Investors With Cash Place Downward Pressure on Home Prices

Homebuyers with enough cash in hand to cover their offer price in full are able to bid significantly lower on properties and according to a new industry report released Monday, because they offer a shorter and more reliable closing timeline without the impediments of a mortgage, they often win out with that lower bid.

The study, provided by Campbell Surveys and Inside Mortgage Finance as part of the companies’ monthly HousingPulse Tracking Survey, found that this low-bid-winning dynamic is particularly true for distressed properties because mortgage servicers selling foreclosed or REO homes generally prefer transactions that can settle within 30 days.
The total share of distressed properties in the housing market in December, as represented by the HousingPulse Distressed Property Index (DPI), continued at a high level of 47.2 percent, based on a three-month moving average. December marked the 24th month in a row that the DPI has been above 40 percent.
Cash buyers, many of them investors, are putting downward pressure on home prices across the board, according to the HousingPulse Survey.
In December 2011, data collected for the HousingPulse Survey shows that the overall proportion of cash buyers in the housing market surged to a record 33.2 percent, up from 29.6 percent a year earlier.
Among investor homebuyers, however, the proportion of cash buyers was much higher, with 74 percent of investors laying down the money to purchase homes outright last month.
The latest survey results indicate investors accounted for 22.8 percent of all home purchase transactions in December 2011, up from 22.2 percent a month earlier.
Despite their relatively small share among homebuyers, investors have an outsize effect on home values because their bids bring down market prices, according to the HousingPulse survey report.
While investor bids may not be the first offers accepted, the report notes that they often end up winning properties after other homebuyers are eliminated because of mortgage approval or timeline problems.
Real estate agents responding to the HousingPulse Survey commented on low bids from investors.
“Investors usually offer 10 percent – 20 percent below list up to a price of $250K. First-time homebuyers are [offering] close to list [price] as are current homeowners. Investors want 2-4 weeks to close…Financing buyers end up with 6- 8 weeks plus,” reported an agent in Arizona.
“In competitive offer situations, cash offers prevail for the most part because of the common knowledge of lender closing issues,” noted an agent in New Jersey. “Cash sales close in 21-30 days. FHA sales close in 45 to 60 days.”
The HousingPulse Tracking Survey from Campbell Surveys and Inside Mortgage Finance polls 2,500 real estate agents nationwide each month to assess market trends surrounding homes sales and mortgage lending