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Tom Lawler pulls out an interesting piece of data from the latest housing statistics. Foreclosures have been dropping in 2012, mainly because of the rise of short sales as a foreclosure alternative. This appears to be changing – the repossession rate in November was 11% above that of October and even up 5% year-over-year – but Lawler is looking back at data, not forward at the recent trend.
The interesting thing Lawler finds is this:
While most areas have experienced a significant decline in the foreclosure share (as well as the overall “distressed-sales” share of home sales this year, it’s sorta interesting to note that the all-cash share of homes purchases has not fallen, at least in areas where data on financing are available. [...]
While in most of these areas the foreclosure sales share of resales in November was down considerably from last November, as was the overall “distressed” sales shares, the all-cash-financed share of home sales was actually higher this November than last November in many areas, and in other areas it was little changed from a year ago. Most analysts (and realtors) believe that investors make up a substantial share of all-cash purchases. Given that the all-cash share of purchases is flat to higher while the foreclosure share of purchases is down considerably, it appears as if investors have considerably increased their purchases of non-foreclosure properties over the last year.
So investors have shifted from merely scooping up foreclosure properties to scooping up all kinds of other properties. This suggests that demand from Wall Street is moving investor purchases into other areas of the mortgage market. Maybe you have motivated sellers using short sales to push properties into the hands of investors. Or maybe investors are over-extending themselves. Having set a budget for a certain level of properties, and finding the foreclosure markets more scarce, maybe they’re buying homes they think are undervalued, regardless of the fundamentals of that decision. Maybe this will make it harder to eventually sell them on the back end, if they’re not getting them for a steal.
What does this say about the character of neighborhoods that these institutional investors are purchasing more and more of the housing stock in cash deals? Will the higher price paid for them – non-foreclosures are self-evidently more expensive than foreclosures – suggest the creation of another bubble? Are individuals getting pushed out of neighborhood in favor of these more attractive cash deals? And what happens in the aftermath? You suddenly have this group of investors who want to collect rent for a few years and then sell. What if there are no buyers? What if they’re buying too high? What if the aftermath results in a big drop in prices?
So many unanswered questions….
Photo by haglundc under Creative Commons license
9 Comments
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All cash seems like a dumb ass idea for investors. The return on investment sucks big time and unless they get some special treatment, depreciation over 28 years (if I remember correctly) also sucks. So are investors really buying or like in Silicon valley the nouveau riche with major liquidity buying their residences or vacation homes?
Institutional investors are buying like crazy because interest rates are so low none of the richy rich can get a decent return on sound investments; that was the spawn of the MBS debacle. It is why Madoff made off like a bandit for so long and Stanford had two gulfstream jets. Rich people as a class are preternaturally stupid. The only unanaswered question of import IMO is when things go wrong how will the uber wealthy pawn their bad risk investments off on us.
Agree. This story makes no sense.
Finance is all about leverage, not “all cash.”
Agree with you too, to an extent. Strange things happen when interest rates are zero.
Disagree with you in the sense that richy rich have ever tried to earn a decent return on sound investment. Findereg was all about leverage, wh is all about making unsound investments with indecent returns.
An all cash purchase makes sense, even with zero int rate, only if you think you’re going to sell at a profit, i.e. another housing bubble.
Wouldn’t thumb wrestle ya about mental capacity of finelite. But looking for another bubble exactly where the last one was?????
On your quandary about how the taxpayer will end up holding the bag, I guess we have to wait to see it.
Really doesn’t matter. Soon most Americans people won’t be able to afford to buy or to rent at the prices that would make this profitable with the structural unemployment and plummeting wages.
I think they are making money on the transactions and plan to offload the investment loss to the taxpayer.
Capitalism; it’s all about the profits.
To all the above, I guess the old rich adage of buy real estate, never sale might be in effect. Still seems a lack in investment sagacity regardless of interest rates.
While in most of these areas the foreclosure sales share of resales in November was down considerably from last November,
Right, this is (or rather, was) a supply side issue. The rumor among RE investors was that federal regulators told banks to slow down the foreclosure pipeline until after Election Day. Now that we’re past the first Tuesday after the first Monday in November, I suspect banks will start throwing more foreclosures into the real estate pyre.
The cash purchases do make sense if the profit isn’t coming from the houses themselves, but rather from the collateralization of rental income across huge batches of properties. The losers are the renters and potential buyers who remain priced out of the artificial market thanks to this Ponzi scheme.