There was an odd sort of myth floating around the market that the cash buyer crowd was somehow a tiny portion of the market, like a drop of water in the vast ocean of home buying. This delusional dream played into the fantasy that this housing market was naturally rising because of overall household demand when in reality, it is being driven by investors leveraging the artificial low rates created by the Fed. The flood of money from Wall Street has been large. Even anecdotally, it was apparent that cash buyers were driving the market given that housing is a margin driven market. That is, at any given time only a small portion of all homes are on the market for sale. However, an analysis by non-other than Goldman Sachs shows that 60 percent of all 2013 home sales are being driven by cash buyers. That is, the middle class is largely being pushed out of this game and has become the minority in this real estate market. Let us look into the data more carefully.

Cash buyers only a small portion of the market?

I think the myth of cash buyers being a small part of the market fed into the meme that the housing market was “organically” going up on the underlying power of the economy. In reality, the market has been bubbling up because hot money is voraciously fighting over itself to eat up whatever inventory is available. The data now being released confirms how massive the investor portion of the market is:

“(WSJ) More than half of all homes sold last year and so far in 2013 have been financed without a mortgage, according to an analysis by economists at Goldman Sachs Group. The analysis estimates that around 20% of all homes sold before the housing crash were “all-cash” sales (or around 30% of sales by dollar volume). But over the past seven years, the all-cash share of sales has more than doubled, increasing by more than 30 percentage points, according to economists Hui Shan, Marty Young and Charlie Himmelberg.”

Think about this more carefully. Even with the median home price of $214,200 families still need to finance the purchase. The above chart clearly shows that investor money is really driving the bulk of the housing market. The low rates promoted by the Fed were cast under the umbrella of helping out regular families but in reality, they have turned into the next hot money play for banks, hedge funds, and Wall Street. The fact that 60 percent of all purchases in 2013 are being driven by the cash crowd is crazy (a 200 percent increase from the 20 percent pre-crash levels). The WSJ article goes on to say:

“There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.”

We’ve talked about this for years but the current percentage is stunning. It is safe to say that your mom and pop American buyer is not eating up all these properties for all cash. Just take a look at the cash buying in Las Vegas:

This incredible trend also helps to explain the massive drop in mortgage applications but the rise in actual home sales:

Source: ZH

Some have argued that the “all cash” crowd isn’t really all cash which may be true in some transaction but the above chart clearly shows that mortgage financing has fallen dramatically since 2012 (below pre-crash levels). This of course has occurred at a time of record low interest rates. So the idea that low rates would spur your regular Joe and Jane to buy homes doesn’t seem to be occurring. Unless Joe and Jane have hundreds of thousands of dollars sitting around (which of course, is not the case). Of course this also helps to explain the dramatic falling of the home ownership rate as well:

Yet this unrelenting amount of investor buying has crowded out people in various markets. Even in California where property prices are rising dramatically and some areas are having homes sell at record levels, the cash buying crowd is at record levels (roughly 30 percent of purchases in one of the most expensive states in the country).

So much for the myth that the all cash crowd was a small portion of the market.

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