How many of you saw this one coming? In two short years, the real estate market has gone from distressed foreclosure sales at deep discounts to a market where potential sellers are afraid to sell because they don’t think they can find a replacement home – not at any price.
It’s true; one of the major causes of low inventory is that people wanting to sell are afraid that won’t be able to find a home to buy. Regardless if it’s just at another location or if they want to buy up to a bigger house, there is too little being offered for sale for them to list their homes.
All Cash Market
The low inventory and tight credit market is driving the all cash market to new heights. Even when buyer is preapproved for a loan, when a seller has multiple offers on the table, the all cash offer that can close in three days will be accepted before the financed offer that will take a month or more to close.
According to Realty Trac, all cash sales hit an all time high of 43% of all closed deals in the first half of this year. Much of that was driven by institutional investors. However, as institutional investors back out of the market, all cash sales continue at a record high rate. A major portion of this trend is baby boomers with paid off mortgages or high equity who are buying down at retirement.
The most recent data shows that institutional buyers make up 32% of all cash buyers while retirees cashing in equity to down size make up 12%. Most experts agree that an all cash market is an unsustainable market. Institutional buyers are turning the lower cost houses into rentals and the baby boomers are likely to remain in their down sized houses for the remainder of their lives. The entry market for younger buyers is shrinking dramatically.
Shrinking Entry Market
The bread and butter of the real estate market has always been first time buyers and second time buyers moving up to bigger houses. Both of these types of buyers are heavily dependent on financing through mortgages. These are the people being pushed aside as prices soar, inventory shrinks, and because cash is king.
As inventory shrinks and prices rise, current homeowners can’t afford or find upgrade homes. When they can’t move up, it limits the number of entry level homes for first time buyers. The entire market begins to stall.
At the lower end of the market, the credit crunch is clearly not easing. On the other hand, buyers of high-end homes requiring ‘jumbo loans’ are finding credit available. These are typically people moving up for the third or fourth time. The homes they are leaving behind are already upscale. It does nothing to increase supply at the entry level.
While these troubling trends don’t bode well for first time buyers, it doesn’t necessarily frown on investors. Those that buy and flip properties tend to be all cash buyers that can still play in this market. As well as landlords who will enjoy the rising rents. Even investors providing private financing to others, for a passive income stream, should do fine in this ever changing real estate market.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.