In February 2014, 35% of all offers on property were in cash which is up 30% on the same time last year according to US property experts RealtyTrac. Even cash buyers are being outbid by higher cash offers made at the eleventh hour. It all begs the question – where is all this money coming from?
For borrowers in the US, interest rates on mortgages have increased by almost a point to 4.3% meaning that repayments are now 25% more expensive than they were in 2013. New construction figures have remained relatively unchanged in recent years, narrowing the housing market further and consequently, what housing supply is left is mostly being snapped up by cash-rich individuals.
Workers in new technology and banking seem to have the deepest pockets when it comes to buying property for cash together with foreigners particularly from South America, seeking to diversify their assets outside of their own countries. Property prices have increased by 13% nationally and up to 20% in certain hotspots and it would appear that this recent growth is being fuelled by the more affluent classes with high levels of disposable income.
What does this signal for the US property market?
According to Forbes the general consensus is that mortgage rates will increase to 5% by the end of 2014 which is likely bring about a drop in homeowners to below 65% - the lowest level since 1995. Another factor which may slow down the US property market is the significant number of properties in negative equity referred to as ‘underwater mortgages’ in the US. Although the second quarter of 2013 saw many borrowers regain positive equity status, there still remain 6.4 million homeowners struggling to sustain underwater mortgages.
However, the decline in home ownership is considered a positive signal for an improved outlook in the US. The housing bubble that existed prior to the financial crisis was almost entirely fuelled with irresponsible lending which ultimately led to bad debt and large scale foreclosures. It was the straw that broke the back of the world’s economies.
The increases in US property prices experienced in the last two years is considered to be much more sustainable in the long term, particularly as affordability seems to decline as the economy improves due to people making lifestyle changes to save money. It would appear that salutary lessons have been learnt reducing the likelihood of a repeat performance – something the rest of the world can feel rather relieved about!
The increased difficulty in obtaining home finance is the main reason behind reduced affordability but there is no shortage of housing inventory. People are choosing to relocate to more affordable areas and younger people are living with their parents for longer rather than creating new households.
Of course, the surprisingly high volume of cash-rich individuals will probably ensure that there is buoyancy in the market for some years to come which will ultimately lead to continued economic recovery albeit at the expense of the average American. There is growing concern that the disparity between the ‘haves’ and the ‘have-nots’ is likely to widen considerably in the foreseeable future – a situation that could be mirrored throughout the western world.