Investor Groups with Cash Pushing Middle-Class Homebuyers out of the Market

By all accounts, Erin and Allen Johnson seem like ideal first-time homebuyers, the kind any real estate agent would vie to represent. Now in their mid-30s, the couple graduated about a decade ago from Cal Poly in San Luis Obispo, before settling down in the Silicon Valley to live close to Erin’s job as a third-grade teacher for San Jose’s Alum Rock School District.

Allen works as a warehouse manager. Both earn a steady income. Together they’ve scrimped, saved and waited for an offer to get approved. But eight months and a dozen rejections into their house hunt, the Johnsons’ stellar credit, savings and stable jobs have all lost out to investors slapping down cash in hand for the same properties.

“It’s incredibly frustrating,” Allen says. “We’re college-educated, working really, really hard, and we still can’t afford a home.

“It goes like this: Everyone loves us, especially since Erin’s a teacher. Everyone loves teachers: the agents, the sellers, the bank. And everything lines up really well. It’s in out budget; we make a strong offer; we got the bank OK’ing it; we got the approval. Then a few days later we find out a cash offer got it.”

The Johnsons typify the downside of an increasingly common trend in Silicon Valley and nationally, where middle-class homebuyers are losing out to cash buyers—often investment groups from overseas—who convert owner-occupied homes into rentals. The natural tendency of sellers to choose quick, guaranteed sales over offers with financing contingencies is a new assault on middle class home ownership, a shift likely to expand the ranks of landlords and tenants and make home ownership an increasingly elusive American dream.

Erin and Allen seriously began looking for their own home when their property manager hiked the rent from $1,400 to $1,700 a month for their one-bedroom Mountain View apartment.

“We go through phases where we’re very confident we’re going to get something. We’re having fun with the process of it. We even start to pack a little bit—then we lose out again,” Erin says.

In the last four years, Santa Clara County saw an increase of cash buys for residential homes jump from 15 percent to more than 21, according to Multiple Listing Service, a national database of real estate listings. Nationwide, about a third of all home purchases were paid in cash this past year, reports the National Association of Realtors. A decade ago, fewer than 10 percent of homes sold for cash.

“We’ve seen a tremendous increase in cash buyers since the housing downturn that we haven’t seen before in history,” the NAR’s chief economist, Lawrence Yun, wrote in a November report about housing trends, which found that the bulk of cash buyers are investors.

“This is the biggest challenge we’re facing right now,” says Matt Huerta, head of Neighborhood Housing Services of Silicon Valley, a nonprofit that helps low- to middle-income earners—including the Johnsons—find a home they can afford. “Investors win so much of the time.”

“New homeowners used to be part of an economic recovery, but more than ever, investors are pushing them out—even prequalified buyers who do everything right and manage to get a loan despite stricter lending standards,” Huerta explains. “The investment class is gaining the appreciation and participating in the recovery while, at the same time, distressed homeowners lose their homes to short sale and foreclosure.”

Add to that a sparse inventory because the recession slowed building for a few years, and “more people are competing for fewer homes,” Huerta notes.

Offshore Landlords

When San Jose-based real estate broker Michael Cheng bid $285,000 on a condo last summer, he considered it an aggressive offer considering nearby units sold the month prior for around $240,000. The Yarwood Court property’s assessed value: $230,000, according to county property records.

Within days, however, offers started pouring in that priced Cheng’s client out of the race. The modest 920-square-foot, two-bedroom space sold to a cash bidder for upward of $300,000 after 45 offers in all, of which Cheng presumes anywhere from 25 to 40 percent were in cash.

“Since my client was getting conventional financing, he could not bid that high, even though he wanted to, as the appraisal would not have come through high enough to satisfy the lender,” Cheng says.

Cheng, a broker at Archer Homes who often works with multimillionaire clients, thinks this influx of cash buys may lead Silicon Valley to a housing market similar to Vancouver, where in the early 2000s he watched thousands of Asian and Indian investors buy up residential properties with cash to tighten inventory and drive up prices.

“It’s very similar to what happens in China or other Asian countries, and it’s paid off for these investors,” Cheng says. “Now that they see the dollar so weak, and since the recession didn’t hit their country as hard, they’re coming here, too. They’re buying and holding.”

It’s hardly a novel idea for the region. The East Coast housing market has for years entertained European or South American investors looking to secure properties and increase value. But it’s relatively new to the West Coast, Cheng says.

Another larger-scale type of cash-buying trend may more dramatically change the landscape of suburbs like Salinas, Gilroy or any neighborhood hit hardest by the housing crisis. In communities with a glut of vacant bank-owned homes, it’s quick work for a private equity group to buy portfolios of 50 to hundreds at a time, selling off the best ones and renovating the others to turn into rentals.

WayPoint, a real estate investment group based in Oakland, has bought thousands of foreclosures and short sales at rock-bottom prices, mostly in the Central Valley to convert into rentals, financed partly by a $1 billion investment from Menlo Park-based private equity company, GI partners. Companies sell the strategy as an answer to a national crisis, but middle-income buyers like the Johnsons aren’t interested in corporate landlords.

Blackstone Group, another private equity fund, put in $1 billion, too, buying up 6,500 distressed homes in the Bay Area, Southern California, Arizona and Florida, among other markets, as part of their “investment in the American recovery,” according to a PR video set to a sappy piano soundtrack posted on the company’s website.

Silver Bay Realty Trust has a similar business strategy. Silver Bay already owns more than 2,450 homes and plans to invest another $250 million to buy 3,100 more in a handful of states, including California, according to its SEC records.

Silicon Valley has historically remained a more stable market, although considerably more expensive. That’s why investors limit their cash buys to one or a few homes. Most shell out cash for lower-priced properties, less than $800,000, according to Barbara Lymberis, a red-headed opera-singer-turned-Realtor who owns Perfect Harmony Properties with her opera-singer husband. That just means more lower- to moderate-income earners will have to rent until the region’s inventory beefs up again, she adds.

“I think people are going to have to save longer in order to purchase a house,” Lymberis says. “I think the banks are going to have to loosen up credit standards a little more to help the housing market. I think most people will continue to rent instead of buy. We live in a market where cash is king for the time being.”

Jennifer Wadsworth is a staff writer for San Jose Inside and Metro Newspaper. Email tips to jenniferw@metronews.com or follow her on Twitter at @jennwadsworth.

6 Comments

  1. This snapping up of real estate by foreigners, not just in Silicon Valley but all over the country, is the inevitable result of the declining dollar. U.S. dollars are cheap now so why wouldn’t investors the world over look to buy assets that are denominated in dollars?

    When you’ve got a $16 trillion dollar national debt and you have a President who gets angry when anyone suggests that we need to rein in spending and who doesn’t think there even ought to be a debt limit- well this is what happens to your currency and to your country.
    Thanks Mr. President. Thanks for giving away our country.

  2. No we don’t need the government to stick its nose in this any more than it already has.  Especially San Jose, the “capital of mismanagement”.  When it went down, we heard about the people “under water” losing their homes, now we are hearing about the people that can’t afford to buy.  For every one of these houses that are beyond the reach of the “middle class” there’s an owner that may not have to do a short sale after all, or will be able to sell and use the money to fund a “lavish” retirement in Modesto or Los Banos.

    Messing with this is only going to wind up helping those deep-pocket evil investors.  They’ll be selling when the hoi polloi want to buy.

  3. In many countries (Mexico, for example), its illegal for non-citizens to own real estate.  Residential real estate in the USA should be subject to similar protections.