Thursday, August 29, 2013

All Cash Deals

40% of all residential real estate transactions are all cash deals.

Of this number, the bulk are made of (1) large equity and hedge fund buyers; (2) foreign buyers; and (3) retired people trading up or down.

The next time you hear an analyst talk about the "stability" or "recovery" of the U.S. housing market based on recent sales appreciation and volume statistics ask yourself this one question.

Is a real estate market where nearly HALF of all transactions all-cash sustainable?  Healthy financially within the sector or even socially as a nation?  Should hedge funds be buying the single family homes our parents bought as newlyweds?  Should professional flippers be buying the eyesores and junkers our grandparents bought to build sweat equity?

The Bernanke Put on real estate has created an inherently unstable, fragile, and cyclical bubble market. What else can be expected when interest rates are at near zero percent for years at a time and you have a tax code which encourages borrowing over saving and debt financing over equity ownership?

The current real estate "recovery" reeks of one large Ponzi scheme to me.  What happens when the all-cash buyers of thousands of single family homes want to sell?  The entire real estate residential sector depends on the trade-up buyer, the second time homeowner who makes room for the first timers by selling and buying something larger with their accumulated equity.

But professional investors do not want to trade up---but OUT, back into cash or some other higher yielding investment.  Speculators always chase yield.

And how do perpetual renters accumulate the down payments required for second and third time homeownership?  Many of the all-cash buyers of today could not buy today without the ability to purchase properties years ago.

The fundamentals of the first time homebuyer keep deteriorating.  Even pristine credit and a pre-approved mortgage does not beat all-cash for a seller.  Paper always beats rock, scissors over paper.

Talk to individuals or couples currently searching for a home.  The competition is not another person but all-cash.

Forget about owning some sweat equity junker.  A flipper already took it.  The residential market is increasingly looking all retail, nice and new and shiny, where the real profits were made in the junkers even by newlyweds straight out of college.  As a buyer I want to see filthy kitchens with nauseating smells and rot dating back to 1972, not brand new shiny granite countertops and stainless steel appliances and the smell of fresh bread in the background.

The market is forever changing due to the distortions of cheap Fed money and these alterations are likely to be generational and perhaps permanent.  Average people are giving up on home ownership let alone investors who dream about making money in the market.

If you are a fan of the famous William Nickerson book, "How I Turned $1,000 into One Million in Real Estate in My Spare Time", ask yourself the simple question could Bill and his wife Lucille Nickerson (married 61 years before she died) have even gotten into the real estate rehab business today.

He worked as a repairman for the local telephone company and she was a housewife and mother.  They started buying, rehabbing, and selling houses in 1936.  By 1959, they were millionaires.  But they started with nothing, or just about next to it.  No major pools of cash, in fact, Nickerson taught not to buy that way in the first place.  He stressed regular saving and the use of leverage through pyramiding as the keys to his success.

Could normal people working as UPS truck drivers, nurses, teachers, police officers, and the like do it today?  Increasingly the answer is no.


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  2. A quick trip around the neighborhood reveals that there is plenty of development currently in progress here, all of of it involving the construction of single-family residences. In our part of town it’s unusual for there to be new office or multi-family developments buyer.