Pay cash for your next home or get a mortgage? Some wealthy home buyers are choosing both.
It’s called delayed financing, in which buyers pay cash for a home and then take out a mortgage soon after closing. Rarely used even two years ago, experts say it has picked up over the past 12 months.
“It was an extremely unusual phenomenon, but it’s going on quite a bit now,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.
The practice is growing mostly in affluent coastal housing markets, including New York and San Francisco. And it all boils down to competition. Sales of million-dollar-plus homes are on the rise nationwide, while inventory remains limited. All-cash buyers have a better chance of standing out from competing bids and getting the home at a lower price since their offer isn’t contingent on financing.
After the deal is done, these buyers also want to regain some liquidity. So they get a mortgage and, in some cases, stash this money in investments that might have higher returns than what they pay in mortgage interest. Other options: They might use it to purchase another property or to simply bolster their cash cushion.
In July, William Martin and his wife closed on a 6,500-square-foot home in Diablo, Calif. Sensing that there was a lot of buyer demand for it, the couple gave a competitive offer: all cash, at slightly above the $1.785 million asking price. Those funds came from a mix of savings and money from his father-in-law and a friend, who were paid back a few months later when the Martins got a delayed-financing mortgage from Fremont Bank, a community bank in San Francisco. “That’s what helped me make the decision to go forward with the purchase from the beginning,” Mr. Martin says.
Delayed financing is similar to a cash-out refinance—in which a borrower with a mortgage also takes equity out of the home. But cash-out refis may require waiting a few months or longer to execute, says Keith Gumbinger, a vice president at mortgage-info website HSH.com. Rates and fees can also be higher, partly because of the extra legwork involved transitioning from an existing loan to a new one. Conversely, buyers who apply for delayed financing can be considered as early as the day after they become the new homeowner, since they own the property free and clear.
Still, not all delayed-finance options are alike. Some lenders, including Wells Fargo and Fremont Bank, say they charge the same interest rate and fees on this mortgage as they would if the borrower applied while buying the home.
The T-Bros have sold 41 of these, and are content to let the market come to them. They don’t have standing inventory – like SP, they are building to your order, which adds an extra two months for permitting to the usual 6-month construction completion:
A reader sent in this note about selling a 1,190sf house in South S.F. listed for $549,000:
Jim-
Hope all is well with your mom. If you make it back up here on a social visit and have some time let me know.
Just thought I would let you know I survived, and the house went on the market Thursday, October 25 with a ‘friends & family” open house.
On Saturday and Sunday approximately 175 groups of people came through. There was a broker tour on Tuesday, October 30 and on Friday, November 2nd I reviewed 17 offers. All but one offer was over asking. Given the market it was interesting to see someone submit an offer about $10,000 under asking.
There was what I presume is the normal range of quality. The highest offer was a mess with many sections visibly whited-out and it had the wrong city listed for the address.
I countered five offers. Three were serious and two were just a mess so they were countered very high with the idea that if the deal was going to close with them I could see nothing but problems so they better make it worth my time.
The house showed really well and despite not being enthusiastic about staging the house it does look real good.
It wasn’t you but I am pleased with the father-son Realtor team I selected. They did strongly urge me to have the house staged and suggested that the budget be $2,000. They brought in this lady who told with a completely straight face that all the houses she staged sell for $142,000 over asking and in twelve days. I could not believe that she has people that buy such a line. She also wanted nearly $4,000 to stage a house that is less than 1,200 square feet. The only issue with which I seriously disagreed with the Realtor was hiring this woman so they found someone else that magically came in right at $2,000.
Anyway, just waiting to remove the appraisal contingency in a week or so. It shouldn’t be an issue.
Bank of America Merrill Lynch revised its housing forecast upward due to a better alignment of supply and demand, and now predicts the S&P/Case-Shiller Index will increase by 5% in the fourth quarter over 4Q 2011.
That translates into an average price gain of 2.1% this year compared to 2011.
In August, BofA analysts predicted prices would rise 2% in the fourth quarter over the year-ago quarter. That was also a revision upward. In March, BofA Merrill Lynch forecasted the bottom in national home prices. However, it underestimated the magnitude of the turn.
The analysts also expect average home price appreciation of 3.3% a year over the next 10 years, a cumulative gain of about 36%.
BofA still expects home prices to slow down into the end of the year.
“It is important to remember that the housing market is subject to volatility in the best of times; in this distorted market, we cannot expect a smooth pattern,” the research note said.
It predicts that national prices will increase 5.6% quarter-over-quarter in the third quarter of 2012, following a 9.3% gain in the second quarter. It predicts flat prices in the fourth quarter of this year as well as a decline of 1.6% in the first quarter of 2013 before prices begin to trend upward.
The main component driving the forecasted increase in home prices is a better alignment of housing supply and demand. Inventory of homes for sale continues to decline because of pickup in house demand, a slow clearing rate for distressed properties and a significantly below normal pace of new home construction.
Sales of REOs were at the lowest pace in August since 2008, which reflects a shift toward short sales.
Analysts said the two most important variables for short-term price dynamics are months supply and change in distressed share. They predict that the decline of months supply will continue to edge lower in 2013, which will underpin home prices. Share of distressed sales should return to 23.7% by 3Q, compared to the current share of 20.5%.
There are also many differences on a regional basis, which can be attributed to the way foreclosures are cleared in different states. For example, year-over-year prices are up 7% in Michigan, compared to year-over-year falling prices in Illinois of 2.3%.
JtR: They expect the national change in 3Q-to-4Q pricing to be flat (in the highlighted paragraph). But I think we will see our San Diego Case-Shiller Index increase every month through next summer, and if they included flips of less-than-six months, the velocity would be double.
What will happen in our local real estate market in the coming months? The election results give the impression that we can expect more of the same – low rates and mortgage-rescue programs.
Our inventory is going to keep its same ultra-low appearance because the good buys sell so quickly.
People complain that there is nothing to buy, but did you know that in NSDCC, we have already closed more detached-home sales this year than in previous years, and we still have almost two full months to go?
Year
Annual Sales
Avg. SF
Avg. $/sf
2009
2,223
2,846sf
$393/sf
2010
2,460
2,982sf
$380/sf
2011
2,562
2,989sf
$375/sf
2012
2,649
3,020sf
$372/sf
Most importantly, there has been a quiet surge lately, which will probably lead to a robust 2013.
The NSDCC detached-home closings for September/October were 40% higher than last year:
Year
Sept/Oct Sales
Avg. SF
Avg. $/sf
2009
440
2,827sf
$391/sf
2010
408
3,086sf
$381/sf
2011
414
2,943sf
$385/sf
2012
579
2,915sf
$378/sf
What will impact the local real estate market in 2013?
Buyers are much more effective in following the market action – they are noticing houses flying off the market, usually at prices that seem a bit high. Anxiety is rising.
Buyer anxiety leads to hasty decisions. They jump too fast without properly considering the negatives, and they pay too much.
Sellers have been pushing higher list-prices all year, and now a late-season price rally is underway. Look at the charts in the right column (scroll down to ‘Pricing Trends’) – the $/sf moving averages have been trending sharply higher the last few months.
The least-informed buyers set the market. They are represented by inexperienced agents who have heard that the market is hopping, but can’t properly quantify it. As a result, their buyers overpay.
Once there is some pricing momentum, buyers start to let their guard down.
If you like McMansions on decent-sized lots and warmer weather, Stonebridge in Scripps Ranch might be your cup of tea. These days I think all builders are going to struggle selling their interior lots – buyers will gladly pay view premiums, but expect bigger discounts for the inferior locations:
How have home prices fared during the last administration? Here are the Top 10 cities (and the only cities) with an increase in their Case-Shiller Index between January, 2009, and August, 2012:
City/Area
% chg in CSI since 1/2009
San Francisco
+14.4%
Washington D.C.
+12.8%
Denver
+9.1%
Dallas
+7.8%
San Diego
+6.5%
Boston
+5.0%
Los Angeles
+3.9%
Minneapolis
+3.5%
Detroit
+2.2%
Phoenix
+1.3%
With all the hub-bub about the 20% increase in the Phoenix median price this year, they must be coming from a long way back….or tracking the median price isn’t as accurate as the C-S Index?
Or could it be that because the Case-Shiller Index excludes repeat sales within six months (flips), it is missing some of the big pops of appreciation that flippers are enjoying these days?
Home prices were up 2 percent in the San Diego-Carlsbad-San Marcos market in September 2012 compared to September 2011, according to CoreLogic’s September Home Price Index (HPI) report. Prices, including distressed sales, are up 1 percent compared to August 2012.
Excluding distressed sales,year-over-year prices increased by 5.4 percent in September 2012 compared to September 2011, and increased by 3.5 percent in August 2012 compared to August 2011.
Home prices, excluding distressed sales, increased by 1.1 percent in September 2012 compared to August 2012.
California was among the five states with the highest home price appreciation. Excluding distressed sales, the five states with the highest home price appreciation were: Arizona (+14 percent), Idaho (+10.5 percent), Nevada (+9.5 percent), Montana (+8.5 percent) and California (+8.4 percent).
“Home prices are responding to better market fundamentals, such as reduced inventories and improved buyer demand,” said Anand Nallathambi, president and CEO of CoreLogic (NYSE: CLGX). “So far this year, we’re seeing clear signs of stabilization and improvement that show promise for a gradual recovery in the residential housing market.”
The Centex tract known as ‘The Ranch’ built in the late 1990s in southeastern Carlsbad was a legend in its time – and the first real McMansions in the area. The first phase started in the $400,000s, and by the time they were done in 1999, the models were selling for more than $1,000,000 – this sold for $1,096,818 in December, 1999:
IDAHO SPRINGS – A two-county SWAT team was sent to a home in Idaho Springs to evict a 63-year-old woman. The eviction happened last Tuesday, according to Captain Bruce Snelling with the Clear Creek County Sheriff’s Department.
“Usually an eviction doesn’t call for a tactical team,” Captain Snelling said.
SWAT team members with assault rifles were sent in because two dozen protestors joined 63-year-old Sahara Donahue. The protestors were part of a group called the Colorado Foreclosure Resistance Coalition, which is part of the Occupy movement.
The group’s spokesperson said they were there to help prevent officers from kicking Donahue out of her home. “We expected one or two sheriff’s deputies to show up, instead what we had was ten vans show up,” Darren O’Connor, a member of the coalition, said.
Pay cash for your next home or get a mortgage? Some wealthy home buyers are choosing both.
Hope all is well with your mom. If you make it back up here on a social visit and have some time let me know.
