Monthly Archives: February 2015

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 tombrezsny.wordpress.com 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 dot.com-inspired 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.