A couple of stats from a survey of Paragon Real Estate Group agents with respect to their last 12 months of activity in San Francisco:
60 percent of the sellers represented by Paragon are relocating outside of San Francisco. The main reasons for their moves: 1. schools (and other family-raising reasons), 2. affordability (the ability to buy more home for the money elsewhere), and 3. job-related (relocation, commute).
50 percent of the buyers Paragon agents have represented are first-time buyers; 47 percent of their buyers are employed in high-tech; and the average age of their buyers is mid-thirty.
Less than 3% of Paragon’s buyers have been from outside the U.S. (i.e., foreign money).
And while 26 percent of their buyers’ offers were presented as “all cash,” many of those offers were written that way “solely for strategic reasons to get their offers accepted” and “many of these buyers end up getting loans either before or immediately after close of escrow.”
Unrelated to Paragon’s survey, we’ve heard from other sources that the number of true all-cash offers in San Francisco has been noticeably drying up as of late.
“many of these buyers end up getting loans either before or immediately after close of escrow.”
Of course. This isn’t news is it?
You’d have to be a moron to leave all that cash in your house when you can get a mortgage at 3.5% and then take the mortgage interest deduction.
The ‘all cash’ offer is and has been a negotiating tool.
[Editor’s Note: Or perhaps the buyers aren’t as liquid as perceived or frequently represented. Regardless, see the last paragraph above.]
Well, if they are getting the mortgage “immediately after close of escrow” they’re pretty liquid.
[Editor’s Note: That speaks to being credit worthy, not individually liquid. Think bridge loans from family members or short-term borrowing against other assets.]
R, one thing to remember is that mortgage interest isn’t deductible under the AMT, which many people buying houses in San Francisco are probably subject to.
AMT does not necessarily eliminate the mortgage deduction. It can cut into it, though the amount will largely depend on how many other deductions the taxpayer has and their income.
Also, speculation about bridge loans or short-term borrowing is just that. Speculation.
Yeah right. There are lots of all cash buyers right now. Why the editor throws away usual editorial practices when it comes to certain topics is comical.
The “wealth” of San Francisco is just a facade, just like the city- an old plywood box with a Victorian face in the front.
Only 3% foreign money? Ouch.
The real money is in New York. Negotiations don’t exist there because money is no object. Tons of big time money from Russia, northern Europe, and China. Old, old money.
The tech money in SF is propped up by billions of stock purchases for a company that makes an app that people use to text smily faces on their dongs.
Paragon says that 26% of SF purchases were “all cash” but that many of those purchases were not, in fact, “all cash.” That all is not inconsistent with the observation that “There are lots of all cash buyers right now.” Perhaps 15% of sales are literally all cash.
I’m one of the “not really all cash” buyers. When we bought our place a couple years ago, we could have liquidated a really high percentage of our assets and literally paid “all cash” but we did not want the big capital gains hit and did not want that much tied up in one single asset. Plus, I was pretty sure I could do better with the funds than the 3.7% interest rate we got (~2.5% after deductions) – and lo and behold I’m up about 40% in the 2 1/2 years. The market was calmer then, but we still bid “cash” with no financing contingency in order to be more attractive to the sellers. It worked. We had to rush to get financing in the 15-day close period they wanted, but we did it (lot of pre-planning helped). We were ready to take the 3% hit if we did not close in time.
So we were not “all cash” at all, although to the sellers (and in the stats) we looked just like one. I suspect that is a fairly common way to go.
Take all real estate info, particularly in SF, with a grain of salt.
Securing loan after purchase is considered a cashout–you will incur a higher interest rate than if financed at time of purchase. Is it worth it?
I don’t think any of these stats are especially surprising. I would be more curious what % of new buyers are buying a primary residence vs. a weekend place or 2nd home? Although I have zero evidence to back it up, it’s starting to feel like fewer of the people who buy here actually end up living here.
Interesting thread. I am not surprised about the stats around where SF sellers are moving and why. I doubt that is any different than it historically has been. What is telling is the composition of the new buyers — first timers who work in tech. I personally do not work in the tech industry, but I do make would many people would qualify as tech level compensation. Speaking for those who do work from some of the tech juggernauts around here though, there income and wealth seems pretty stable. I find it amusing when tech haters talk about it being a temporary fad. Companies like Apple have been around a long time and generate craploads of cash, so they are certainly past the “fad” stage. BTW, I echo the comments from Craig above about AMT. It reduces deductability of certain tax breaks, but it does not eliminate them completely.
People are misreading the way these deals work for high net worth individuals.
Here’s how this works.
Say you have $5m in liquid assets, e.g., already vested restricted shares in TechCo. You make an all cash offer for an SF house for $2m. Your offer is accepted.
Once you’re in escrow, your private banker lines up a LIBOR-based loan for you. I saw a product Morgan Stanley was offering the other day for 1.8-something percent. These loans are some premium above monthly LIBOR.
You maybe spend up to $500k for a down payment. If you $5m in assets has been redeployed into a more balanced portfolio, the monthly interest on the loan is likely financed out of your passive income on that $5m. (Often the downpayment is a line of credit from the bank, also paid back from passive income.)
Cash is very, very cheap right now if you don’t need it. It would be kinda dumb to sink $2m in the house when it could be earning a return far above the LIBOR+premium rate you can borrow at.
Very bold gloom-and-doom statements out there.
Let’s see: a good number of people tend to do ALL CASH to crush the competition. Then some of these all cash buyers end up setting up a mortgage. That would be bearish how?
1 – These buyers have the income to qualify to these lofty mortgages
2 – They have the cash sitting around, either from their own wealth or from someone who trusts them
3 – They are confident enough on their credit-worthiness that they are ready to take the chance of getting stuck without a mortgage.
One anecdote: not long ago I completed the purchase of a villa on the Mediterranean. Since I hate debt but I do value the right balance of risk/cash, I decided to do 50% down. I had approached the international branch of one of my banks who has done intercontinental lending with me in the past and the numbers worked pretty well.
I found myself going through a bunch of hoops, expectedly, but found my bank so picky and demanding and overall quite inefficient that I started to consider doing all cash myself, then borrow later. Luckily the seller was patient enough to wait for the 5 months it took to complete financing (big buyers market here). Quite a roller-coaster and I understand why some would just throw the cash then sort rings out later, especially in a seller’s market like SF.
lol, your story reminds me of Part 2 of my own. About a year after we did our “not really all cash” purchase, we sold our old place. We selected the second highest bidder (just a tad below the highest) because they were “all cash” and no contingencies. Well, they also were “not really all cash”! But they could not line up financing in the 30 days we wanted. We had to extend escrow twice – easier than listing and showing the place all over again. We closed in 45 days. All worked out, basically.
So two “all cash” offers in the stats that were in fact just plain ol’ mortgage deals.
Yeah, different proportions. I did not expect a deal to take 5 months but apparently Europe hasn’t still fully regained its confidence. Banks are not just not lending.
Overall I think we should give a great big thank you to the guys in charge in DC and in particular Helicopter Ben. Job well done, considering what happens when you take the problem the wrong way, like in Europe.
I guess nobody is “hearing a lot of French spoken at open houses” any more. (You have to be a long time Socketsite reader to remember the “overhearing a lot of French spoken” issue)
I am shocked by how small the percentage of foreign buyers is in San Francisco. Manhattan, Miami, and the better parts of Los Angeles/Southern California have a much larger percentage of foreign buyers. I wonder if the Peninsula has a greater percentage of foreign buyers than the city?
Scrolling through Paragon’s agents, one notes that almost all are white. Could it be that Chinese buyers are working with agents who speak Cantonese or Mandarin?
“but found my bank so picky and demanding and overall quite inefficient that I started to consider doing all cash”
‘Yes. Monsieur. It is zee part where you have written that your occupation is ‘spinning boolsheet on internet message boards’ that has given pause to les underwriters.’ Zay are not sure zis is reliable income.’
My pet theory about the lack of Chinese buyers in SF, they can’t tolerate the terribe Chinese food here! Better to invest in Vancouver, LA and NYC.
I believe lol’s picky, demanding bank story.
Know what held up financing for the buyers of our old place? They owned a place outright in Spain. A good thing, right? But their U.S. lender required proof that they had no mortgage on it. Proving one has no mortgage on a foreign home is not easy! Never did quite understand what the bank wanted – an affidavit from every lender in the world saying “yup, we didn’t give a mortgage on that one.” Worked it out somehow.
“Scrolling through Paragon’s agents, one notes that almost all are white. Could it be that Chinese buyers are working with agents who speak Cantonese or Mandarin?”
That was my first thought when I read this post. I’d expect there are agents/firms out there that are focusing their business at the Chinese buyers and it likely isn’t Paragon.
noodle – Cash is very, very cheap right now if you don’t need it. It would be kinda dumb to sink $2m in the house when it could be earning a return far above the LIBOR+premium rate you can borrow at.
In that case shouldn’t the LIBOR lenders just keep the money and instead earn the far above LIBOR rate return themselves?
SocketSite quote that less than 3% of Paragon’s buyers are from outside US. Specifically regarding Chinese buyers, I’m sure the number are far more than 3%. The baseline is San Francisco is about 1/5 Chinese.
pierre,
Sorry to disappoint you. I am using my rental cash flow to pay for my current project (been busy prepping it for the full season). Please catch-up on my last 7 years of posts on SS… The parts where I explained what I did in Paris. The part where I switched from bear to bull. The part where I bought in SF. The part where I got bummed out on finding any other good deals in SF and went to the French Mediterranean looking for value.
anon,
I did consider purchasing in Spain. 2 main issues stopped me: 1 – Financing with a French bank for a property in Spain using income from the US and France? Not for the faint of heart. 2 – Many liberties that local government along the coast took with zoning for 30 years, and the hanging sword over your title.
Then I looked at how much a house cost in the Malaga area and how much it cost in the place I liked in southern France. Sea view, 1/4 acre lot, banana belt. In the same price range the only difference was the swimming pool. I guess I’ll just have to dig.
@Wai – You’re assuming the lenders are in business to make money on mortgages.
Some of the lenders – and these are not mortgages you find on online comparison sites – use these loans to lock-in customers. They’re not in business to make money on mortgages, they’re in business to make money by hosting billions of dollars of assets for high net worth individuals. In addition to the example I mentioned before (it was ML, not MS – my bad), Charles Schwab and First Republic both have products for people who custodian at least $Xm in assets on their platforms.
In the case of LIBOR loans, private banks get a small premium over the one-month LIBOR (which itself could be higher than the rate they borrow at), but they don’t really make money on the product. They just figure they’ve better off with Muffy and Trip’s money on their platform than cashed out and sunk in a vacation home.
I’m a little surprised Socket Site et al haven’t covered this angle before. The high end of the market is subject to entirely different laws of financial physics…
As a long time reader, commenter and general observer of all things real estate I can safely say that if the tone of comments and assumed roles and personas are any indication of the market I would put us right at about 2006/2007 in terms of the feel of these threads and characters within. I have my feeling on where the true market sits right now and on where its going. Not sure if I’m any wiser from the last time. I do agree that softer lending standards are coming, although I’m not sure we’ll see the crazy things we saw last go-around. The market is fueled by sky high rents and cheap money. Amazing how people will sign up for a 30 year mortgage based on a rental prices but it seems to be having a real impact. Unless rents drop significantly and employment / density in SF drops in kind I think we can largely sustain where we are at right now for some time. Things will soften but I would hate to be on the sidelines praying for a meaningful drop right now.
@noodle, I was trying as ask you where can I find those LIBOR mortgage. So you are saying I can have it if I have a $X million account with them? Damn, this world is so unfair!
@Wai
Turns out it is good to be rich.
Check out my name link for a hint of the Merrill Lynch product I mentioned. (Are those ads for white people or what?)
PrimeFirst. It’s a registered trademark! Note the exclusively for clients preferred pricing ad.
Another hint – Quicken Loans services the Charles Schwab stuff. Happy digging.
Y’all are kidding yourselves if you’re looking at 30 year mortgage interest rates and thinking they have much to do with the high end of the market these days. This isn’t lending in the normal sense. It’s people will millions of dollars of liquid assets levering said assets to purchase millions of dollars of real estate. The custodians of said assets are saying “What the hell, let’s finance that at cost-plus” in order to maintain their custodial position.
The financial institutions only lose if liquidity is removed from the market and prices of both assets collapse together. The Fed remembers 1994; there’s an upper bound on tightening.
The beauty of it? If LIBOR goes up, a whole bunch of players bigger than you are screwed more than you.
And no, I am not Satchel.
MSSB has a similar product, though we went instead with an equity line of credit for the downpayment and a conventional 30 year mortgage (VA loan in my case) for the rest for our second house. I just can’t see the downside to locking in 4% interest rates.
The first property has a 15 year at 2.875%. I sure wish I could borrow more at that rate!
Floaters make me too nervous in a world of rising interest rates. I know I am being a nervous nellie, but the difference in monthly interest payments is pretty slight.
Re: Chinese buyers. Wai, I think the clear intent was why there are so few overseas Chinese buyers. (All the stories about Mainland Chinese trying to export their fortunes, educate their children in America, etc).
Someone said that Paragons stats may be off because it’s agents are mostly white. But as listing agents they’ll be catching folks from all over, yes? And Paragon has pretty good coverage citywide on the high end. So I don’t think that’s a great explanation, and I remain surprised by the low number of foreign buyers.
I wouldn’t base too many conclusions about foreign buyers based on Paragon stats given that no one outside of SF has ever heard of Paragon, and they’re an also ran to PacUnion, Sothebys and Coldwell Banker in total sales and avg price per sale. I’d also suggest “real SF” logic be applied to foreign buyers and even all cash if you want to know the impact they’re having.
This survey could be meaningless – were the agents logging all of these factors all year long as transactions happened? Or did they comb through their records to produce the data? Or are they just doing a guess-ballpark at survey time?
If methodology is not shared, you should disregard the survey. For example, any political poll by a media outlet (i.e. most polls discussed in the media) is usually very poor, because good polling is expensive – it costs a lot to get a representative sample. Media polls rarely share info re: subgroups, sampling, etc, and even when they do, upon examination you can see problems.
Noodle- why would HNW want to be tied to libor if they plan to keep the home long term? Especially with very low 30 yr fixed handily avail? And last I checked, Freddie and Fannie weren’t handing out any favors to the country club set.