Thursday, June 20, 2013

Where is all the CASH coming from?

A housing market that shoots up roughly 25% in six months, is a scary sort of chart I hate. Anything that takes off like a balloon should make you nervous. I mean, no one wants this to be true more than me! Did you see my last post? Yet the housing market is now a secretive market. You have to work really hard to try and figure out what is going on. Everyone lies, so you have to ask tons of people to sort of tease the truth out. There are many things to question. For instance, I've never ever seen a market that so many people had a stash of cash to buy anything with. Little alone houses. The NyTimes has this to say:

"Nearly a third of all homes purchased in Los Angeles during the first quarter of this year went for all cash, compared with just 7 percent in 2007. In Miami, 65 percent of homes sold were for cash deals, compared with 16 percent six years ago."

My whole life has revolved around finding out how people afforded to buy houses. Growing up in an environment where you moved every year, and not having a family that had any money - it was just an obsession. I needed to know how they could do it... so I could find a way. Some cashed out 401k's, some were low rent trust fund kids. I mean, they didn't really have a trust fund, but they had a family who helped them out. Some just saved. And then, before the housing crash, you didn't even really need to save. There was 0 down, 3% down types of deals.

So all of a sudden, 1/3rd to 65% of houses depending on the area, are going all cash? That is way not normal. Obviously there is speculation that Asian countries are making up the bulk, but where are they getting the cash? Perhaps some of it is from our own stock market. It has been doing quite the clip, but you'd think that would show up in tax receipts.

I guess if most of it is from stock markets around the world - we will soon find that out. I can't find a market anywhere that doesn't make your stomach a little queasy. I'm just really curious how that whole cash pool is supporting themselves. Either our economy is much stronger than I think, or people have gone insane. Most cash buyers are even waiving their right to inspections. WTF?


  1. The comparisons are a little deceptive They're comparing the cash freeze in 2007 to where we are today and of course the difference will be extreme. Look at the numbers from 08' or 09' when money markets weren't frozen and hedge funds imploding due to cash liquidations and the journey doesn't seem as dramatic. Most of the cash is being driven by the boomers. There's zero yield coming off of bonds and anyone whose in their 60s would be crazy to put everything in equities, so they're looking for alternatives. Some of them are buying the houses directly to rent out, but most are looking for passive income, so they drive this through their investments.

    The rush back into the stock market has created an opportunity for a lot of the private real estate trusts to go public. Take a look at COLE as an example, they IPO'd today, but you can see similar trusts go public almost every day now.

    By going public with the trust, COLE is allowing investors to cash out for the first time in 7 years. Some will take their money, but many will automatically reinvest into a new private trust that they are creating designed to buy houses and commercial properties in California. This giant pool of cash will give Cole the ammunition that they need to wash, rinse and repeat this cycle over and over and over again. I'm not sure how many Cole's are out there, but these sorts of transactions are becoming increasingly common and probably has a lot to do with the bidding wars and the all cash transactions. - DF

  2. Maybe so. But to me it doesn't look like they are making YOY comparisons. Or Yo'08. I agree most of them ~do~ make YOY comparisons and that obviously skews the numbers because the previous year was chunked. And the year before that and so on. It makes it easier for the headlines to look sensational. I will have to let it roll around in my head a little more though.

    It's interesting what you say about the IPO's though. I don't watch that sector at all anymore. I will have to look at that company COLE. If I understand you correctly, it sounds a little like what I read they were doing in Japan with just a different facilitator. When I read this article I though "thank goodness that doesn't happen here".

    "Facing the specter of bankruptcy, some construction firms persuaded their staff to take up loans to mop up unsold apartments."


    I personally don't think that is going to work the way they think it will. I mean, they are all overpaying for houses now. Sure, you will probably never get to borrow money this cheaply again. But being a landlord isn't all its cracked up to be. And anyway... these houses seem too expensive to make any money on renting. At least IMO. Because I'm an unintentional landlord.

    Mr S. think it's possibly coming from foreigners who are running to the US for safety and converting their money into dollars. Now they have all these US dollars, and they have to put it somewhere.

    It is an interesting angle though. I'll have to keep that in mind when I look at the market. Thanks.

  3. It's doesn't have as much to do with the construction firms as it does Wall Street's preferred method of funding development. It typically starts with a company like Cole creating some random trust to buy properties. They then turn to the bankers and pay them underwriting fees that are in far excess of normal commissions, in order to encourage their accredited investors to participate.

    The pitch to the investor is that they are able to get higher yields because it's private and because they can take on risks like buying foreclosures, commercials spaces without tennants or even empty pieces of land that they can build on. These trusts come in more flavors than lollipops. You'll see multi-housing ones, vulture ones, some that only invest in bio-tech properties and others that will only buy wherehouses at the docks.

    Once the accredited investors fund the trust, they then go on a shopping spree and deploy the cash they raised minus fees. After the portfolio starts producing income, they'll pay out a yield and will try to either sell the trust as a bulk lot to a hedge fund or will IPO it to the public.

    The downside to investing in a private placement is that there is no liquidity if you want out. Most have surrender penalties and make you give up 100% of any yield if you exit early. This isn't usually a problem though because companies like Cole are incentivized to turn them over as fast as they can.

    For years these trusts were part of the bedrock of the financial system, but once access to cash from "liquid" things like floating rate notes and money markets broke, it became all but impossible to exit any investment where you were contractually bound to hold it. As a result, anyone who has used these vehicles in the last 10 years has more or less been locked into a perpetual trust that may or may not pay yield, while they've had to watch the housing market burn down.

    For most people, how much they paid for a home impacts their decision to buy or sell. If you're underwater, you might not even be able to walk away, but what drives demand on the institution side of things are liquidity events that allow them to wash, rinse and repeat the same cycle over and over and over again. The institutions have no loyalty to a certain price, they are only looking for the opportunity to refinance people in and out of the investment as often as they can to generate income.
    This is how a sudden jump in interest for IPOs can unlock billions in capital without the properties inside the trust ever going up for sale. Some of the money will go towards other area of the economy, but with the institutions being in the cash out stage of this cycle, there's bound to be new money spilling over into a new cycle.