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Full Cash Transactions In The Real Estate Market.

The purpose of this blog is to take articles published on different websites and offer a critic and a better understanding of how it effects us as college students.

Day 1: "I'm too afraid to sell my home"
money.cnn.com/2014/05/20/real_estate/hom...

Being a real estate agent licensed in Virginia with Sperry Van Ness, I am always drawn into articles discussing the real estate market.

This article in particular offers an interesting idea that house owners are stuck in a Catch 22 idea where the value of houses are rising significantly in big market cities such as Washington D.C., San Francisco, and New York City. The issue however, is a lack of faith in the ability to find housing to move into. This problem has inhibited sellers from putting their home on the market and led to a discrepancy between high demand, but little supply of housing.

With this problem, buyers have had to distinguish themselves from other potential suitors by providing higher down payments with "43% of home sales" coming as all cash deals. This statistic in particular leads me to my point of interest:

Why have all cash deals become so common, and what does it mean for the future?

When first seeing this statistics, it was incredibly surprising to see such a significant number of individuals having the reserve cash to be able to pay the value of a house outright. Especially with big city house values hovering around $1-1.5 million dollars. The issue however is that in big cities, taking the traditional route and picking up a mortgage is becoming less and less of an option.

Today I will be discussing the three main reasons why big city customers can not afford to use the "all cash method" when purchasing a house.

1.) interest rates on the rise
When looking at taking on a mortgage, one of the first things to ask about after price is the interest rate that will accompany it. Throughout the past 12 months however, interest rates have started to become a topic of concern. Average rates on 30-year fixed jumbo private mortgages stood at 4.49% at the end of 2013 compared with 4.17% for a 30-year fixed-rate FHA mortgage, according to mortgage-info website HSH.com. To put that into perspective, when looking at the average big city single family home mortgage value of $729,750, that's roughly $137 more per month and around $49,300 in extra interest over the life of the loan. This significant change has provided more strain on buyers wallets and has made it less appealing to take out a mortgage.

2.) Strict Lending Standards
The second obstacle that buyers are having to overcome is the strict barriers that lenders demonstrate to individuals looking to purchase a big city house. It is no secret that location is a key part of real estate, and as such, prices are significantly higher in more urban areas, however lender standards have gotten to the point of making it incredibly difficult for non-CEO's to have access to these financial institutions. So far, they have been focusing on very affluent buyers with sizable assets (both liquid and in other real estate) who are buying multimillion-dollar homes.

These lenders state they are open to working with less wealthy buyers, however FHA rules conveniently provide a multitude of hurdles. One example of this can be seen in how there is a sizable discrepancy in minimum credit score of 220 points in between FHA lenders and private ones. The issue in this is that sellers are usually not thrilled about FHA loans because of the risk that comes with it and are more willing to sell to buyers using private lenders. Because of the discrepancy between demand and supply for houses explained about, FHA lenders do not get used as often.

3.) International buyer competition
As discussed originally, there is a significant discrepancy between the number of buyers and sellers that has left many buyers having to compete for the rights to a house. Competition those has always been a factor for buyers so what's different? The main difference that is starting to occur involves the increase in international investors. One example in particular is Chinese investors looking to place money into the United States real estate market. When talking with one of my business partners, an immigrant from Nanjing China, I learned that there is a serious lack of clarity security in the market due to possible corruption. Along with that, China runs on a system where buying land is impossible and is instead based off of a 70 renting system where you essentially "rent until you die." This system, while being possibly beneficial due to taking away the risk of foreclosure, it makes it impossible for Chinese citizens to purchase investment properties.

This barrier has led to waves of Chinese looking to invest their money and finding the United States as a smart place to invest. In my time working at Sperry Van Ness, I have been exposed to multiple Chinese investors looking to invest in properties ranging from single family houses, commercial spaces, and even massive coal mines. Because of differences in culture along with an inability to apply for loans due to regulations requiring two years of tax record, Chinese have really helped push this trend of "all cash" payment.

In reading these ideas, it seems clear to see that the real estate market is experiencing significant changes and people are being pushed to make themselves stand out in the big city market. As college students with bright future, I expect a lot of us will be going to work in big cities to work in big companies, but it is important to be aware that if you want to make the leap, you're going to probably have to carry a lot of cash.

I want to make it clear that this is solely an opinionated piece that these points are solely from my understanding. If I made any mistakes in my writing I welcome comments, as it will help me learn as a future businessman. Thank you for taking the time to read my piece and I will be releasing more in the near future.

For more information check out these articles:
money.cnn.com/2014/05/08/real_estate/cas.../
www.nytimes.com/2014/02/23/realestate/ra...
www.marketwatch.com/story/getting-a-mort...