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The U.S. housing market's turnaround has been very much a cash-and-carry business. And that raises some serious questions about whether there's enough fuel there to sustain the recovery.
A New York Times article over the weekend highlighted a remarkable aspect of the current resurgence of the downtrodden U.S. housing market: An enormous volume of residential properties are now changing hands via all-cash sales. The National Association of Realtors reports that cash transactions now account for nearly one-third of all home sales in the United States, up from the pre-financial-crisis norm of about 10 per cent.
In some markets, the prevalence of cash-only deals is flat-out shocking. The Times reported that in the first three months of this year, 65 per cent of all houses sold in Miami were all-cash deals, up from 16 per cent in 2007.
"We've seen a tremendous increase in cash buyers since the housing downturn that we haven't seen before in history," said Lawrence Yun, chief economist of the National Association of Realtors, in a report last November.
Much of this reflects a flood of investor money jumping into the market to snap up properties at depressed prices. As my colleague Scott Barlow noted in an ROB Insight post last week, big investment funds have been gobbling up an unprecedented volume of residential properties, a trend that has lit a fire under housing prices. Private investors, both domestic and overseas, have been piling into the market, too.
At the same time, for prospective buyers looking to finance via the traditional mortgage route, funds remain frustratingly hard to come by in the post-crisis U.S. banking system, with its tougher lending regulations and gun-shy loan officers.
"Having gone through a similar experience recently, I can tell you the new Dodd-Frank regulations for mortgages make it extraordinarily difficult to get a loan and drive individuals to use cash instead," said market strategist and financial commentator Andrew Busch on his financial blog Monday. "This has the dual negative effect of increasing prices while shutting out buyers.
"It will eventually cause sales to stagnate when cash runs out."
Indeed, that's the danger. The investment-driven cash buying spree is limited both by the amount of cash out there willing to flow into residential real estate, and by the fact that at today's significantly higher price levels, there's a lot less upside left to entice investors (not to mention a reduced inventory of bargain-basement properties there for the taking). Meanwhile, the traditional buying base is being squeezed both by elevated prices and a lack of available financing.
That's not a formula for a sustained rally in the market. Rather, it's a recipe for eventual stalling of the upturn, as the investors run out of ammunition and the traditional buyers remain frozen out.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .
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