley and where the median price of a home borders on $700,000,  I don’t think it’s that simple.  I’m not sure I even know what a rich person is anymore and it’s not going to provide much helpful insight for anyone scratching their head, trying to figure it out.

Anyone that has a cash offer experience of their own is invited to e mail it to me.  I welcome all thoughts or theories or tantalizing clues that anyone can come up with while we are trying to follow the money trail and track the cash.

Cash is King?

UnknownRecent stats say somewhere in the range of 30% of the homes being sold these days are all-cash transactions. For most of the 26 years I’ve been doing this, the notion that our Santa Cruz real estate market could be made up of this many cash buyers would have been – unthinkable.

Sure, there was a big influx of folks flashing cash on this side of the hill, during the real estate wave of the late 90s. That’s when IPOs and Stock Options were raining down new-found money, like manna from heaven, into the laps of a growing number of thirty-something tech-types.

And ironically, many of those techies that hastily ran out and bought houses with the unexpected windfalls burning holes in their pockets were, in hindsight, very happy/lucky they did. Specially when NASDAQ crashed in 2000 and left lots of co-workers holding close-to worthless options at the same time they were expected to pay taxes on the inflated value the stocks had when they were first issued the previous year.

At least those early-real estate adopters ended up with brick and mortar assets, cool roofs over their heads and something tangible to show for all those crazy, code -writing marathons they had pulled. Instead of nothing or even less than nothing in some cases.

But all-cash wasn’t the king in real estate before then. And all-cash didn’t register that big of an impact on our Santa Cruz market after that. Until recently that is. Even when real estate fever spiked and the market rose to its most en fuego pitch in the peak years of 2005-06, people rarely offered cash.

It wasn’t considered smart or fashionable at the time. Leverage was the name of the game. And to do that you needed as much OPM (other people’s money) as you could get your hands on. And that wasn’t much of a problem when the mortgage market was handing out easy qual, no qual and sub-prime loans like Halloween Candy to anyone who showed up at the door.

In 2008-2009 the market imploded and old ways of doing things slipped into a black hole. Notable trends were difficult to discern. Other than – it was damn hard to get a loan of any kind.

Sometime in and around 2010-2011, cash started to emerge as a bigger player in the growing number of transactions that were happening. When a surge of multiple offers hit in the spring of 2012, all-cash offers pumped up their street cred. And by 2013 the best chance to compete in a market that suddenly had a lot less houses to choose from, cash bulled it’s way to the front of the line and became the very best way for buyers to compete against other multiple offers – something that was becoming the staple of a new market normal.

So much for a brief history… let’s turn ours attention to the more salient question that so many Agents and Mortgage Brokers have turned their attention to and been scratching their heads about: Where is all the cash coming from?

More next week.

The Big Squeeze

picContinuing our discussion of the Static Quo of the Status Quo.  The No/Low Inventory of  homes on the market.   A move-up market bogged down. A move-down market with nowhere to go. An entry-level market with shrinking opportunities.  What’s left?  A side-ways market?  Not really much incentive to sell a house just to be able to move into another one just like it.  Home transactions flow out of life transitions and contrary to the old adage, the more things change in your life, the more you don’t want your home to stay the same.

In the old days, there was a natural progression in the prevailing wisdom about how home ownership should work.  First you had to get into the market.  Beg. Borrow. Scrimp. Save.  Anything to buy that first home.

Then you settled in. Built sweat equity. Waited for appreciation.  And voila! Three to five years later, you had a stepping stone to the next bigger, better place. Then, you settled back in again. Repeated same.

Somewhere between the 3rd and 5th move-up –  you were arrived at the end all/be all of perfect homes.  Until of course you realized that life really wasn’t going to end there.  And the biggest lesson life teaches over a lifetime is, you never really arrive.  There’s always one more change ahead.   But then… I digress…

Here’s the list we started last week –  factors that in one way or another or in conjunction with each other that are helping to squeeze the current listing inventory. (Remember low inventory tends to become a self-fulfilling prophecy. Sellers become Buyers after they sell, so if no one is selling then not as many are buying either.  Low inventory is a cause and an effect.)

– Prop 13 Deterrence                                                – Limits on Capital Gain Exemptions

– Step-ups in Tax Basis                                           – Sustained Low Interest Rates

What else can we add to the mix of contributing factors?  Certainly each of the following plays a role in holding down the growth of inventory at this unique juncture in history.

– Fundamental Changes in Mortgage Lending

– Unprecedented Numbers of Cash Offers

– Inherent Undesirability of Contingent Offers

– Corresponding Low Rental Market Inventory

– Increasing Numbers of Foreign Investors

– Differences between New Tech & Old Tech Trends

– Shrinking Middle Class/Concentration of Wealth with 1%

– Higher Employment w/o Corresponding Wage Increases

– Lack of Suitable Housing Density

– Slow Growth Planning Policies/Land-Use Politics

– Huge Surge in Aging Baby-Boomer Demographic

– Changing Millennial Attitudes about Home

– New Paradigm of Risk-Aversion since the Meltdown of 2008

Need we go on?  Not right now since we are out of room anyway.  Next week – we’ll start talking about how some/all of the above can align in different ways to create a series of perfect storms for individuals.

The Whys of Low Inventory

UnknownWe hear it all the time.  Buyers want to Buy but they are frustrated. Stuck. Mired in a market that doesn’t seem to be on the same page as their desire to buy.  And Sellers want to Sell but they can’t quite pull the trigger and put their houses on because they can’t figure out exactly where they are going or how they are going to get there.

The knot in the Mobius loop of supply gets tighter and tighter when Sellers insist on having a roof over their heads after they sell  (unless they have gone on to their final resting place).   In order to get it, they have to become Buyers in a market where there isn’t much worth buying.

We could offer up the suggestion that more Sellers could rent after they Sell.  But that’s pretty much of a non-starter for folks who’ve owned their own homes for awhile.  And if there’s anything more disappointing than the number of homes to buy out there – it’s the number of places available to rent.

So we arrive at the Static Quo of our current Status Quo.  Where the Quid No Quo of Low Inventory begetting Low Inventory doesn’t offer up many easy solutions.

Let’s dig in and continue the discussion.  If you want to catch up on previous columns leading up to this one, go to  (the print is a bigger there too!)

Right now there are plenty of people talking about Low Inventory. But very few are talking about “The Why” of low inventory.  What’s causing it?  Perhaps it’s time to start outing a few of the factors contributing to the mix. Rounding up a list of likely suspects.

Here’s an initial list of some of the lesser characters involved in aiding and abetting low inventory. We’ll call them “accessories to the time”.   The hotline is open for any additional tips you’d like to call in.

Prop 13: The cap on annual property tax increases acts as a deterrent to selling in a market where prices are rising.

Capital Gains Exemption of $250K/$500K  for Singles/Couples:   Many longtime residents are over this cap and the tax consequences have ironically become a disincentive for some to sell homes

Rule Governing Step-ups in Tax Basis:  Act as encouragement for many married sellers to stay in their homes  until  one or the other to passes away before a move makes practical financial sense.

Sustained Low Interest Rates: Act as encouragement for homeowners and investors to hold on to the real estate they’ve already purchased at incredibly low rates

The list will get longer next week.  Then we’ll spend more time examining it in greater detail.  It’s a complicated mix of interrelated factors and underlying causes but I won’t leave you hanging.

A Crimp in the Flow

Unknown-3We’re ten days into 2015 already! Time’s-a-wastin’ so we better get to work. There’s a real estate market out there waiting to be distilled.  Here’s a quick recap to make sure we are all on the same page:

First: There’s no more significant factor shaping today’s real estate market than the sheer lack of available inventory. A fact that has brought increasing frustration to buyers. Placed huge crimps in the regular flow of transactions. And overwhelmed many people’s ability to find practical ways to move up or down in their lives. Anything else we might choose to talk about would pale in comparison to the effects of our ongoing supply issue.

Second: Cyclical ups and downs in the marketplace aren’t unusual or unexpected.  World, national and regional economies are always swinging back and forth at the same time the real estate market is busy either leading the way or following suit – waxing and waning between Buyers’ and Sellers’ interests, fluctuating waves of supply and demand and the subsequent rise and fall of prices.

Third: The precarious depth our inventory has now fallen to combined with the prolonged duration of its decline is a powerful statement that current conditions aren’t just another iteration of cyclical business as usual.  Something fundamental has shifted. Signaling a sea change well-beyond the scope previously imagined.

Fourth:  Low levels of inventory are a permanent fixture of the new market normal – a truth that will continue to unfold over the course of the coming year.  There’s no simple solution to the inventory problem, waiting around the corner, ready to nudge the supply cycle onto its next phase.

Fifth:  There’s no question that many of the big changes real estate is experiencing stem from deeper, residual impacts still reverberating from the Great Recession. The world was turned upside down in 2008. While it would be comforting to assume we could just resume where we left off before the rude interlude of the last seven years, there are some aspects of how things work that have changed forever.

Sixth:  Something else happened on the way to the great recession and its patchwork recovery. The perfect storm came along.  While the economy was crashing and burning, the country was also coming to the tipping point of a huge demographic shift that’s been in the works for a long time. Aging baby-boomers began reaching retirement age at the same time millennials began launching journeys into adulthood. These significant life transitions are changing the essential fabric of our culture. Redefining notions about quality of life and how people want to live it.  We haven’t quite figured out how to make our new choices, find comfortable places and build strong new foundations on all the left-over shaky ground we’ve got – where so many of the old rules no longer apply.

It’s coming… but it’s going to take courage, hard choices and a lot of work.  More next week.

“Scratching for Answers”

Unknown-2The main feature in last Sunday’s SF Chronicle Real Estate Magazine was a year-end poll that asked three high-profile Bay Area Realtors to respond to the same question:  What was the biggest surprise in the real estate market in 2014?  All three weighed in and gave the same exact answer:  The biggest surprise, bar none, was the lack of inventory of homes for sale.

The same conspicuously low inventory that has profoundly shaped every other factor in the market for the last two years.  The one that will continue to remain real estate’s biggest elephant in the room heading into 2015. The one for which there is no apparent magic wand, ready to transform our severely ratcheted-down supply back into a steady, reasonable flow of good choices and opportunities again.   Suffice to say that we’re heading back into crunch time soon. Once more unto the breach Dear Friends.

None of the three were able to offer any enlightened perspective about “why” there is such low inventory.  Just that there is.  And that’s exactly what we’ve been scratching our real estate mind’s about these last few weeks.  Trying to get a few answers. Or at least a clue.

So here’s my latest, best thought:  I remember a wise person, once telling me that if I wanted to understand the big picture of real estate, I had to forget about all the nagging little ups and downs of the economy.  Things were always going to ebb and flow back and forth.  That was the norm. Getting hung up on smaller cycles was a form of misdirection, sure to obscure the true slight of hand at work, changing the game on a much more fundamental level.

If I wanted to understand what was really going on, I should dig deeper. Not by drilling down ad nauseum into reams of statistical analysis but rather by stepping back and adjusting my gaze toward a broader, meta-view of the landscape.

When I couldn’t figure out why something was happening, I should take note of any large demographic trends taking place and start following them.  Big changes in population – like shifts in age, migration patterns, birth rates –  often happen below the conscious awareness of everyday life.  Demographic changes are what happen when the world is busy making other plans.

Is there any evidence that suggests our prevailing pattern of low to no inventory is a symptom of a much larger struggle that two different generations are having, trying to find their place in a world turned upside down by the Great Recession?  One that came of age and one that began reaching retirement age both during the last ten years?

Next Week: Aging Baby-Boomers and Millennials looking for their places