Cash is king in Park City real estate
November 26, 2010
The Park City housing market is thawing and unit sales are up from last year, yet it’s still hard to get a loan. Experts say this apparent paradox is partly explained by an increase in cash purchases.
Luxury real estate attracts affluent buyers so cash purchases have always been common in Park City, but according to data compiled Rick Klein at Wells Fargo Home Mortgage, the percentage of property bought with cash is way up.
According to the National Association of Realtors, 29 percent of real estate nationally in September was paid for with cash. On the West Side of Summit County, 50 percent was. About 35 percent of single-family homes, over 50 percent of condominiums and nearly 80 percent of land sales were paid for with cash in the 3rd quarter.
For perspective, Klein compares that to the same period in 2007. In three years, that’s a 65-percent increase for homes, double for condos and up 150 percent for land.
These buyers tend to be a mixture of investors and people unwilling to subject themselves to the lengthy and rigorous lending process banks have developed. And sometimes those are the same people, he added.
These cash purchases are usually for distressed properties, which continue to threaten the health of the market, but their number is declining, Klein said.
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"Is it elevated? Yes. Is it also coming down? Yes," he said.
About one-third of purchases in today’s market are of distressed real estate, but the flip side of that coin is two-thirds are normal sales, he said.
The increase of cash sales is having an interesting effect on local mortgage brokers, he said. It’s a sign of recovery, but it doesn’t help people in his business.
The uptick in sales means buyers are recognizing the bounce off the bottom has occurred and prices will begin rising. But with half the transactions being done with cash, there must be an even larger number of people who would like to buy now but can’t get the financing.
"There have been 344 credit policy changes," Klein said.
He was recently asked to talk about "changes in the industry." Klein said that’s like asking Jonah how he liked his cruise.
This is hurting first-time home buyers the most, he said. With tougher scrutiny of credit, many American families are failing to convince lenders they’re ready for home ownership. That’s hard to regular people, mortgage brokers, Realtors and home builders.
If a breadwinner was unemployed for several months in this economy, some lenders are asking to see proof of new employment for six months before they’ll consider lending. It’s hitting people who are already down, he said.
The irony is that the trend is still moving the market in a positive direction.
Mortgage agent Lisa Lundquist with Axiom Financial’s Park City office said any movement in the market is a good thing. People are putting cash into real estate instead of the stock market and that will help her in the long run.
Rich Sonntag, managing director of the Promontory Club, agrees.
With roughly 80 percent of the most recent land purchases made in cash, Sonntag said buyers are broadcasting a message that it’s time to get off the fence.
Sure a lot of people are being left out in the cold right now, but as these cash buyers snatch up real estate they are stabilizing pricing. As lenders become more confident about their appraisals, they’ll loosen lending restrictions and allow more people into the game, he said.
He also agreed with Lundquist about investing. Gold promoters describe the precious metal as a hedge against inflation, but so many people have bought recently that gold is experiencing a bubble. Real estate is the best hedge against inflation, Sonntag said.
Right now it’s the smart money that’s buying, he said, and that will have short-term and long-term benefits. Cash buyers are purchasing what they are most confident about reselling as soon as lending restrictions loosen, he said.
They are improving the market and will profit when it is better, he added.
"It’s the best support for next year’s market," Sonntag said.