From the latimes.com:
Cash talks. And it’s speaking loudly in California real estate these days, even in the nicest parts of town.
All-cash buyers grabbed a record 30.9% share of the Golden State’s houses and condos in January as low prices lured investors and others, according to San Diego research firm DataQuick Information Systems.
Cash activity has been brisk for months in foreclosure-ridden areas such as Riverside and San Bernardino. But now, the cash buyer has become a major player in Southern California’s most expensive communities, where cash deals account for as much as two-thirds of home sales.
The trend is being driven by several factors, analysts say, including the difficulty of getting a “jumbo” loan from lenders still stinging from the mortgage meltdown. It also reflects speculation by wealthy investors who believe home prices are at or near a bottom.
“A lot of people think housing will outperform other financial investments,” said Andrew LePage, a DataQuick analyst. “This is just a place to park their money.”
In the Southland’s $1-million-and-up market, 29.2% of buyers paid cash last year — the highest percentage since 1994, DataQuick statistics show. For homes selling for $5 million and up, 62.2% paid cash. Overall, cash deals constituted 27.8% of Southern California home sales in 2010, the most since DataQuick began tracking the market in 1988. It’s also more than double the 13% average for cash sales over the last decade.
The shift toward cash purchases started when foreclosures became a significant factor in the market, said Gary Painter, director of research at the USC Lusk Center for Real Estate. That’s because investors buying properties on the courthouse steps don’t go looking for mortgages.
“There have always been all-cash investors who think they can go in and flip a home,” he said.
There’s just more of them now. Cash buying has reached fever pitch in parts of Orange County, where the Balboa community of Newport Beach saw the highest percentage of sales going to cash buyers last year of any $1-million-plus Southland community — 66.7%.
Chris Crocker, a Coldwell Banker broker in Corona del Mar, said well-heeled buyers are using cash to acquire investment properties and second homes or to better their portfolios.
“Buyers are looking out 10 years, and buying a trophy property for 40% off its price” before the housing downturn, Crocker said.
Within a five-mile radius, his office closed 24 all-cash deals in the $5-million-and-up price range in the last six months.
“The smart money is ahead of the game and buying before the summer selling season when they will have competition,” he added.
Other big cash markets were Montecito, with 57.2% of sales, and Beverly Hills, with 45.6%.
“All-cash buyers are becoming the optimum buyer,” said agent Ian Brooks of Rodeo Realty, Beverly Hills. “I just closed three deals in a row that were all cash.”
Brooks says most of his clients who pay cash are investors looking for a fast close.
“We call it land banking,” he said, “because buyers are literally taking these condos and homes and they are betting prices will go up.”
But all-cash purchases aren’t a cause for excitement in every luxury community in Southern California. Montecito is one such market where cash is old news.
“It doesn’t sell any popcorn here,” said Harry Kolb, a Sotheby’s agent with 32 years of experience in the wealthy Santa Barbara community. “We’re pretty jaded. Over-$5-million sales are, for the most part, cash.”
The absence of a mortgage on the property does not immunize it from becoming a distressed sale.
Hmm… So if banks weren’t bailed out and were forced to liquidate assets wouldn’t prices have gone down to the point regular people could buy with cash? I wonder how much of the cash being used to buy these properties is bailout money used by people with “connections”?
It just seems odd to me that people with huge amounts of cash would be putting it into RE. Essentually betting that banks will continue to strangle hold the foreclosure market in an effort to keep prices high.
Fraud on the way up. Fraud on the way down.
“Hmm… So if banks weren’t bailed out and were forced to liquidate assets wouldn’t prices have gone down to the point regular people could buy with cash? I wonder how much of the cash being used to buy these properties is bailout money used by people with “connections”?
It just seems odd to me that people with huge amounts of cash would be putting it into RE. Essentually betting that banks will continue to strangle hold the foreclosure market in an effort to keep prices high.
Fraud on the way up. Fraud on the way down.”
It’s the FCB. Anyway, I’m Asian and we view RE as a great investment and that is why I am looking at an investment property in Carlsbad and surrounding areas. A few of my mates and their parents have bought second or third homes with all cash and relatives from overseas have too. Generally, they are all in good school districts though. No need “connections” to score some good deals.
“The smart money is ahead of the game and buying before the summer selling season when they will have competition,” he added.
Isn’t spring the time with the most sales, especially April and May?
Additionally I’ve noticed that people buying +$1MM also don’t care about comps, and, don’t want to deal with the hassle of getting an appraisal or qualifying for a loan.
I am with CV Owner on this one. No need to have connections … There are many folks with lots of cash sitting in Money Market/CD Accounts earning 1%. I am also from Asia (India) and in my circle of Asian friends I know a few who are planning to buy either all cash or 50%+ down payment in South Carlsbad. Its the same common theme … “Buy properties in Good School Districts near coast”.
Like CV Owner said … it’s more of an Asian thing to look Real Estate (especially coastal Southern california real estate ) as good investment … there is a strong belief that Carlsbad is the last decent SoCal community left for grabs (after LA and OC) before it becomes out of reach.
“A few of my mates and their parents have bought second or third homes with all cash and relatives from overseas have too.”
The money for all those toys you buy at target has to go somewhere. And ignoring American IP laws can be very profitable as well.
If you like high priced real estate then this is a good thing. If not, well, its not so good then
Or course, don’t try to buy RE (and many other investments) in certain Asian countries. Government won’t allow it and you probably won’t get a fair shake in the legal system either.
But, we don’t want to go there on this board…
That’s a low blow.
Many people are buying ‘all cash’ because it is the way to get a deal done at a meaningful discount. Sellers want “surety of closing” and all cash does it. Financing means delays, appraisals, and a risk of wasting time and not closing.
We are closing next week on a $2.7mm deal all cash (commercial). If we offer to purchase a property with financing, sellers are less motivated to accept our offers. All cash, 2 week close, great price, accepted.
We may eventually put some modest debt of <60% on the deal post closing.
Thus, all cash is about getting the deal done at the right price. In the meantime, earning a yield of 7%-8% on an all cash property beats the current use of cash while we stabilize the property and eventually finance most of the cash out of the deal.
“The money for all those toys you buy at target has to go somewhere. And ignoring American IP laws can be very profitable as well.
If you like high priced real estate then this is a good thing. If not, well, its not so good then
Or course, don’t try to buy RE (and many other investments) in certain Asian countries. Government won’t allow it and you probably won’t get a fair shake in the legal system either.
But, we don’t want to go there on this board…”
Sounds like someone butt hurt because they can’t afford to buy a home because they are “priced out”
Two words for you mate. Work harder.
I own plenty of real estate, my friend.
And I have purchase several at foreclosure from underwater Asian “investors.”
When China floats its currency, allows foreigners to do business freely and enforces IP laws you can talk about hard work.
Till then, not so much.
I’m not sure what the purpose of banks are anymore. Other than as a holding entity for malinvestments.
I agree with clearfund,
Cash is king and gets the sellers attention.
Go in all cash, get the best deal done fast. As the new owner you have time on your side to find the best loan terms if you need to pull money out.
“I own plenty of real estate, my friend.
And I have purchase several at foreclosure from underwater Asian “investors.”
When China floats its currency, allows foreigners to do business freely and enforces IP laws you can talk about hard work.
Till then, not so much.”
Great. But I’m not Chinese fyi.
“Buyers are looking out 10 years, and buying a trophy property for 40% off its price”… let’s just change a few words around here… “IT’S A GREAT TIME TO BUY!” I thought that’s what he was really saying.
Wouldn’t it be great if this Jackalope had to substantiate this statement? Or that when it’s down more over the summer into next year and the year after, he lost his license, was financially liable or went to jail?
Man, that would be great. Couple that dream with appraisers having to buy properties at or near the price they quote and I think you’d clean the BS out of the real estate system pretty fast.
Come on guys … Asian or not, we are already “priced out” on better parts of/properties of coastal North County. Do you think those nicer Ocean View properies in Aviara selling for 500-600K in 1998-99 will ever reach that price point again … even if we blow all the shadow inventory out there? I think we will have much bigger problems to worry about if we ever reach there. It would be nice to touch those even in 800-900k range toady … cash or otherwise.
I see it getting more competitive in North County … China or India is still a long shot (Immigration !!!) … our next competition is coming from Iowa, Kansas or Sacramento … Internet is connecting, is making things more transparent and helping make an informed decision sitting 1000 miles away. It is the new way of doing Real Estate now.
When you look at cash flow investments real estate is one of the classes that looks pretty good relative to everything else. Pretty much everyone thinks the long end of the US treasury curve is going to continue to increase so yields are expected to go up and the bond prices are expected to go down. S&P dividend yields as a whole are at one of the lowest levels of all time (about 2%). Commodities continue to appreciate in price but don’t offer any cash flow unless you want to get creative with selling covered calls.
People looking for cash flow and possible appreciation of asset prices see real estate as the best option. We don’t know what the future holds, but seems like real estate should be ok relative to other investment classes with the possible exception of cash in a deflationary environment. Of course the fed and government seem hell bent on preventing the deflationary scenario so I can see why people are putting cash to work in real estate.
Is there really a substantial amount of coastal California residential properties available that will cash-flow right now as rentals?
Oceanside and other cheaper areas seem like they fit the cash-flow rental model, but I thought the Carlsbad and desirable coastal areas were still overpriced relative to rents. Anyone done the math this year?
Uber – No positive cash flow in decent/nice coastal areas at today’s prices…and there likely never will be.
consider this simple macro view:
Rent $1/sf/mo = $12/sf/yr
Conservative Home cost in coastal NC $200-$300/sf (note JTR’s subsequent blog showing $373/sf for NCC).
Landlord expenses (tax/hoa/mr/maint/vacancy/reserves, unk, etc) we’ll be light and say 4%/yr of the home cost ($250/sf x 4%= $10/sf/yr)
Thus:
$12/$250 = 4.8%-4% exp = .08% return…likely to be a negative return if it doesn’t work out perfectly.
To NET a 5% yield you need to cut your cost/sf down to $125/sf and still charge $1/sf/mo in rent. That is why phoenix/vegas/riverside can cash flow, coastal never will.
Thats a lot of capital banking exclusively on future appreciation.
What is gross rate of return in Carlsbad?
My friend get >11% gross in Riverside county for less than $100 per square feet for a regular sale for a house built in 90s with tile roof and Carlsbad track home quality. Carlsbad demands a less gross rate.
“Thats a lot of capital banking exclusively on future appreciation”
… Right-on.
Is this in agreement with other “Developed & Sought-after” coastal markets along OC and LA areas? How have those evolved over the past 10-20 years?
After North County Costal, are there any other “Under-Developed” coastal markets left in SoCal?
clearfund: “Thats a lot of capital banking exclusively on future appreciation.”
Agreed.
Every time I see someone crowing “40% off!” it tells the tale for me.
40% off bubble pricing is an illusion. It was a bubble.
If these people think they are going to get 40% appreciation over 10 years they are dreaming. Or stupid.
There is no housing bubble if one use silver dollar or gold or cruel oil or AUD, NZD, CNY currency instead of USD currency for valuation.
Houses that cost 1000 oz of gold in 2000 is now only costs less than 500 oz of gold. Australians who use AUD don’t see any housing bubble in the US market.
If the fed/government keep the interest rate low(issue more bonds, do QE3, print more) and drive the USD currency down >40%, the house price may appreciate 40% or more in prime area.
In times of high inflation (and it IS coming) then money held in hard assets (like real estate) is a good idea, anyone notice bricks,sticks,concrete,gas and labour going DOWN in price recently?Really wealthy People with $1M in cash or more know this (thats why they can afford all cash deals) and that is why they are buying real estate, any return over 1% at the moment beats cash in the bank.
Art,
You are genralizing … There will be and there already are sub-markets that got the “deserved” 40% appreciation in the past 10 years …. those are the locations (Ocean Views, Bigger/Premier/Private Lots and Good schools) in NCC that everybody wants and still can not touch :), and yes they will appreciate at a higher rate in future as well.
Was’nt most of Aviara just strawberry fields and orchards till early 90s? Why folks are now paying $300/sf for an avrage lot, all of a sudden (now even after the bubble)? Remember, Carlsbad and Encinitas are still looked down upon from upper echelons of La Jolla and Rancho Santa Fe … and they have a lot of room to “play” catch Up.
If you still want to generalize then you may say, … More “Coastal” you are, better positioned you are.
Waiting for SoCal coastal home prices to drop is about as interesting as watching paint dry.
“Hmm… So if banks weren’t bailed out and were forced to liquidate assets wouldn’t prices have gone down to the point regular people could buy with cash? I wonder how much of the cash being used to buy these properties is bailout money used by people with “connections”? It just seems odd to me that people with huge amounts of cash would be putting it into RE. Essentually betting that banks will continue to strangle hold the foreclosure market in an effort to keep prices high. Fraud on the way up. Fraud on the way down.”
No, because if (a few) banks hadn’t been stabilized then all kinds of assets would have collapsed and millions (more) “regular people” would have been wiped out. Only those that sat in cash all along would have been spared enough to step up and buy with cash.
Furthermore, if that scenario were to have been allowed to play out…while you’d have your previously $600K house now for $120K cash, you might need to defend it daily with guns!
Also, when interest rates are 10% + (ie: not being completely screwed with by our pathetic fed) it will be more fun to put that cash into savings accounts than housing that is still depreciating in hard dollar value… The “rich” people who are putting their cash into real estate because they can make so little currently in savings are going to realize it’s different this time due to many reasons including government intervention and the wide range of markets in commodities (in which you never have to take delivery of anything) are among the biggies. Gold or copper can be going up in price (investors / manipulation / demand) while many other things (housing / banks / health care / bonds / commercial) are going down.
Oh, Aztec, do you believe everything the banks who were bailed out and the government that used to work there tell you?
Think for yourself for a second, wouldn’t everyone but the finance professionals all be better off now if we had bitten the bullet and sold off the parts of the banks that failed in a controlled sale? We could be on a sustainable recovery instead of still staring at the abyss with 30 Trillion + in spending and guarantees used to keep the completely unsustainable mess going?
“In times of high inflation (and it IS coming) then money held in hard assets (like real estate) is a good idea, anyone notice bricks,sticks,concrete,gas and labour going DOWN in price recently?”
The cost of building a house has gone down by a lot here in the Seattle area. Builders are selling mid-range tract homes at under $150/sq. ft.
Also, your belief that serious inflation is coming is faith-based. Inflation is lower than in 2008, when interest rates were around 5%. There are a lot more factors at work than the monetary base.
“Really wealthy People with $1M in cash or more know this (thats why they can afford all cash deals) and that is why they are buying real estate, any return over 1% at the moment beats cash in the bank.”
Warren Buffet just spoke of this fallacy in his most recent shareholder letter.
“More money has been lost reaching for yield than at the point of a gun”.
A house is not the same as cash. If you’re not a real estate professional, transaction costs from buying and selling exceed 10%. You do not get your cash out of it until you sell it. You have carrying costs in the form of taxes, insurance, and maintenance.
The money I’ve seen flowing into real estate has been based on the same misguided belief that real estate is always a good investment, not any rational investment analysis.
“Furthermore, if that scenario were to have been allowed to play out…while you’d have your previously $600K house now for $120K cash, you might need to defend it daily with guns!”
There isn’t a whole lot of history to suggest that an economic collapse would decay into an anarchy with roving bands of armed gangs. In most economic collapses the unemployment rate goes up 25-30% and people become scavengers in the worst case. If you look at the history of Argentina in 2000, the Asian currency crisis in 1997, Iceland in 2008, or the great depression, you find that the wealthy are hit the hardest in a deflationary collapse and the income disparity between rich and poor shrinks.
Effectively it much like a system reset for income disparity. The wealthy suffer the most when asset prices decline. It really depends on where you sit in the economic pyramid. If you’re poor living paycheck to paycheck then a deflationary collapse that lowers rent, lowers gas prices, and lowers food price is somewhat welcome assuming you can keep your job. If you’re nearing or in retirement with lots of stocks, bonds, and real estate it’s something you want to avoid at all costs.
@livinincali…. I was mostly kidding. But dudes like Shadash would still likely be worse off. Most would be worse off. Not just because their wealth would decline, but because the shock to the country’s culture (and infrastructure) would be severe enough to decay the standard of living.
“Oh, Aztec, do you believe everything the banks who were bailed out and the government that used to work there tell you? Think for yourself for a second, wouldn’t everyone but the finance professionals all be better off now if we had bitten the bullet and sold off the parts of the banks that failed in a controlled sale? We could be on a sustainable recovery instead of still staring at the abyss with 30 Trillion + in spending and guarantees used to keep the completely unsustainable mess going?”
Uhhh, I’m paid to think for myself, and I work in a related field. The answer to your question is NO. The sale(s) would have been too large, and the contagion too great, to be controlled. And if that HAD been allowed, imagine the screaming today about how DID benefit from those sales. Heck, Barclays was sued for getting “too good of a deal” on Lehman! Multiply that by 10 or 100 and it would have been merely a shift of wealth among today’s robber barons.
Also FYI, that $30T wouldn’t be much lower if we’d had the controlled sale. And it could potentially be more (from reduced tax receipts).
Hey, I loves me some 6000 sq ft on 2 sexy acres in RSF for $800K, too. But just think for a moment what the environment would be like from the events necessary to make that happen.
I think the word for the environment you’re describing is “sustainable.”. “logical” also comes to mind.” So does “free market” and “democracy”.
Grizzly, maybe in the long run (e.g., 10+ years). Definitely not in the short run.
Study up on deflation.
Grizzly,
Couple of words you missed “Global” or “Glbalization”.
Unfortunately, “Hard Dollar Value” is not so hard anymore … I am buying/renting less and less of Milk, Gas and House with it here in NCC and also abroard; compared to 10 years ago and it appears to be going downhill. 10 years ago, I could have baught the Dream McMansion for around 600k … now its sitting at 1.35 Million and with 6 other buyers with whom I have to compete.
I am with you on commodities, gold/copper, and Oil … but I am of the opinion that same factors that drive the markets there would indirectly impact/manipulate/drive the “Prime” Real Estate markets “Globally”. CV-Owner touched on this … incoming foreign money can keep things balanced in desiarble/prime developing and developed hoods.
Deflation is my point. Housing going down with the dollar and interest rates rising. Are you familiar with the term Socialism? How about “privatized profits with socialized losses?”
“There is no housing bubble if one use silver dollar or gold or cruel oil or AUD, NZD, CNY currency instead of USD currency for valuation.”
_____________
How many guys are wheeling 9,000 barrels of West Texan Intermediate into the escrow office to close on their new home in Carmel Valley?
Who is getting paid in gold bricks these days?
Is it not possible that the commodities referenced have also formed a large bubble?
Why stop the evaluation with just those items cited as a measure of valuation? For instance, why not use Lehman Brothers’ stock as a measure of housing valuation? Do we have a bubble in home values based upon the performance of that stock?
The realtors made the “the foreigners are going to buy all the houses” argument as the bubble was first bursting and it didn’t happen then and it’s not going to happen now. The overwhelming number of houses sold in the desirable area are to people who will live there. Real-estate in these areas, as pointed out above doesn’t work as an investment in these locations either at these prices and rents. Globalization may affect things that are traded on markets, but not houses.
The reality is that the prices will return to the sustainable level and it’s not here yet. And “there” is a lot closer to 600k than 1.35
And how long can China keep it’s fantasy economy going?
Grizzly,
Calm down man, we are not going for deflation … we are just in for a little tune-up/adjustment/change with rest of the world … whereby the quality of life on two sides of the world is getting adjusted to a new equilibrium. It will result into some interesting social changes on both sides. As those senior managment types say “Be Part of the Change and dont fight it out”.
Agree, many many Americans will have to readjust their expectations. Just wish our government would stop spending so much pretending they can prevent it.
Grizzly,
Yes you are thinking correctly.
Its off-topic … but just food for thought … what if our Govt allows for immgration from rest-of-the-world just to keep up the bubble prices (keeping politics out of it) … something like “Buy a House in North County Coastal at Bubble Price (all Cash) and get your Green Card on the spot ?” … sort of “Freeing Up the Market” as they call it in Intl Business circles.
What do you think will happen?
Out with Old Foreign – In with New Foreign.
“I was mostly kidding. But dudes like Shadash would still likely be worse off. Most would be worse off. Not just because their wealth would decline, but because the shock to the country’s culture (and infrastructure) would be severe enough to decay the standard of living.”
Certainly an economic depression is not something that would be a good thing for most people in the short term. It would have been wise to let recessions in the early 1990’s and 2000’s run their course so bad debt could have been cleared, but the fed used policy tools to prevent that from happening. By doing so they’ve built up a larger imbalance each time and it makes the problem of bad debt much more difficult to solve and harder to control.
Unfortunately nature usually has a relatively harsh way of sorting these things out.
Many people are buying ‘all cash’ because it is the way to get a deal done at a meaningful discount. Sellers want “surety of closing” and all cash does it. Financing means delays, appraisals, and a risk of wasting time and not closing.
#24: andrewa – FYI not all ‘all cash buyers’ are wealthy with $1+mm just lying around.
Our purchases are on behalf of groups of individuals who collectively contributed to the all cash purchase ‘bucket’ in much smaller amounts. Many with their IRAs/401k. They get the benefit of the all cash purchase power with a smaller individual amount.
Same project/economic risk, just on a smaller amount of individual cash.
This thinking has served me well…when everyone is running for something, run from it, and when others are running from something, start getting interested.
People are running to gold and running from real estate in varying degrees. We probably haven’t seen the top in gold or the bottom in real estate, but it’s about time to start getting interested in the latter and viewing gold with great skepticism. Like clearfund told me last week, it’s about the 2nd inning where the insiders are getting interested in RE again (atleast commercial).
I had lunch with a commercial investor (Harvard MBA) yesterday and he was unwavering that it’s like 2007 all over again. He talked about economic recovery, etc. I said, “that’s the result, what’s the cause.” That’s where we argued, he talked about economic growth, I pointed out that there’s nothing organic or sustainable about economic growth when the interest rates are artificially low, the deficit exploding, federal money FLOODING the market, and “experts” who should be unemployed needing to invest the money the government is pumping into the system (other peoples money)or they will (FINALLY!) be out of work… We know how this is going to end, the trick is knowing when.
I also agree about being interested when others aren’t. Where I live, in an extremely desirable part of LA, it’s down 30-40%. 40% seems like a lot, except when you consider that the market quadrupled in 12 years. (It should double in about 21 years based on historical appreciation / inflation) 3rd inning for return to the mean is about right. It’s very hard to act rationally when so many people (Bernanke) are acting irrationally.
“It’s very hard to act rationally when so many people (Bernanke) are acting irrationally.”
Just to nitpick, Bernanke & Co are acting very rationally. He (and others) are optimizing. You don’t like it. Plenty of others don’t. But they have very strong reason to believe that what they are doing is the best long term approach.
Aztec,
Bernanke’s actions benifit two distinct groups.
1. Bankers
2. Those with physical assets
Everyone else is cannon fodder. What’s particularly annoying is he’s funding it all with tax money paid by everyday joes and devalueing the dollar by printing money. If you buy into the notion that if banks fail the world ends you simply don’t understand. Banks are like casinos. They make massive amounts of money by doing almost nothing. If one bank fails hundreds more will be there to fill the void.
And BTW…
“I was mostly kidding. But dudes like Shadash would still likely be worse off. Most would be worse off. Not just because their wealth would decline, but because the shock to the country’s culture (and infrastructure) would be severe enough to decay the standard of living.”
Don’t worry about me. All my cars (including a couple classic collector cars) are paid in full, I have no debt, and could live comfortably for 10+ years on savings. I could have bought a house 4-5 years ago as easily as I can buy a house right now. The only difference is in 2007 houses that were selling for 800k-900k in the area I want to buy are selling for 500-600k in 2011.