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.

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