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This Is the No. 1 Enemy of the Housing Market

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Consider this a follow-up to my look into housing prices two weeks ago.

To quickly recap, I determined that, excluding the effects of rent, with at least 4 million more foreclosed properties set to make their way onto the market over the next couple of years, it seems highly probable that home prices are unlikely to rise. Considering that home prices only outperformed inflation by a paltry 0.21% in the 100-year period from 1890 to 1990, I concluded it could take 100 years before your home's value actually caught up with inflation in real-money terms.

The hamster in my head couldn't stop there, however. I was curious about what else could be behind the precipitous drop in housing prices beyond just the normal answer that "foreclosures are driving everything down." After some perusing that took into account what type of housing was selling, where it was selling, and what was facilitating those sales, I came to my conclusion -- and let's just say that it wasn't even in the same ballpark with what I was expecting.

It's the financing, stupid!
Before I get into what shocked me, let me first explain what I assumed was the natural cause for lower housing prices.

I predicted before I began my research that an inability to obtain financing by lower-to-middle-class prospective homebuyers was the primary culprit. In a way I was right, but it turned out to simply be a branch of the problem, not the root.

According to the Federal Financial Institutions Examination Council, more than 2 million people in 2010 were denied a mortgage loan. The Mortgage Bankers Association takes it one step further in its research, estimating that 50% of all home refinances and almost 30% of all home loan applications were rejected in 2010.

It'd be easy if there were one primary reason lower- and middle-class homebuyers and homeowners were being rejected, but there are myriad possibilities. Insufficient income, high debt levels, bad credit history, and even low appraisals are some of the most common culprits for denying a home loan or a refinancing; and here's a little secret, even I almost fell prey to one of them.

I recently refinanced my condo in Seattle, as I am part of the nearly one-quarter of Americans currently underwater on their mortgage. The appraisal of my condo had fallen so much from my purchase price that it put the loan-to-value ratio beyond the typical scope of what the bank was willing to refinance. It didn't matter that I more than met the income requirement, had no debt, and had immaculate credit while never missing a payment on the condo over the five-year period in which I owned it. All that mattered was the loan-to-value ratio. Eventually, I did get approved for my refinancing, but I can only imagine what ridiculous hoops homeowners are being forced to jump through to obtain a loan.

The real problem
This leads me to the real problem of why home prices seem doomed to continue to head lower: Wait for it... wait for it... Cash!

Yes, cash! Generally, cash is great because without it our stock markets would be illiquid. In addition, we all should have cash on hand for emergencies and to cover at least some of our daily expenses. But one place where cash is certainly not welcome right now is the housing market.

To say that all-cash home purchases are on the rise would be a gross understatement. In 2007, when the housing market was considered normal (though by whose standards?) all-cash purchases accounted for about 13% of all transactions. In Southern California, for example, the number of all-cash purchases had jumped to just shy of 28% in 2010 according to DataQuick. The trend is continuing to grow and expand with a whopping 74% of all fourth-quarter foreclosure purchases being conducted in cash and 33.2% of all sales nationwide in December being conducted in cash. A rise in the amount of foreclosures on the market might explain some of the rise in all-cash sales, but it's my contention that all-cash investors are driving this market, not an increase in foreclosures driving investors to use cash.

Here's why it's a problem
So why is cash bad news for homeowners and prospective homebuyers?

Let's first look at this from a homeowner's perspective. Given the documented tightness in lending practices by most financial institutions, cash is seen as the path with the least resistance. Cash deals are easily facilitated and can be closed quickly, but they come with a price. That price, according to a report from Fortune, is an average 10% haircut off the price of the home being purchased.

The same goes for real-estate-owned properties. As I discovered in my previous article, according to LPS Mortgage Monitor, the average home is taking an average of 611 days to repossess once a homeowner begins to miss payments to when the bank actually repossesses the house. With 1.35 million foreclosed properties already on the market and 4 million more waiting in the wings, banks are willing to accept a haircut in price in exchange for the guarantee of a cash payment.

From the perspective of a low-to-middle-class homebuyer, the rise of the all-cash buyer is very bad news. If you thought you had a lot to worry about with regards to income, debt, and credit in order to get a home loan, think again. All-cash buyers seem to be attracted most of all to the lower-priced foreclosure market -- perhaps one of the few areas where lower-to-middle-class-income individuals can meet the down payment required for a home loan. With all-cash investors moving in, middle-class America is being pushed further out of its niche territory.

Foolish roundup
The hardest thing to tell right now (and perhaps what I'll look at in a follow-up article to this one) is who exactly is doing the buying. It's clear we have individual investors with cash willing to buy properties right now -- especially foreclosures -- but what is their purpose? Are they buying them for rental income and betting on housing prices to rebound, or are these simply quick flips? I'm also curious about whether there's a large influx of foreign buyers who would be betting not only on a recovery in housing prices, but an appreciation in the U.S. dollar. If these investors are correct, they would profit from a boost in home prices and net a secondary gain when their U.S. dollar are converted to another currency.

What I can say for certain is the all-cash buyer is transforming the housing landscape, but not necessarily in the way most people would like to see. The disparity between the upper class and the lower/middle classes is growing, and this is another solid example of that trend in action.

Disagree with me? Tell me about it in the comments section below.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has been known to go weeks without using cash. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's just the right price: free!

Read/Post Comments (48) | Recommend This Article (50)

Comments from our Foolish Readers

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  • Report this Comment On March 22, 2012, at 4:47 PM, BMFPitt wrote:

    In 2009, my $220k (with financing already in place) offer was "outbid" by a $200k cash offer. Ended up building a new house after giving up on trying to deal with REOs and short sales.

    But I wholeheartedly reject the notion that house prices are low, or that credit is hard to come by. Prices should be 20-30% below their current levels, and underwritign standards are still insane by historical standards (with taxpayers on the hook for 95% of these terrible loans.)

  • Report this Comment On March 22, 2012, at 4:57 PM, TMFUltraLong wrote:


    I whole-heartedly agree that housing prices could and should still fall further.

    As for credit, I'm going to disagree and say that it is indeed harder to come by... and not because financial institutions want to be smarter but because new regulations in place make it so.


  • Report this Comment On March 22, 2012, at 5:26 PM, vegaland wrote:

    With interest rates as low as they are cash is trash. Buying a house on an all cash deal gets rid of something that is being devalued by the government printing presses and replaces it with something that brings some current return (unlike gold, etc).

    All cash purchases also avoid the non-deductability of passive losses you have when you have a mortgage on a rental property.

  • Report this Comment On March 22, 2012, at 6:16 PM, TMFUltraLong wrote:


    Apparently my repsonse went into limbo...

    I was merely going to respond that this will be the focus of my next article. I want to take a closer look into who is doing the buying and what their purpose for buying is... whether its for rental income/long-term buy and hold, or whether it's for a quick flip. That could have a big bearing on whether home prices continue to fall.

    I do agree with you that CDs and savings account are pretty much meaningless forms of investments right now.


  • Report this Comment On March 22, 2012, at 8:25 PM, duuude1 wrote:

    My God, where were you housing bears 5, 10 years ago? I felt like the only person on the planet who was wary of buying a house, other than my heros Robert Shiller and Dean Baker, both of whom consistently called out problems with home prices for years before the implosion. Every single person I interacted with, from extended family and in-laws, friends, coworkers, acquaintances and strangers, thought I was a googly eyed nutcase for thinking home prices were not sustainable, for merely expressing distrust in the housing market.

    Shiller for one has expressed reservation about today's housing market, and noted that it is possible for prices to continue falling for some time to come. I'm with Shiller and Sean here, two obviously rational prescient wise tall dark and handsome duuudes.

    I'll put a duration swag on it...Prices will drop, in my opinion for another decade. Without Fanny and Freddie (seriously, do ANY of you want these two disasters of "government/private" organizations in operation - do you seriously think these orgs are long for the earth?) why why why would any bank be motivated to provide loans - except at outrageous interest rates to compensate for the risk that has clearly been demonstrated by all the defaults on their books? With outrageous interest rates, where will home prices go? Down.

    Without banks to provide reasonable loans, only those who can make cash payments (Fool members perhaps) will buy houses, and with so few of those cash buyers, demand will be low so....where else can prices go? Down.

    Fools - especially young Fools - don't lose your capital in buying a house. Rent. Blood in the streets - that's what we need to see before buying, and this is not what blood in the streets looks like. Just like buying a stock, buy when everyone else is like Sean here saying housing is a disaster. That's blood in the streets. When everyone agrees homes are a poor place to put your cash and income, then buy.

  • Report this Comment On March 22, 2012, at 10:44 PM, JULPAC wrote:

    In my area we have people who purchase homes from forclosures, fix them up & then opt to have them listed as Section 8 housing.

    Now I'm not familiar with this process, but from what I understand it involves renting houses to low income individuals and/or their families.

    The families that qaulify as tenents in Section 8 housing recieve a government subsidy to help pay the rent.

    So if you bought a multiroomed house, you would be able to fix it up by splitting it into several appartments & thereby increasing the rental income - most of the money would come from the government.

    Again I'm not very familiar with this process, but its something that has been going on in my neighborhood for a while. The increase of Section 8 housing comes at the cost of decreased home value.

  • Report this Comment On March 23, 2012, at 9:35 AM, BMFPitt wrote:


    I agree that credit is harder to come by than it was in 2007. But those "new regulations" are still reckless as compared to what was common 20 years ago, when the housing market was sane. The best regulation would be to remove all government guarantees and subsidies from the mortgage market, and let the investors be on the hook for their own decisions.

  • Report this Comment On March 23, 2012, at 10:01 AM, SueGen wrote:

    I would like to know how you refinanced in spite of being underwater (all other conditions being as you described).

  • Report this Comment On March 23, 2012, at 10:31 AM, EGTalbot wrote:

    Sean -

    Could you explain a little bit more about those new regulations? If you mean that institutions are pretty much only offering loans that with make them conform with regulations so they can be backed by the GSEs, I agree that is a big factor in the tightening of credit.

    But I wouldn't characterize the regulations as the "reason" why credit is tightening. Credit is tightening because banks do not want to make loans without a government backstop. The fact that the government has requirements for that is not surprising. Banks were burned by the bubble. IMO, quite a bit of it is an intelligent response. The loose credit before was not healthy.

    The disparity between classes is indeed growing, and I thank you for pointing out how the increase in cash sales is one more sign of it. People will argue endlessly over how to change it (or, for some, whether seeking to change it even should be a goal), but the signs of it are everywhere.

  • Report this Comment On March 23, 2012, at 10:31 AM, griderX wrote:

    SueGen...I would also like to know the answer to only guess is to ante-up the cash difference.

  • Report this Comment On March 23, 2012, at 10:40 AM, 1pj wrote:

    Are we living on an island? Can we not see what happened in Europe? Do we not realize that we have been isolated from the real world for a long time? OR, do we think we "have a better way". What's the quote? We either become a student of history or a victim of it. Get real and evaluate your investment decisions on real value.

  • Report this Comment On March 23, 2012, at 10:46 AM, Andrewp111 wrote:

    If the government props were taken out of the housing market, the prices would have to fall by at least 50%. This would be a disaster for a Congress and a President who are seeking reelection. Thus, it ain't gonna happen. We are in for a long malaise, where prices are flat or drift downward for decades, sort of like Japan.

  • Report this Comment On March 23, 2012, at 10:50 AM, MFlahaven wrote:

    As a banker in a small communtiy bank with ORE for sale, I can agree with much that has been said. I would jump at the chance to unload our ORE at a 10% discount for cash. The midwest may not be as bad off as the two coasts, but carrying these properties on our books is a drag on our capital and makes it harder to lend. Plus, and just as important, mortgage regulations have gone crazy in the last year with no relief in site. The application process is so difficult that little attention is given to the marginal borrower, mainly because of our experience in the forclosure process.

    One last dig, if I may. As a small banker, I often wonder how long I would remain out of jail if I forged even one signature on a mortgage document.

  • Report this Comment On March 23, 2012, at 10:55 AM, ETFsRule wrote:

    "A rise in the amount of foreclosures on the market might explain some of the rise in all-cash sales, but it's my contention that all-cash investors are driving this market, not an increase in foreclosures driving investors to use cash."

    Hold on a second there. Has the number of all-cash purchases of homes really increased since 2008? Or have they just risen as a % of overall sales?

  • Report this Comment On March 23, 2012, at 11:07 AM, treebarc wrote:

    I own some rental real estate properties, and I can tell you I just picked up a foreclosure property in one of my rental neighborhoods for cash. It is a huge pain in the neck to get financing right now, although I do think the process is much more responsible. A few years ago we could do "stated income no-doc loans" - yeah, tell me why there are so many foreclosures out there? Now the banks have so many restrictions that it's tough to find investor financing - they won't give you financing if you have too many mortgages in total, or they won't do more than 2 loans with you (when it used to be 10,) even though you have a good relationship and history with the institution. If you have some cash that isn't doing any good in a savings account, the deal becomes pretty attractive.

    We were able to buy a home for 60% of what we paid for another one 4 years ago in the same neighborhood. We know the rental market is good there and the rents have stayed steady. So it certainly works out to be a pretty good investment - the other house was cash flow positive, so you can imagine the stats on one for 60% of the price, same rent/taxes/expenses, but with no mortgage. Great returns to buy and hold as a rental. And the cash offer does give a competitive advantage in getting the offer accepted. Some of these homes also need a little work, and are always sold "as is." Not every "owner-occupied" buyer can afford to buy the home and then also have cash left to make the repairs to make it habitable.

  • Report this Comment On March 23, 2012, at 11:10 AM, tramagli wrote:

    The nightmare of home ownership!

  • Report this Comment On March 23, 2012, at 11:17 AM, pbass003 wrote:

    No, the people using their own cash are doing so because they can, and maybe have to, assuming lending practices are as you say. If someone who wants to buy a property for whatever reason (investment, their kid, etc.) could use the banks money, why would they use their own, especially at 3 or 4 %? Now they just do it the old fashioned way because the bank doesn't want to hold a mortgage for 30 years, but the buyer would have done it anyway.

    If someone else couldn't afford to do the same thing because they were in the lower socio-economic class and couldn't qualify for a loan, would they be any better off "owning" a mortgage? They don't really own the property and are essentially paying rent to the bank, but with a lot more liability. Even if housing prices rise, they are unlikely to realize any net benefit which outweighs the expenses (mortgage, insurance, upkeep, etc.).

    You say the disparity between the upper class and the lower/middle classes is growing, and this is another solid example of that trend in action. Very true but how is everyone owning a house going to change that? That is a function of self-serving politics, crooked banking and investing practices, and public apathy. Like a stock, a house is only worth anything the day you sell it, or it's paid off.

    Now that rules require them to keep some skin in the game, banks will lend money again when people have decent jobs and a reasonable chance of paying the money back. When a generation of borrowers walk away from their bad loans, a precedent has been set. It will take time to re-establish the old way where both parties worked to keep their end of the agreement.

  • Report this Comment On March 23, 2012, at 11:36 AM, FP52 wrote:

    I am one of those Cash Buyers. The "middle class" houses I buy for $150,000 to $200,000 need about $10,000 invested simply to rent; or $50,000 invested to make habitable to flip to a first time home buyer. I find myself completing with other Cash Buyers, all of whom are business trying to make a living. The key thing no one pays attention to is that their is a narrow market of "move-in ready" homes being sold by flippers like me, or traditional Sellers of homes in nice condition. The distressed short sales, and especially the foreclosure sales, need lots of work/dollars to make ready for occupancy.

  • Report this Comment On March 23, 2012, at 12:45 PM, kjurow wrote:

    I write's Housing Market Report and have written several in-depth articles about all-cash buyers. Here is a link to my latest one:

    While all-cash buyers play a growing role in major markets around the country, they are not the cause of weakening prices. With the trade-up market dead, first-time buyers are the only major player left in addition to the cash buyer.

    I've written extensively about the changing thinking about buying a house. Many renters who can afford to buy are waiting because they suspect and hope that prices will be lower down the road. This change is deadly for any market and it feeds on itself.

    I've been almost alone in claiming for the last 20 months that there is no housing bottom in sight. You can check out the nearly 30 articles I've written either at or

  • Report this Comment On March 23, 2012, at 12:46 PM, TMFUltraLong wrote:


    Here... here! Let me find a table to pound! Letting investors be liable for their own decisions is something I'm all for!


  • Report this Comment On March 23, 2012, at 12:46 PM, jmbring wrote:

    great article - it's not easy to write a useful one-pager on a complex subject.

    @duuude1: <i>My God, where were you housing bears 5, 10 years ago? </i>

    maybe some of the apparent housing bullishness leading up to the collapse was due to price relativity. for anyone selling one home and buying another their debt/equity *could* remain the same after the transaction - though of course some over-extended themselves. the former was my case: we sold our first home six years ago to the first person to view it for our absurd asking price, then bought our current house at a slightly less inflated price. so despite the soaring valuations, it was a far better market for a non-first time buyer than, interest rates were decent (though not crazy low) then too. you could sell your then-present house easily and at least be no more in debt on the new one, if not ahead.

    just an under-informed observation...

  • Report this Comment On March 23, 2012, at 12:49 PM, jasonnyc wrote:

    Sean, you are on to something. Cash is and should be required to purchase a home. Traditionally, that would be a minimum of 20% in cash. Sadly, the bubble was created by lowering the standards and the bust is just a proper correction.

    However, we've learned little. The government still underwrites loans with as little as 3.5% down. 90% of all loans for purchase are underwritten by the government because they are risky ... too risky. The gov't is still at it ... risky financing to prop-up the housing market. Let the market fall until sound financing can support sustainable housing.

  • Report this Comment On March 23, 2012, at 12:49 PM, TMFUltraLong wrote:


    Having a good refinancing agent was the main reason. She went to bat despite my high LTV and used the fact that I'd never missed a payment and essentially had my entire life with this bank in question (checking, savings, HELOC, mortgage, and 2 of 3 major credit cards) as bait to get her way.

    It seems so counterintuitive that LTV is even taken into consideration especially when I'm refinancing with the SAME bank. I mean they're on the hook for the loan anyways. Meeting my loan wasn't a problem.. the payment was small, I just wanted to use particularly low rates to make it even smaller. You'd think most people are in the boat that they need the lower rate to survive which wasn't my individual case. That could have had some bearing on it... but again, that would indicate a brutally backward system.


  • Report this Comment On March 23, 2012, at 12:53 PM, TMFUltraLong wrote:


    You basically nailed it because that's exactly what I'm getting at. The banks got burned, they went crying to the government for help, the government said "fine", slapped them with a bunch of new benchmarks they'd have to follow and now no one wants to lend for fear of the same thing happening again.

    The thing about the market, it has a pretty short-term memory span. I mean it didn't take but 10 years for us to give internet stocks valuations that are in the stratosphere again. Give it a few more years and lending standards will relax when the economy is actually healthfully in the correct direction. Until then, all those scrutinous eyes aren't going to let that happen and credit markets will remain tight.


  • Report this Comment On March 23, 2012, at 12:54 PM, TMFUltraLong wrote:


    I did not have to ante up a cash difference. That would have been a refi killer as it would not have been prudent at the time for me to come up with the added cash value to make the loan work.


  • Report this Comment On March 23, 2012, at 12:57 PM, TMFUltraLong wrote:


    Yeah, I can agree that the government has overstepped its bounds with regards to supporting the housing market. I don't blame the Obama administration for doing so, I just think that instead of a washout, we're in for years of slow-but-steady declines as these foreclosures come to market.

    It's been almost a year since I wrote this up, but this pretty much sums up my opinion on how I felt about the government's housing bump back in 2010:


  • Report this Comment On March 23, 2012, at 12:59 PM, TMFUltraLong wrote:


    I appreciate the insights from the banking perspective and would encourage other financial institution employees to chime in (and remain anonymous of course as to where you work) and just give us your general overview of how things are at your institution.


  • Report this Comment On March 23, 2012, at 1:02 PM, TMFUltraLong wrote:


    It's my contention that the amount of all-cash sales is on the rise. In the fourth-quarter of 2011, 74% of all foreclosure sales were done in cash while 33.2% of total sales (foreclosures included) was done in cash. Prior to 2008, the norm for all-cash sales was about 10% while its a LOT tougher to find data on all-cash foreclosure sales prior to 2008. All-in-all we've seen about a 200% increase. Yes, the increase in foreclosure will dictate *some* of that, but nowhere near the majority.


  • Report this Comment On March 23, 2012, at 1:04 PM, TMFUltraLong wrote:


    Thanks for the personal story that more or less emphasizes some of the points here.

    I remember one of my favorite figures (which of course I'm struggling to find right now) was a chart that showed the combined value of undocumented income alt-a loans completely dwarfed the amount of subprime loans ever written and most of those loans were going to re-set in 2011 and 2012.... oh joy huh?


  • Report this Comment On March 23, 2012, at 1:08 PM, TMFUltraLong wrote:


    I think this one might deserve another look in my next series of articles which is concerning who is doing the buying. My assumption now at least is these all-cash buyers don't need the financing and it's only hurting the middle-class consumer who is looking to purchase his/her first home.

    I do agree that the stigma of homeowners just walking away will take a long time to get over, but we have to remember, as I stated a few comments ago, the market tends to have a short-term memory span - it only took a decade for us to give internet companies 100+ P/Es again. Who knows.. 5 more years and low-intro rate mortgages might be the hottest-moving item again despite the dangers.


  • Report this Comment On March 23, 2012, at 1:09 PM, TMFUltraLong wrote:


    Thanks for the all-cash buying perspective. I'll be looking more into this over the coming weeks.


  • Report this Comment On March 23, 2012, at 1:13 PM, TMFUltraLong wrote:

    Kahuna and kjurow,

    Thanks for the insights.

    Kahuna - I agree to some extent that banks don't properly know how to value their home assets, but I think it's more of a product that they're terrible salesmen and don't want to put the capital into selling them for a better price.

    kjurow - Count me in the same boat as you for being bearish on housing for many moons.


  • Report this Comment On March 23, 2012, at 1:35 PM, jlmjlm77 wrote:

    I have a friend who owns home as a rental. When the right buyer comes by that home will sell. My friend has to consider what to do with the cash.

    Which will he likely do? Buy stock at 2 times the cost as you could in 2009; deposit cash in the bank for near zero percent interest; or look for a good deal on a home using the cash and creating rental income from a property that can yield near 10%, which is readily available in the geographic area?

  • Report this Comment On March 23, 2012, at 1:45 PM, outoffocus wrote:

    Am I the only one who doesn't see this as an entirely bad thing? While I'm all for the fact that you home can be a shield against inflation (sorta), this idea that your home is your best financial asset is false and needed to be disproven. A home is a place to live. Period. You buy a home for the quality of your life, not your portfolio. The increase in cash purchase to me is a good thing, especially for home buyers as the pricing with get cheaper. (I've never known the price of an item going down around the time I'm ready to buy it as a bad thing. But maybe thats just me) We all know that home prices are not going to remain this low forever. So I take indicators like this as a sign that housing is at or near the bottom. The only thing that people need to get used to is that housing prices are not going to skyrocket back up to bubble prices. But they dont need to. Housing prices need to match affordability based on a 20% down payment, not 3%. I know it sounds boring, but if you want to make money, either buy a second home and rent it out or invest in some dividend paying stocks or REITS. A home is a place to live. Period.

  • Report this Comment On March 23, 2012, at 2:15 PM, much2doabout wrote:

    Here is a question that I have long looked at but no one seems to address. Shouldnt forgone rent payments be included in any analysis of investment in real estate for personnal use?

    For example I buy a 150K house and my mortgage with taxes and insurance is 1000. Rent for a similar property is 1000 a month. If I live in both places for 2 years (24 months) shouldnt my real property if only worth 126K be a wash?

    I realize I am simplifying the cost of ownership factor but am also removing the tax benefits etc...

  • Report this Comment On March 23, 2012, at 3:09 PM, sailrmac wrote:

    It's an interesting thought that we have short memories. At some point houses will bottom (this year, 10 years from now?). At that point, if you are a bank, lending looks much less risky than today. At that point, you are no longer lending on an asset declining in value. Will we then go back to breath on this glass and we'll give you a loan?

    Maybe. If the banks have to retain risk, the answer is probably no, but if the banks can resell the paper to an entity (government supported or other) which will bear that risk for them, then sure. They will do whatever the executives of those banks think is in their best interest. If someone else is willing to take the risk of bad loans again, then sure, they'll make bad loans.

  • Report this Comment On March 23, 2012, at 3:17 PM, sailrmac wrote:

    Don't try to simplify the financials of a home purchase. The tax writeoffs, maintenance costs, property taxes, transactions costs, forgone rent, etc. are all significant. Just take out a spreadsheet and spend the 3-4 hours it's going to take you to do it all right. You will be glad you did.

    Set up the spreadsheet as if you were buying to rent. Figure out the cash flows for 10 years or so including sale. What's the ROI? If the ROI is higher than you make elsewhere then it's paying you to buy. If the ROI is less than you would make with that money (initial cash outlay) elsewhere then it's better to rent.

  • Report this Comment On March 23, 2012, at 6:03 PM, duuude1 wrote:

    God bless you sailrmac - just do the FREAKING spreadsheet folks! Sailrmac is right - you'll be glad you did. Anyone who buys anything that costs as much as a house without doing a spreadsheet and figuring out all the costs and tradeoffs - as well as the alternate uses of the cash and income - is asking to be ripped off - and to be harsh but realistic - deserves it.

    I'm in my mid-forties with a young family and am retired. Never bought a house and invested all the savings and laughed while everyone told me I was "throwing my rent away".

    Do the spreadsheet. Always.

    Googly eyed Duuude1

  • Report this Comment On March 23, 2012, at 6:11 PM, duuude1 wrote:

    God bless you sailrmac - just do the FREAKING spreadsheet folks! Sailrmac is right - you'll be glad you did. Anyone who buys anything that costs as much as a house without doing a spreadsheet and figuring out all the costs and tradeoffs - as well as the alternate uses of the cash and income - is asking to be ripped off - and to be harsh but realistic - deserves it.

    I'm in my mid-forties with a young family and am retired. Never bought a house and invested all the savings and laughed while everyone told me I was "throwing my rent away".

    Do the spreadsheet. Always.

    Googly eyed Duuude1

  • Report this Comment On March 24, 2012, at 6:52 AM, whereartgoes wrote:

    I realize this is anecdotal but my brother-in-law who has a significant amount of cash has bought a number of foreclosed properties in the last several years. He is rehabbing them and renting with the belief that he can resell them 3-5 years down the road and make a good profit. A secondary reason or maybe primary reason is that he has two sons out of work and this is a good way to keep them employed

  • Report this Comment On March 24, 2012, at 8:26 AM, GAMOK wrote:

    If you really want to understand what is happening to our economy you need to educate yourself on how our economic system and government really works. Here are a few videos that explain this:

  • Report this Comment On March 24, 2012, at 8:50 AM, maxmattnyc wrote:

    Prices need to fall more and will fall more not because there is a rising percentage of all cash buyers, but simply because housing prices are way too large a multiple of people's annual income. Only when the government returns to practical rules on this will a healthy housing market return. I doubt this will happen as it will mean more pain for everyone with a property they bought the past 10 years, but I think it is necessary.

  • Report this Comment On March 24, 2012, at 12:18 PM, zzdoug wrote:

    The reason cash buyers have a pricing advantage is that financed buyers are limited by their appraisal. This requires more explanation which i have explained in a blog post at

  • Report this Comment On March 24, 2012, at 12:20 PM, zzdoug wrote:

    The short explanation is that financed buyers are hindered because of the need for an appraisal. See a more detailed explanation in my blog post:

  • Report this Comment On March 30, 2012, at 12:26 PM, clue4u wrote:

    As an appraiser I find that I must remind the readers that Cash value is the actual value of a property.

    A typical transaction of a residential property automatically contributes to an inflated value caused by the purchase of two items: 1)the home and 2) the financing.

    The day of reckoning for three episodes of spec driven markets has arrived. It will take some patience and aligning oneself with reality to endure the chastisement. The subsidence of the last bubble has yet to settle completely.

  • Report this Comment On March 30, 2012, at 1:07 PM, kd55341 wrote:

    Interesting article - and since you are wondering what the motivation is behind the cash buy movement, here's our story.

    We've been regular investors for years - got burned both in 2000 and in the more recent debacle which to my way of thinking is still playing out. We've always been long on cash (one of us is super risk averse) which turned out to be very good thing during those two market swings. But not necessarily now with inflation starting to kick in.

    Long and short of it is that we've been regular savers with nowhere to put that cash to work for several years now.

    The risk evaluation methods and reasoning the industry "experts" tout is meaningless if you happen to be heavily invested or relying on your investments as your only income when the inevitable event occurs. I'm only in my mid 40's and I've been through two of them! If I live to be 80 I guess I can expect to live through 2 more.

    We started buying condos in good neighborhoods last year. The market seemed close enough to the bottom to live with, we believed having cash would allow us to buy slightly below market, and the foreclosure and interest rate landscape looked to be stable. It really came down to balancing the potential realistic after tax returns with the risks of a worst case scenario. All those former owners still need a roof over their heads.

    We pay cash, get the mechanicals solid, take care of the maintenance that's generally been deferred by the seller and get them slightly above average in appeal cosmetically for our target renter. This has allowed us our pick of stable renters. After all is said and done our after tax return runs between 8-9% with potential long term price appreciation as well. I expect that higher demand in our local rental market will translate into regular rent increases which should push our returns a bit higher over time.

    Yes, I know we could use leverage to substantially increase our return on investment, but what we need to meet our financial goals is a 6-7% average return across all our investments. We have a lot of peace of mind knowing we've got a stable income stream with no debt. If that property goes empty for a month or three our outlay is minimal.

    The biggest risk I see in buying rental property right now is that the market is already responding to the increased demand with new apartment complex builds. Lots of shiny new developments could very well impact our ability to raise rents or keep the most desirable tenants, we will have to see.

    We specifically did not get into this to flip properties, although that's a personal fantasy of mine, I think it's a really tough way to make money in a sideways or declining real estate market.

    I don't happen to agree that cash buyers are impacting the ability of the middle class buyer to get into their first home. I believe that is purely a function of tightened lending standards and the difficulty of saving the required down payment and closing costs. If cash buyers are driving sell prices down, which I do agree is happening, they should actually be making the purchase of a first home easier for that buyer, if they are financially prepared to be a buyer in the first place.

  • Report this Comment On March 30, 2012, at 3:32 PM, DBoston2 wrote:

    New to comment here but everyone seems to be forgetting the S&L crisis and what happened to home prices. Since 1991-92 the values in my area have more than trippled (even adjusting for the current bust). Housing will return - the demographics call for it.

  • Report this Comment On March 31, 2012, at 2:20 PM, hachmujt wrote:

    @ sailrmac, much2doabout and others who are interested in a valuation tool. I think this is interesting and useful. I agree on the need for spreadsheets and that is what I use, but some people will never build them.

    NYT rent vs. buy calculator/interactive graphic:

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