bostonbubble.com

[admin]

I did some superficial Google-ing to see if I could fill in some of the blanks on the rumors of cash purchases. Here's a Globe article from 2011 on how cash sales had swollen to 34% of the market:

http://www.boston.com/business/articles/2011/10/02/real_estate_becoming_a_cash_economy/

A few points of interest:

• They cite people having cash from the sale of a previous property, as balor123 suggested.
  
• They indicate that people are taking out a mortgage after buying in cash. Investors who can bootstrap the process by buying a first property in cash could then turn around and borrow against it to buy additional properties in cash repeatedly, swelling the number of purchases that get recorded as cash but are in fact dependent on financing in multiple ways. Higher rates would negatively impact "cash" purchases where the buyer intends to finance after purchase. I think it would be extremely interesting to see some stats on how many purchases had no mortgage say 1 year later, rather than just at the time of sale. (Again, this data could be derived from the public records, I just think it would be time consuming.)
  
• This was two years ago, so it doesn't explain the spike in prices that started last winter.
  

This isn't targeted at Boston, but I think it gives a decent idea of the timing and scope of the increase in cash purchases:

http://www.doctorhousingbubble.com/all-cash-buyers-us-housing-market-real-estate-figures-real-estate-investors-percent-of-market/

I've seen it suggested many places that institutional investors are responsible for a significant percentage of purchases, which would also explain the source of cash in all cash purchases:

http://mhanson.com/archives/1249

I would expect that source of demand to very quickly dry up should bond yields (and mortgage rates) rise as the explanation for investor activity has been that they are turning to property for lack of better yields elsewhere.

- admin

[Renter - former Owner]

Admin,

Thank you - glad to know there other rational folks.

We live in a world where cash is sloshing around the decks - until one day it won't be.........
The story of cash buyers gets retold by everyone - I also wonder the impact of people owning multiple Homes - I suspect it is rising again.

Regards.

[mpr]

To answer admin and others' question, the spike in Boston area home prices, as elsewhere is due to a confluence of factors. Low interest rates, improving economy, supply dynamics. Yes, the recent increase in rates will likely put a brake on prices, but this is in a context of rapidly rising prices - that's what all those above asking offers are telling you, that prices want to rise.

As with any leveraged investment buying a home carries risks. But rising interest rates is not a big risk factor. Sure, all else being equal, higher rates means lower prices. But all else is never equal. Higher rates almost always means either a stronger economy or inflation, which erodes the real value of your mortgage payment. The effect of a stronger economy will swamp the effect of higher rates (if the last few years hasn't convinced you of that nothing will).

It makes much more sense to worry that prices will fall because the economy will slow again.

[admin]

[mpr]

[Renter - former Owner]

Higher Home Price in an environment of rising inflation and rising interest rates - I have to disagree - even though I'm probably wrong.

Lets look at the inflation of Home prices, gasoline, the price of milk, automobiles and bread over the last 13 years. Meanwhile white collar jobs excluding finance) have remained flat. Most good white Collar jobs are in the $100-$150K range - Would people agree with this?

So, we have had a period of time with inflation and no wage inflation. Home price appreciation is dominated by the Interest Rate crash.

In the 1970 I think there was home price appreciation with wages - thne Volker appeared and raised interest rates dramatically - to break inflation and he crushed the value of housing.

But, there is a really good chance I'll be wrong.
Regards

[mpr]

[Former Arlingtonian]

Graph of Housing

http://www.ritholtz.com/blog/wp-content/uploads/2009/09/200909251.gif

[mpr]

[Arlingtonian]

Check out the drop in Interest Rates - from 1980 to 1985...

15%-20% in 1980 down to ingle digits in 1985??

http://inflation.us/charts.html

So , was it inflation or was it dropping interest rates that gave people more cash to borrow..
I remember a family member trying to sell a home in 1979 - the Bank would finance the entire loan - so a private mortgage where the Buyer pays the seller a certain dollar amount every year until the private note was paid off....I suspect this was very common in late 1970s or early 1980.

What do you think.....again - no period is ever the same and I'm wrong regularly and often...

Regards,

[Arlingtonian]

Check out the drop in Interest Rates - from 1980 to 1985...

15%-20% in 1980 down to ingle digits in 1985??

http://inflation.us/charts.html

So , was it inflation or was it dropping interest rates that gave people more cash to borrow..
I remember a family member trying to sell a home in 1979 - the Bank would finance the entire loan - so a private mortgage where the Buyer pays the seller a certain dollar amount every year until the private note was paid off....I suspect this was very common in late 1970s or early 1980.

What do you think.....again - no period is ever the same and I'm wrong regularly and often...

Regards,

[balor123]

I just stumbled across this listing on Trulia:

http://www.zillow.com/homedetails/10540-Culbertson-Dr-Cupertino-CA-95014/19644726_zpid/

Not in Boston but it's a pretty home. Built in 2007 on what looks like a $720k teardown. Should be about $450k to build that house for a total cost of $1.17mil so they're asking $1.3mil naturally 2 years later (~6%/yr so high but not terrible). Drops to $1.2mil before delisting and now reposted for $1.6mil. 25% return in 5 years? Those are some good numbers.

Incidentally, if I were to post my house for sale (and I hope to in 2 years if my wife will let me) I'd list it for $750k in today's money, also a 25% return. I might get it too. Market is pretty frothy.

[mpr]

I think you are significantly underestimating what it would cost to build that house.

[balor123]

Depends on location. You may be right in CA. In Austin it'd be about $150/sf for hard costs so I figured $200/sf for CA but perhaps a bit more. Still, a 33% swing over two years in asking price is pretty amazing!

[mpr]

CA may be more, but that isn't the main point.

Its the quality of the finishes - I don't know everything in there, but I am inferring from what I do see - and cost of making such an elaborate structure.