Cash talks. And it’s speaking loudly in California real estate these days, even in the nicest parts of town.
All-cash buyers grabbed a record 30.9% share of the Golden State’s houses and condos in January as low prices lured investors and others, according to San Diego research firm DataQuick Information Systems.
Cash activity has been brisk for months in foreclosure-ridden areas such as Riverside and San Bernardino. But now, the cash buyer has become a major player in Southern California’s most expensive communities, where cash deals account for as much as two-thirds of home sales.
The trend is being driven by several factors, analysts say, including the difficulty of getting a “jumbo” loan from lenders still stinging from the mortgage meltdown. It also reflects speculation by wealthy investors who believe home prices are at or near a bottom.
“A lot of people think housing will outperform other financial investments,” said Andrew LePage, a DataQuick analyst. “This is just a place to park their money.”
In the Southland’s $1-million-and-up market, 29.2% of buyers paid cash last year — the highest percentage since 1994, DataQuick statistics show. For homes selling for $5 million and up, 62.2% paid cash.
Overall, cash deals constituted 27.8% of Southern California home sales in 2010, the most since DataQuick began tracking the market in 1988. It’s also more than double the 13% average for cash sales over the last decade.
The shift toward cash purchases started when foreclosures became a significant factor in the market, said Gary Painter, director of research at the USC Lusk Center for Real Estate. That’s because investors buying properties on the courthouse steps don’t go looking for mortgages.
“There have always been all-cash investors who think they can go in and flip a home,” he said.
There’s just more of them now. Cash buying has reached fever pitch in parts of Orange County, where the Balboa community of Newport Beach saw the highest percentage of sales going to cash buyers last year of any $1-million-plus Southland community — 66.7%.
Chris Crocker, a Coldwell Banker broker in Corona del Mar, said well-heeled buyers are using cash to acquire investment properties and second homes or to better their portfolios.
“Buyers are looking out 10 years, and buying a trophy property for 40% off its price” before the housing downturn, Crocker said.
Within a five-mile radius, his office closed 24 all-cash deals in the $5-million-and-up price range in the last six months.
“The smart money is ahead of the game and buying before the summer selling season when they will have competition,” he added.
Other big cash markets were Montecito, with 57.2% of sales, and Beverly Hills, with 45.6%.
“All-cash buyers are becoming the optimum buyer,” said agent Ian Brooks of Rodeo Realty, Beverly Hills. “I just closed three deals in a row that were all cash.”
Among the properties was a $1.73-million condo at the Azzurra in Marina del Rey, a 19-story building known for its collection of paintings, sculptures and photographs by artists including Andy Warhol, Ed Ruscha and Roy Lichtenstein that adorn the lobby and other public areas.
Brooks says most of his clients who pay cash are investors looking for a fast close.
“We call it land banking,” he said, “because buyers are literally taking these condos and homes and they are betting prices will go up.”
But all-cash purchases aren’t a cause for excitement in every luxury community in Southern California. Montecito is one such market where cash is old news.
“It doesn’t sell any popcorn here,” said Harry Kolb, a Sotheby’s agent with 32 years of experience in the wealthy Santa Barbara community. “We’re pretty jaded. Over-$5-million sales are, for the most part, cash.”
One reason for the high percentage of cash sales is that luxury properties are hard to value, making it harder to get a loan.
“Our market is very subjective,” Kolb said. “We’ll have a 3,000-square-foot house that sells for more than a 5,000-square-foot house. Appraisers don’t know how to handle that.”
Another factor contributing to the high percentage of all-cash deals in luxury markets is the prospect of being turned down for a loan because the qualification process has gotten much more difficult for jumbo loans, Kolb said. In areas with high housing costs, including Los Angeles and Orange counties, a jumbo loan is a mortgage of more than $729,750.
“Very substantial financial people have not been able to get loans,” he said. “It’s the first time they’ve ever been refused for anything.”
While investors are counting on home prices to rise, they should also be prepared for a long wait, USC’s Painter cautioned.
“My sense is that we are in a flat period,” he said. “I expect we’ll be there for another 12 months as the inventory gets pushed out in the foreclosures that banks are holding and as they dispose of them.”
The growth in cash buying is making clinching a deal increasingly difficult for traditional buyers.
“There is a competitive advantage against people who have to finance,” Painter said. With a cash buyer, the seller knows that the chances of a successful close are higher. “It gives people a leg up on the buying side.”
It also translates into dollars. The all-cash buyer often can negotiate about 10% off the asking price, real estate experts agree.
“Cash will continue to prevail in any purchase, big or small,” said Rodeo Realty’s Brooks. “The all-cash offer is king.”