If it’s still Spring why are we already in the Summer doldrums?
After getting out of the gate in May like California Chrome at the Kentucky Derby, the housing market finds itself out of the Winner’s Circle in the middle of June. Other than in parts of our most affluent local counties, housing sales as represented by number of units sold of existing homes are very low. In the Northeast, the annualized volume is estimated to be only 600,000 homes this year which will be down 6.3% from 2013. Nationally, we are looking at annual sales of 4.59M for 2014 which is down from almost 7M during the height of the market in 2005!
More troubling, and not just for those of us who make our living in the mortgage industry, is the number of cash sales. In 2014, 43% of the purchases have been cash sales with some areas like Florida and Manhattan seeing numbers as high as 60%! Compare this with a “normal” market of 20-25% and this trend is downright terrifying (except to the real estate agents who are downright giddy over the usually quicker and always more certain closings on these transactions without the inconvenience of the “big bad banks” in the mix)!
So, why is the number of cash sales a problem? First, nearly all of these buyers are either investors or extremely wealthy. This is causing a “gold rush” for trophy properties and a further imbalance in the growing income (and asset) disparity in the US. The investors are purchasing properties to flip or to rent which are keeping first time buyers on the sidelines where their 5-10% down offers can’t compete with the all cash investor’s.
In areas where the investors are renting the properties, entire communities may be converted to a permanent rental class where families will no longer have the dream of home ownership available to them. We are looking at a very real possibility of real estate not being the first rung in the ladder to middle class.
Second, many of these buyers are foreigners who are bringing cash into this country to escape the economic and political uncertainty in their countries. With no rational value on the prices of higher end properties, these foreign buyers are helping to create the next bubble in real estate. The federal government is oblivious and unconcerned about this problem. They waste taxpayers money as they continue to salivate over the carcass of the sacrificial mortgage industry they destroyed without realizing its affect on the housing ecosystem nor on the hardworking folks who want to buy houses.
Finally, as “cash continues to be king” in real estate, the next generation (i.e. the Millennials) are further disadvantaged as they do not have the funds available to compete for properties. They are already buying houses at a lower rate than those in any other generation and are headed toward becoming a permanent renter class. As this exacerbates, the Millennials will no longer see home ownership as either a desirable or attainable goal.
Like Dr. Seuss’ Lorax and the Truffula trees, I see the Onceler mentality taking hold in the real estate market. I also see a long term harm to this market and a likely big crash coming again soon if the government does not take action to (i) stem some of the foreign cash as many other countries have and (ii) ease up considerably the mortgage lending market to encourage first time buyers and move up buyers as well to get their piece of the American Dream!