In this housing market, all cash offers are king | Jobi Cool

Prospective homebuyers have been in a lot of trouble in 2022. While home prices have fallen somewhat recently—and are expected to fall much more in the near future—many are not buckling down from decades of high mortgage rates paired with Fed rate hikes.

All of this represents a crunch among prospective first-time home buyers, who are often 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 foothold in this housing market. According to a report by the National Association of Real Estate Agents, the percentage of new buyers last year was 26%, down from 34% last year and the lowest percentage since data collection began 41 years ago.

One group of buyers is helping to drive the all-cash development: private equity firms and real estate holding companies. These large, capital-rich companies tend to move into low-income neighborhoods and entice sellers with cash offers for their homes, says Majora Carter, an urban revitalization expert, real estate developer and MacArthur “Genius Grant” recipient. Her latest book is called “Reclaiming Your Community: You Don’t To Move Out of Your Neighborhood to Live in a Better One.”

“These cash deals are predatory speculators, you know, who basically go into what we call lower-class communities,” Carter told Marketplace’s David Brancaccio as part of our ongoing Economic Pulse series. “They are the kind of societies where inequality is expected by those who live in those societies, and also by 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 moving into their first homes has plummeted in the last year or so. I mean, does it worry you?

Majora Carter: It keeps me up at night. And I wasn’t aware of how much it actually ran. But it’s also very difficult, you know, to know that at the same time, in these kinds of communities where people could be a part of the American dream by buying one of these homes, private equity is actually buying more of them than normal people.

A cash and private equity deal

Brancaccio: The typical way to acquire a house is to take a loan from a bank, right? But not everyone has to. And those who do not need to go to a bank to borrow have another option. I mean, it’s kind of like the private equity companies buying things up. They have cash on hand at the barrelhead ready to roll.

Carter: Yeah, these cash deals are predatory speculators, you know, who basically trade in what we call low-class communities. And these are the kinds of societies where inequality is assumed by those who live in those societies, and also by those on the outside looking in. And these are the same kinds of places where you’re going to see lower health, lower education, unfortunately, now, less home ownership, but in these neighborhoods you’re also going to see, you know, people who don’t believe that there’s much value in their community in general . And that’s why it’s so easy for, whether it’s private equity companies or just general real estate holding companies, to kind of pick on these people, because they don’t recognize that there’s great value in these neighborhoods. So it’s like, why keep this house that, you know, grandmas had in the family for generations, when somebody can literally, you know, close a deal in less than a week.

Brancaccio: You know I want to say that it would be ironic though that maybe the central bank, the Fed, is helping this. They have been raising interest rates in the fight against inflation. And that’s why multiple offer frenzies are becoming less common than they were during the pandemic. And some prices are coming down. But of course the downside is that if someone wants to buy a home, they have to pay more for the mortgage.

Carter: Right. Yes, with interest rates going up and in so many markets where prices for homes are really just astronomical, I’m just amazed at some of them when I work in various places around the country. And for an ordinary person or family, this is very difficult. And you know, the fact that there’s not a real push to say, okay, just plain old Americans, plain old Americans, how do we support them, like reducing the wealth to give people the opportunity to be in a better position for the generational wealth that we know is the key, not just prosperity, but just stability in American communities across the country. It is really a very difficult way that we are looking at this country and really who needs to succeed. And I think we’re also essentially privatizing profits and social costs, you know, [for] so many of these issues we’re going through,

Rather high price, but very high borrowing costs

Brancaccio: I mean, the statistics show that some of the prices are starting to come down over the summer and into the fall, but when you look at it, compared to the year before, the prices are still much higher than they were a year ago. So you still have, I think, is this your experience, where you work? Quite a high price, but very high borrowing costs now?

Carter: Yes, these two combined literally take people off the table. You know, another way of looking at it is that it also just makes rents higher as well. So we’re seeing them just stay up where it’s just like nothing is affordable. And we’re not just talking about low-income people, we’re talking about middle-income people who often find that they’ve had to have more than one, whether it’s a family or a couple like living in the same space. And that in itself should send a warning, 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, who are first-time homeowners or otherwise, are still in this situation where they’re the ones that really benefit where their families are? And we’re seeing that continue to decline.

Brancaccio: I mean, you see the cash offer, I think I’m hearing, an unfair advantage. But Majora, you can’t blame the property seller for taking the cash offer. I mean, there’s less risk of the mortgage not going through. There is no mortgage.

Carter: No, but here’s the thing. We want to make sure the seller knows what they are getting into. Like for example in the US if you are accused of a crime and cannot afford legal counsel, you get a public defender. The same can actually be done for property owners. So think about it. Before any real estate transaction proceeds within a community unit, the seller should get legal and financial advice so that they are fully aware of the value of their land and how to maximize it with smart financing and understand that they could use it to build, you know, ADUs ( Accessory Dwelling Units) or put their children through university, start a business. But again, if people don’t know the value of what they have, and if they are led to believe that in these societies there really are no values, then they are easy prey. And we know well that there are far-reaching benefits of ownership that go beyond our city or community. We know it’s well known, so we don’t want to concentrate the wealth too much in one area or poverty. But alas, that is what we are doing as the real estate trend is now.

Brancaccio: You’re saying that if someone comes around the neighborhood waving cash, who can make 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 it?

Carter: Oh, yes, that’s what private equity and real estate holding companies rely on. They rely on people and communities like mine – I live in the South Bronx – not seeing the value. We’ve seen in our own neighborhood that the home ownership rate drops from something like 20% or so down to less than 7%. And it was since the 2008 crisis, and most of them have been all cash contracts.

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