Today’s overheated Bay Area real estate market is very different for buyers than the real estate bubble of the mid-2000s. “There have been a lot of all-cash deals,” says realtor Martha Hill of Pacific Union, noting that cash appeals to sellers who want to close the deal more quickly (escrow for an all-cash deal is usually about 14 days, as opposed to 21 days or more when a bank loan is involved). “This is new. I don’t remember it 10 years ago at all.”
Real estate professionals don’t know where the glut of cash is coming from, but they agree that there is no single source. “During the downturn, all cash was relegated to investors and flippers,” says Hill. Now, she says, “I’ve seen everything.” Some people are taking money from their 401(k)s or borrowing from family members. Hill notes that “it seems like the lion’s share of the all-cash offers are at the high end of the market,” which she defines as sales over $1 million.
Viral Joshi, a Loan Consultant and Branch Manager for C2 Financial Corporation, offers a possible explanation: Fannie Mae and Freddie Mac won’t buy loans larger than $625,000. During the financial downturn, banks stopped offering larger loans, called jumbo mortgages. Now, he says, institutional lenders are starting to write bigger loans at competitive rates. Still, he says, “Everyone is jump bidding right now.” He adds, “It squeezes out a lot of first-time home buyers.”
The standard 20 percent down on homes priced between $400,000 and $700,00 means that buyers often need $100,000 or more in cash just to make an offer. Joshi notes, “Those people who are getting into contracts have to be fairly aggressive about what they’re bidding.”
Joshi sees the current competitive market as part of a predictable real estate cycle. “As property values fell, sellers were reluctant to put their houses on the market,” he says. That creates a shortage of inventory. As interest rates have ticked up, people are jumping into the housing market hoping to get in while they can still get a low rate. “The consumers act as one. They’re kind of like lemmings,” he adds. “They all jump in at the same time.”
Sellers, on the other hand, are sitting tight, trying to hold out for the highest possible price. “I’ve seen at least 50-70% appreciation” on homes in Oakland appraised for refinance recently, says Joshi. “When we’re at these inflated prices and interest rates go up, buyer’s will flee the market,” he says. “I’ve advised people not to buy now.” He predicts that, as home prices start to fall, sellers will flood the market, further reducing prices, and it will once again become a buyers market.
Joshi has worked with buyers who have spent over a year bidding unsuccessfully on houses in Oakland. Some give up trying and leave the market. Hill agrees that house shopping in Oakland can be discouraging right now, noting that “there are really some traumatized buyers out there.”
“I’ve spoken to agents who have buyers who have written four offers and gotten clobbered,” Hill says. Buyers become reluctant to write any more offers. She sees an opportunity in this: “When everybody zigs, you have to zag. So if people are getting burnt out on the market, that’s your opportunity to buy a house.”