In this housing market, all-cash deals are king
In this housing market, all-cash deals are king
Prospective homebuyers have been having a rough go of it in 2022. While home prices have fallen a bit recently — and are projected to decrease by a lot more in the near future — many people aren’t biting because of decades-high mortgage rates driven by the Fed’s back-to-back interest rate hikes.
All of this represents a crisis among would-be first-time homebuyers, who are frequently getting priced out of bidding wars and offers they can’t match. Expensive mortgages mean that people who can make their offers in cash have a leg up in this housing market. According to a report by the National Association of Realtors, the share of purchases by new buyers in the past year was 26%, down from 34% last year, and the lowest share since data collection began 41 years ago.
One group of buyers is helping drive the all-cash trend: private equity firms and real estate holding companies. These large and capital-rich firms tend to go into low-income neighborhoods and entice sellers with cash offers for their homes, says Majora Carter, an urban revitalization specialist, real estate developer, and a MacArthur “Genius Grant” recipient. Her latest book is called “Reclaiming Your Community: You Don’t Have to Move Out of Your Neighborhood to Live in a Better One.”
“Those all-cash deals are predatory speculators, you know, who basically traffic in what we call low-status communities,” Carter said in an interview with Marketplace’s David Brancaccio as part of our ongoing Economic Pulse series. “They’re the kind of communities where inequality is assumed by those who live in those communities, and also those on the outside looking in.”
The following is an edited transcript of their conversation.
David Brancaccio: You and I were just sharing a statistic: the percentage of homebuyers who are getting into their first homes plunged in the last year or so. I mean, does that worry you?
Majora Carter: It keeps me up at night. And I wasn’t aware of how much it plunged, actually. But it’s also really difficult, you know, to know is that at the same time, in the kind of communities where people would be able to be a part of the American Dream by buying one of those homes, that private equity is actually buying more of those and not regular people.
All-cash deals and private equity
Brancaccio: Now, the typical way to get a house is to borrow money from a bank, right? But not everyone has to do that. And those who don’t have to go to a bank to borrow have another advantage. I mean, it’s a little bit similar to the private equity people buying things up. They have cash on hand on the barrelhead ready to roll.
Carter: Yeah, those all-cash deals are predatory speculators, you know, who basically traffic in what we call low-status communities. And they’re the kind of communities where inequality is assumed by those who live in those communities, and also those on the outside looking in. And those are the same type of places where you’ll see lower health outcomes, lower educational attainment, unfortunately, now, less homeownership, but in those neighborhoods, you’ll also see, you know, people who don’t believe that there’s much value in their community in general. And so that’s why it’s so easy for, whether it’s private equity or just general real estate holding companies, to sort of like pick off those folks, because they don’t recognize that there’s much value in those neighborhoods. So it’s like, why keep this house that, you know, the grandmas had in the family for generations, when somebody’s literally able to, you know, close on a deal in less than a week.
Brancaccio: You know I’d like to say, it would be ironic, though, that maybe the central bank, the Fed, is helping this. They’ve been jacking up interest rates in the fight against inflation. And so the multiple offer frenzies are becoming more rare than they were in high pandemic. And some of the prices are coming down. But of course, the flip side is if someone wants to buy a house, they have to pay more for the mortgage.
Carter: Right. Yeah, with interest rates going up, and in so many of the markets where the price for homes is actually just astronomical, I’m just astonished at some of them when I work in various places around the country. And for a regular person or a family, this is really hard. And, you know, the fact that there is not a real push to say, okay, just plain old Americans, regular Americans, how do we support them, like decrease the wealth gap to provide the opportunities for folks to be in better positions for generational wealth, which we know is the key not just the prosperity, but just the stability in American communities around the country. That really is a very problematic way that we’re looking at this country, and actually, who needs to succeed. And I do think that we’re also essentially privatizing profits and socializing the social costs, you know, [for] so many of these issues that we’re going through,
Pretty high prices, but very high cost of borrowing
Brancaccio: I mean, the statistics show that some of the prices are beginning to drift down over the summer into the fall, but then when you look, compared to a year earlier, the prices are still much higher than they were a year ago. So you still have, I guess, is this your experience, where you work? Pretty high prices, but very high cost of borrowing now?
Carter: Yes, those two combined just literally take people off the table. You know, another way of looking at it is it also just makes rental prices higher, as well. So we’re seeing those just stay up where it’s just like, nothing is affordable. And we’re not just talking for lower-income people, we’re talking middle-income people who are often finding that they’ve needed to have more than one, whether it’s family or a couple like living in the same space. And that in and of itself should send alarms, I think everywhere, but instead, we’re just thinking, “Well, isn’t this good?” But, you know, again, we’re looking at, like, how many of these homeowners, first-time homeowners or otherwise, are still in this position where they’re the ones actually benefiting where their families are? And we’re seeing that just continue to go down.
Brancaccio: I mean, you do see the all-cash offer, I guess I’m hearing, an unfair advantage. But Majora, you can’t blame the seller of a property for taking the all-cash offer. I mean, there’s less risk the mortgage can’t fall through. There’s no mortgage.
Carter: No, but here’s the thing. We want to make sure that the seller knows what they’re getting into. Like, for example, in the U.S. if you’re accused of a crime and can’t afford legal counsel, you get a public defender. The same can actually be done for property owners. So think about it. Before a real estate transaction goes forward within the unit of the community, the seller should receive legal and financial counsel so they’re fully aware of the value of their land and how to maximize it through sensible financing and just understanding they could use it to build, you know, ADUs (Accessory Dwelling Units) or put their kids through college, start a business. But again, if people don’t know the value of what they’ve got, and if they’re led to believe that in those communities, there really isn’t any value, they’re easy prey. And we know full well that there’s broad benefits for ownership going across the board in a city or our society. We know that that’s well known, so we don’t want to concentrate wealth in any one area too much or poverty. But unfortunately, the way that the real estate trends are going right now, that’s what we’re doing.
Brancaccio: You’re saying, if someone comes around the neighborhood waving cash, who can do an all cash offer, sometimes the seller doesn’t have the connections or the infrastructure to fully evaluate whether or not he or she is getting a good deal. And maybe we should think about providing that?
Carter: Oh, yes, that’s what private equity and real estate holding companies are counting on. They’re counting on folks and communities like mine — I live in the South Bronx — not seeing the value in it. We’ve seen in our own neighborhood, the homeownership rate for owner-occupied homes go down from like 20% or so down to less than 7%. And that was since the 2008 crisis, and most of them have been all-cash deals.
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