Tags: housing | bubble | sales | cash

This Is a Fake Housing Recovery

By Robert Wiedemer   |   Thursday, 05 Sep 2013 11:29 AM

Nearly half of U.S. home sales are cash transactions.

That's right. Goldman Sachs just reported that cash sales account for 57 percent of all residential home sales versus 19 percent in 2005. Other estimates are not as high, but still range from 40 percent to 50 percent. That's amazing. And that's not just new homes; it's all homes.

So, do you think a lot of first-time homeowners are buying their homes with cash?

Editor’s Note: Put the World’s Top Financial Minds to Work for You

You've got to be kidding. Even most second- and third-time homeowners probably aren't paying 100 percent cash.

The fact that this bull market is driven so heavily by cash purchases tells you that it's not a real housing market. It's another investment bubble.

In some places, like Florida and Nevada, the cash sales represent a whopping 65 percent of the market. And in Arizona, the figure is close to 50 percent.

So booming housing markets are clearly not booming because of a fundamental demand for housing. They're booming because of investment demand.

Why does that matter? An investor-driven housing market is fragile by definition. While general demand for housing depends on fundamentals like household formation growth and income growth, investment demand is much more fickle. It could dry up in a hurry, especially if the market doesn't live up to investor expectations.

Take a company called American Homes 4 Rent, which, after raising over $700 million in its IPO in July, has already laid off 15 percent of its work force. A big reason for that might be the fact that nearly half of the homes the company has bought are still unoccupied.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

As always, a bubble can be maintained as long as prices keep going up. But when prices fall, it could create real problems. That's why higher interest rates are not welcome news to the housing market. Add to that the fact that a lot of newly built apartments will be finished in the next 12 to 18 months, and that puts even more downward price pressure on the housing market.

This bubble may not pop in the next few months, but I don't think the long term looks good for a fake housing market driven largely by investors rather than homebuyers.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $300 million under management. He is a regular contributor to the Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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