Many, if not most of the major markets across the U.S. are reporting an uptick in home sales activity. But these are not your new, first time home buyers with FHA loans that are driving this increase, it’s real estate investors and foreign buyers.
Even as housing sales reports are showing some encouraging signs of life, the real action is in the category of “all cash” sales. Many cities are reporting record levels of contracts from all-cash buyers. Prior to the housing market crash, all-cash sales were around 25% or less. Today the all-cash contracts in many areas are 30% or more of all home sales. This difference is enough to account for the entire increase in home sales over the past few months. Even in areas where home sales are down, the percentage of all-cash sales is still higher than it was prior to the market melt-down.
This means that real estate investors and other buyers with cash have decided that prices are low enough to start making offers. Many smart investors had been on the sidelines from 2005 to 2009, waiting for the sky-high prices from the peak market years to finally come back to earth.
In cities like Atlanta, GA, which has posted year over year price decreases since 2007, the investors are moving back into the market and generating significant sales activity. Roughly 35% of all sales in metro Atlanta are investor related and are mostly all cash. And it’s no wonder that the market is getting more attention from investors, with prices off more than 30% from the market peak. Some areas of metro Atlanta are seeing foreclosed homes selling for 80% below their original prices.
I recently viewed an investor sale in which the property, a 3 bedroom 2 bath originally listed for $113,000 sold after foreclosure to an investor for $17,000! And it was not a junker in an old neighborhood. It was built in 2002 and was in a neighborhood that had seen a high percentage of foreclosures. Many of the properties in this particular neighborhood were foreclosed and were being sold at roughly 20 cents on the dollar.
A lot of these lowest prices are going to well funded investors and investment companies who have cash and can buy a package of 5 or 10 properties from a bank in a single transaction. While the media has focused more on the big bulk REO packages for investors who have access to millions of dollars, there are quite a few small package deals being done between local banks and smaller investment companies. Some of these properties are then resold by the original investment company buyer, to individual investors who use them as rental properties. Even after paying a mark up of as much as 50%, local real estate investors are realizing some of the best positive cash flow numbers we’ve seen in years. They are paying $45,000 for a 3 bed 2 bath, and renting it for $875 per month.
Due to the large number of foreclosures, property prices are down, and property taxes are down as well. This has helped revitalize the rental property market. Rising prices and rising property taxes were one of the primary triggers of foreclosures among investors early in the housing crisis. Today in many areas, the prices and taxes are finally back down to levels that will allow investors to cover their ownership costs and still realize a nice positive cash flow. This is even more profitable when buying with all cash, and there is no mortgage to pay.
In more desirable resort locations such as Miami, Florida, the all cash sales activity is seeing a large increase in the number of foreign buyers coming to south Florida to pick up great deals on condos. This market was very over-built during the housing boom years. As a result, condo prices in many south Florida cities have dropped 50% or more from their market peaks. And it’s been a few years since there were any really nasty hurricanes. After the horrendous hurricane season in 2005, many south Florida residents packed up and headed north to Georgia, North Carolina and other cities out of the reach of hurricanes. This led to an early collapse of the south Florida condo market, well ahead of the national market. Florida has never recovered from this, but the more desirable coastal areas are seeing much better cash sales activity these days.
Overall, cash buyers account for around 33% of all existing home sales on average. California reported a record year for all cash home sales in 2011. Phoenix, Seattle, Portland, Reno, Las Vegas and Denver are also reporting record activity in all cash transactions. Along with Chicago, Atlanta, and Miami, these cities are also among those who have seen high rates of foreclosure. Some data tracking services are saying that about 52% of the all cash home sales are properties that had been foreclosed on.
Foreclosure is certainly the most likely reason for such significant reductions in home values and selling prices. And with foreclosures still at very high levels, it’s likely that the discounted prices and all-cash sales will continue in many areas for years to come. Indeed, without these all-cash buyers moving in to take advantage of the current market, home sales activity would still be at all time lows.