Record Numbers of California Homes are Being Purchased with Cash

We have seen a surge in the number of buyers paying all cash for real estate in 2011.  The factors contributing to this shift are numerous and the impact of these buyers is palpable.

The share of California homes purchased with cash increased to a record level in January 2011.  More than 30 percent of all single family houses, town homes and condominiums purchased statewide sold without a mortgage – the highest level in 23 years.  According to San Diego-based DataQuick Information Systems this level has maintained throughout the year with only a slight decrease in September.

Tightened lending and reduced conforming loan limits have created qualification challenges for even the wealthiest buyers.  Sam Khater, chief economist for Santa Ana, California based real estate information company CoreLogic Inc. states, “You’re seeing an increase in cash deals at both ends of the price distribution curve.  You’re seeing it in the hardest hit areas, where investors are coming in and picking up low-priced properties and you’re seeing higher cash activity at the upper end as well.

The effect all cash buyers are having on the market is mixed.  Preferring a faster close with fewer complications, many sellers favor all cash offers.  While this may be good news for investors, this activity can cause concern for nearby homeowners as values may decrease and appraisers will base the value of neighboring homes on these lower prices.

Factors contributing to increase in cash purchases:

Appraisals

Low appraisals are contributing to cash purchases. Before a sale, banks compare nearby home sales to assess value.  In many markets, appraisers are including foreclosures and short sales sold at discounted prices in their valuations.  As a result, appraisals often come in too low to meet minimum loan to value (LTV) requirements to finance the amount needed to fund the purchase.

Owner occupancy limits

Some condominium buyers cannot secure financing because of lending restrictions regarding the ratio of owner occupied and non-owner occupied units within any given complex.

Property condition

Some homes are in poor shape and may not qualify for financing.  Lenders often reject mortgage applications for properties with missing or damaged amenities and/or utilities (i.e. floors, bathrooms, toilets, oven/range, etc.)

Rental Demand

The growth in all-cash deals occurs amid rising demand for rental housing as more homeowners go into foreclosure. The U.S.homeownership rate fell to 66.5 percent at the end of last year from a high of 69.2 percent in December 2004, according to a January 31 Census Bureau report.

Changing investor strategies

“Flippers” are buying homes at a discount with cash then reselling the property.  Other investors are purchasing investment properties and second homes using cash to diversify their portfolios.  “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.”

 

The median price paid for a home in Californialast month was $249,000 – down 6 percent from $265,000 in September a year ago.  Locally, the median price paid for all new and resale houses and condos sold in the Bay Area was $365,000 last month – down 1.4 percent from $370,000 in August and down 7.6 percent from $395,000 in September 2010.  Distressed property sales, the combination of foreclosure re-sales and “short sales” made up more than half ofCalifornia’s resale market last month.

These lower prices have stimulated sales volume.  While sales numbers in Californiafor September are down from 6.2 percent in August, sales are up 6.7 percent from September 2010.

While cash buyers have caused some frustration to buyers who require loans, in many instances they are beneficial.  Flippers are going in and rehabilitating properties, creating a product that buyers requiring loans can purchase at an increased market value.

Neighboring property owners may then benefit from improved values resulting from newly rehabilitated properties and improved stock of housing inventory within their specific market which can also help to stabilize and drive prices up.

Percentage of homes sold to buyers paying cash

County/Region

Jan-10

Jan-11

Peak month since 1988

10-yr monthly avg

Los Angeles

26.30%

24.60%

26.40%

10.60%

Orange

24.20%

27.40%

27.40%

11.30%

Riverside

36.30%

35.80%

37.40%

16.70%

San Bernardino

36.10%

38.60%

38.80%

15.90%

San Diego

28.00%

28.00%

29.10%

12.60%

Ventura

22.70%

21.30%

43.00%

11.00%

SoCal

29.60%

29.50%

30.10%

12.90%

Alameda

25.40%

25.50%

28.10%

10.40%

Contra Costa

29.60%

32.00%

32.00%

12.60%

Marin

26.10%

29.90%

32.20%

15.80%

Napa

32.20%

31.90%

33.70%

13.30%

Santa Clara

22.20%

26.30%

26.30%

12.50%

San Francisco

25.40%

21.90%

25.60%

13.10%

San Mateo

24.50%

25.40%

25.50%

10.70%

Solano

27.90%

35.90%

35.90%

13.30%

Sonoma

27.50%

28.30%

34.60%

14.80%

Bay Area

26.00%

28.70%

28.70%

12.40%

El Dorado

19.40%

34.80%

37.70%

18.00%

Fresno

31.10%

35.00%

35.00%

15.90%

Kern

28.50%

35.80%

36.50%

16.90%

Madera

33.60%

48.60%

48.60%

22.90%

Merced

46.70%

46.50%

48.00%

20.70%

Monterey

30.40%

31.50%

36.20%

13.70%

Nevada

37.20%

28.20%

37.70%

23.10%

Placer

30.50%

28.50%

32.60%

17.70%

Sacramento

31.80%

37.50%

37.50%

13.90%

Shasta

36.90%

37.30%

37.30%

21.40%

San Joaquin

32.50%

34.10%

36.10%

13.70%

San Luis Obispo

25.70%

27.50%

34.30%

18.10%

Santa Barbara

25.00%

33.90%

33.90%

14.70%

Stanislaus

31.70%

37.10%

37.10%

14.60%

Sutter

23.60%

34.20%

36.80%

15.20%

Santa Cruz

26.50%

31.90%

35.70%

13.80%

Tuolumne

37.00%

39.50%

46.70%

25.40%

Tulare

27.70%

31.60%

32.40%

16.70%

Ventura

22.70%

21.30%

43.00%

11.00%

Yolo

19.50%

22.40%

31.90%

11.70%

Yuba

20.30%

22.70%

33.70%

14.60%

California

29.50%

30.90%

30.90%

13.90%

Table provided by dqnews