April 3, 2011 - All-cash home buying is surging across the United States, including in Orange County, as lenders tighten mortgage standards, middle-class buyers are sidelined and investors see opportunity.
Nationwide, cash buyers grabbed 33 percent of all used homes sold in February, the National Association of Realtors reported March 21. The figures, based on agent reporting, do not include foreclosure auctions on courthouse steps, which are usually cash-only.
In Orange County and California real estate, DataQuick Information Systems reports similar trends based on county recordings that do not show any purchase loan.
Cash-only sales have more than doubled in Orange County, from a monthly average of 10.4 percent in the past 23 years to a monthly average of 24 percent in the past 12 months, DataQuick statistics show. In January, all-cash sales hit 28.3 percent in the county – the highest for any month since DataQuick started tracking the figure in 1988.
In Irvine, 31.6 percent of the 393 homes sold so far this year were paid for in cash, real estate broker Cathy Haney said. The average sales price of the all-cash deals this year was $657,854, while the median price for all the Irvine homes sold was $535,000, she said.
Across California, mortgage-less home purchases have doubled from an average 14.7 percent in the past 23 years to 28.3 percent in the past 12 months, according to DataQuick. Cash deals hit 32.9 percent in February, the highest for any month since at least 1988.
"You're seeing an increase in cash deals at both ends of the price distribution curve," said Sam Khater, chief economist for CoreLogic Inc., a real estate information company. "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 "lion's share" of all-cash purchases nationwide are from investors, according to Walter Molony, a spokesman for National Association of Realtors. Real estate investors seek rental income, long-term appreciation or a quick profit.
Vito Antoci, a full-time real estate investor from Newport Beach, recently bought an ocean view home at 1006 White Sail Way in Corona del Mar for $1.45 million in cash. He is spending another $500,000 in cash to expand and renovate the house, and said he will sell the home within six months for $2.5 million to $2.89 million to earn at least a half-million dollars in profit.
"When you buy with cash, you get the best deals," Antoci said. "Sellers don't want to deal with the bureaucracy of banks."
Antoci, who owns Varm Development, saw a nonlocal realtor putting the for-sale sign into the ground as he drove the streets looking for homes to buy. The sellers were asking $1.8 million. He made an offer and it was accepted that same day. It never hit the market, and escrow closed in a week.
"It was a quick, intriguing cash offer, and they took it," he said.
Carl Alford, a retiring owner of a dry-cleaning product business, recently paid cash for two homes in Irvine that he is renting out for income.
"Stocks and bonds are a gamble, and banks certainly aren't paying anything on money," he said. "You can earn more in real state, and I like something you can touch, feel and correct."
Alford recently sold a home in Fontana and carried the mortgage note himself, he said, meaning the buyers are paying him monthly payments.
Investors are also using cash – either their own or from alternative resources – to gain an advantage over buyers using a mortgage in nabbing bank-owned properties, which are plentiful these days and usually less expensive than other homes. Foreclosures in January accounted for 37 percent of all home sales nationwide, 25 percent in Orange County and 54 percent in California.
Traditional lenders often reject mortgage applications for foreclosed properties because the homes need a lot of work, appraisals come in below the accepted price or deals just take too long to close, said Thomas Popik, research director for Campbell Communications Inc., which conducts national surveys of real estate brokers.
Some flippers don't even have to improve a foreclosure.
"You buy the house at a discount with cash, then you flip it almost immediately to the first-time homebuyer who's using a mortgage, simply because they were not able to buy at the foreclosure sale," said Oliver Chang, a housing-market analyst with investment bank Morgan Stanley.
About half of all home purchases were paid for in cash in Miami, Las Vegas and Phoenix, Chang said.
In the local, million-dollar-plus home market, buyers are choosing to use their own money to purchase their principal residence, says Chris Valli of luxury real estate brokerage Surterre Properties.
Why? Banks are asking intrusive, exhaustive questions of anyone trying to get financing for a home above $729,000, Valli said. Fannie Mae and Freddie Mac won't insure mortgages over $729,750. Buyers feel it is just less of a hassle to pay for the home with their own money, Valli said. The buyers also want to negotiate a better deal on the property by showing they can close escrow without a third party lender, he added.
"It puts the seller more at ease and gives them a little more assurance," Valli said. He recently sold an estate in the $7 million range in Irvine's Shady Canyon community for all cash. Another home in Shady Canyon recently sold for $4.3 million in cash.
Chris Crocker, a Coldwell Banker broker in Corona del Mar, says the wealthy are looking at waterfront dream homes priced 40 percent below the peak as a safe venue to out their money in for the next few years while also having some fun. The cash buyers he or his colleagues have worked with are looking to buy second or third homes as a place to dock their yachts and their money on the West Coast.
There's a general perception that the market has bottomed out on prices, Crocker said.
Tighter underwriting in general for mortgage loans is also a factor in the percentage increase of cash-only deals among all sales.
Lenders are requiring higher down payments and higher credit scores.
The median down payment for all home purchases with a mortgage rose to 22 percent last year in at least nine major U.S. cities, according to a survey by Zillow.com. That's up from 4 percent in late 2006, when the housing bubble began to burst. During the housing boom, buyers could purchase a home with little or no money down.
The weighted average FICO score for a home purchased with a Fannie Mae mortgage was 762 last year, up from 716 in 2006, the mortgage finance company reported.
The tighter underwriting is sidelining many would-be middle-class buyers, especially first-time buyers, from purchasing a home – even though prices are relatively low because of all the foreclosures.
"The average Joe can't take advantage because he simply cannot get the credit to buy," said Paul Dales, senior U.S. economist for consulting firm Capital Economics.
The banks who fueled the housing bubble with lax mortgage underwriting are now being too restrictive, said Molony, the Realtor association spokesman.
"Lenders have only been willing to lend to the cream of the crop in terms of credit scores," he said. "As a result, you're seeing a depressed level of traditional buyers."
Bloomberg News and The Associated Press contributed to this report.