House Sales and Mortgage Applications - Something Doesn't Add Up

I was not a good father today.

Instead, I engaged in laboriously hand-entering data to satisfy a question that has been bothering me for a while.

The issue that was worrying at me was the apparent discrepancy I'd mentally noted between the happy-happy increase in existing home sales, as reported by the NAR last week, and what I remembered from the MBS mortgage application releases.

But who could be sure?

Perceptions can be tricked and need to be tested and subjected to fact-based inquiry.

Confounding things, the Mortgage Banker Association (MBA) application reports are notorious for changing their reporting methodology, most recently (during the past 3 weeks) dispensing with reporting of an absolute number in favor of a simple percentage change.   Where, for example, the number used to change from 1000 to 1100, it is now only reported as having changed +10%. 

After a few weeks, who can remember what +10%, -4%, -3%, +12% is supposed to mean?  I certainly can't.

At any rate, this shift to a percentage basis altered a convention that went back several years.  Now we only get to read the weekly percentage and yearly changes, without the confusing benefit of an absolute number to guide our perceptions.  So for those without the time or the inclination to dig through the data, it is what it is.

For me?  The only way to resolve this was to obtain all the base data, hand-enter it into a spreadsheet, and see what was up.

Well, this is what's up:

Where the NAR recently reported a gain of +5% in existing home sales for July09/July08, the reconstructed MBA report shows a -22% decline in purchase applications over the same period (in stark contrast to their misleading recent release, which spoke of a yr/yr gain, but was actually referring to a blended gain that included the highly volatile refi apps):

Where the MBA most recently said that purchase applications have been "trending up," I am at a loss to see the period of time to which they are referring.  I've boxed in 2009 for reference, but it is difficult to make a case for "trending up" unless one decides to begin randomly at some point after March.

Note that the data I have is all seasonally adjusted and straight from the MBA, so I doubt we are referring to different data.

At any rate, I am simply not in a position to believe that purchase applications are down 22% yr/yr while total sales are up 5%+.  This would imply that nearly a third of all national sales are cash-on-the-barrel.

Sorry. No way. Somebody here is lying.

Somebody Not At all Reliable.  However, I will retain my judgments - for now.

This is a companion discussion topic for the original entry at

Thirty years ago – late 1978 and early 1979 – average mortgage rates exceeded 10 percent, on their way to an eventual peak in the 13 percent range. I remember, because I was in the market for my first house then.
At that time, many fixed-rate mortgages were assumable by a new buyer. Outstanding mortgages at 6 to 8 percent were very attractive to assume, in comparison to applying for a new mortgage at 10 percent. Owners often would supply a smaller amount of second mortgage financing to keep the down payment reasonable.

I don’t hear as much about ‘assumable’ mortgages these days. Probably it’s a case of risk aversion, plus the fact that mortgage rates remain near historic lows. In any case, assumed mortgages and owner financing – both of which tend to become more popular during real estate depressions – may have some effect on discrepancies between data series. I would guess that the overall effect is pretty small, though.

Today’s San Francisco Chronicle had an article beginning on the front page explaining this as “cash is king”.  Reportedly in California bids are being made on-line for foreclosures without ever seeing the property; cash offers are being accepted in preference over loan-based purchases even when those bids higher than the cash offer.  The article also states that some cash buyers are buying up to 10 properties at a time and whole blocks of (residential) properties.        Again, I may regret having not taken out a “liar’s loan”. 

The article:

"Since January, I've put in 10 bids (on foreclosed homes); some were up to $80,000 over asking price and were still turned down," said Nielsen, 41, a medical assistant. Each time, the banks selected offers from investors with all-cash offers - even when those offers were lower than his, Nielsen said.

“Cash is king right now,” said Glen Bell of Keller Williams Realty in Berkeley. For foreclosed homes, “a cash offer that hits the target price will many times trump a higher-priced offer with a loan. The ability to close has become just as important to banks as price. The prospect of a property being tied up longer, still on their books and then falling out is costly.”

Cash offers close escrow quickly and easily, while offers with a mortgage now often take 45 days or longer to close and can fall through if the financing hits any snags.

The result is that average consumers say they are being shut out because they can’t compete against deep-pocketed investors snapping up homes to rent out or flip. The situation could have long-term repercussions as neighborhoods shift toward more heavily rental, and it has frustrated many who hoped that low interest rates and increased affordability would let them gain a toehold in the market.

‘Gold Rush mentality’

All-cash sales are most common where prices are low and bank-owned properties account for the lion’s share of listings. In foreclosure-ridden Pittsburg, for instance, 42.7 percent of home sales in the first three weeks of July had no record of a purchase loan, according to county data analyzed by MDA DataQuick. The median price for those transactions was $105,000.

For the same period in San Pablo, 45.1 percent of sales appeared to be cash transactions; their median price was $110,000. In the Bay Area overall, 22.2 percent of sales in the July period looked like cash transactions; their median was $200,000, DataQuick said.

“Houses are less expensive than they’ve been in over a decade, and there is a Gold Rush mentality out there,” said Andrew LePage, an analyst with San Diego’s DataQuick. “If you want to be the one who gets the house, in some cases you just have to have cash.”

“As properties hit below 100 bucks a square foot and the cash-flow ratios are there, investors are out buying 10 properties at a time in some of the same areas where first-time home buyers are looking,” said Kevin Kieffer, an agent with Keller Williams Realty in Danville. "If you buy a $150,000 home in Pittsburg, you can rent it out for $1,500 a month.

But if you get a $500,000 home in Walnut Creek, renting it out for $5,000 is not going to happen."

Yes, I can easily envision these extreme readings of 40%+ cash sales in some specific, hard hit areas.

No, I cannot imagine cash-basis transactions averaging a third over the entire country.

We’ll see.  The data has a way of working itself out over time.

Regarding assumable mortgages:
My wife and I just bought a house.  Conventional mortgages do not come in ‘assumable’ at this point, at least according to our agent.  FHA loans are assumable, but had other restrictions.  We thought about getting an FHA loan for the assumablility: if interest rates to skyrocket, being able to assume a 4.25% loan would be a big selling point if we ever did want to sell later.  It wasn’t worth the extra expenses (extra mortgage insurance that FHA requires). 

On a side note, it struck us both as utterly insane that we could have gotten an FHA mortgage with less than 4% down.  Apperently, nobody has learned anything…

Actually, a lot of sales probably are cash sales. We are under contract for a vacation home we’re selling near Breckenridge, Colorado. The house has been on the market for a year and 3 months. Once we lowered our asking price to below what we originally paid in 2004, we started getting offers - but not before then.
Our first and second offers (and the one that finally “stuck”) were both cash offers. Our realtor said that FULLY HALF of the houses that are being purchased are CASH DEALS in this particular area. Here’s what else is interesting about this. Both of the couples that put an offer on our house were moving to that mountain town of Fairplay, Colorado - they weren’t buying our house as a second home. What in the heck they were going to do there, I have no idea. Maybe they bought a business in Breckenridge or were planning on being permanent ski bums there.

Our realtor went on to explain that a lot of people are buying only what they can afford in cash because it’s so difficult to get a loan, or the process is very complicated these days. For example, one of the new rules is that the appraisal has to be “objective” - therefore, they bring in appraisers from other towns who don’t know the local market. Appraisals are not accurate, and people are losing deals because the appraisal comes in at below their contracted price and their buyers can’t get the loan approved. This is what happened with our first potential buyers, who were waiting to close on their home in North Carolina and then the deal fell through.

So yeah, it’s totally possible that many, many purchases are cash purchases. Isn’t that a good thing?

“We thought about getting an FHA loan for the assumablility”
-could not agree more ! 

Real Estate (CA-my old haunt) in late 70’s early 80’s was all about 1) assumable loans, and 2) ownwer financed carry backs - deals were very creative and all pivoted off of net cashflow

— I now rent, but would gladly pay a premium for any mortgage to ensure it was ‘assumable’ if I planned on holding for more than 2-3 years

– congrats to you

It’s short term liquidity I believe.
Many people have a great deal of money numbering in the hundreds of thousands.  These I suspect, are where the customers are coming from.  But that number is decreasing as more people who used to consider themselves part of this class, either lose their job, or retire. 

This is the BEGINNING of the problem, not the end.  I would suspect  (even if the october predictions are 10x what they turn out to be [optimistic]) over time, the amount of people ABLE to purchase these decreases.  If it really falls off the cliff in october, than obviously much worse.

People have cash to spend NOW, but what about 4-5 years from now?  It’s what’s running the housing market now, but what about then?  Hard to get loans, and NO cash, that’s a serious problem.  But one that in fact, could play out over the next few years.

Right now there is a ‘gold rush’ mentality, I’ll agree with that, but take it one step further.  Frugality.

Right now we really have the ‘frugal’ people, seeing a good deal (apparently), and purchasing homes.  These people are cheap.  Which is fine, but what happens to cheap people at an expensive restaurant? Anyone know? They either leave, or get the water and breadsticks or salad.

Meaning when house values drop, two things, I suspect would be bound to happen.

  1. The frugal people won’t buy, because they don’t want to lose their money, the ‘shock’ of 50 percent off that jolted the ‘frugal’ buyers into buying, won’t hold up if these same people believe via various metrics that the house can lose 50 percent from what they bought it.  So I really see frugal buyers being big THIS year, but not as big NEXT year, unless the price of a house drops to $50,000 median. 

These are the same people (mindset) that are trading in their 20 years old car via ‘cash for clunkers’.

  1. Frugal people, hate spending/losing money.  They are if anything, MUCH MORE price sensitive.  Therefore who do you think will put their house on the market, and/or undercut everyone else if the value of their home start noticably dropping from what they buy, and the daily news points them in that direction? It’ll be the same people who bought this year, selling next year or the year after.  So with the backlog of homes…being added to unsold new homes…being added to…1-2 years of seized homes not on the market, all the foreclosures to come.  That’s a scenario where many of these ‘frugal buyer’ homes will be put back on the market again, and prices will just keep going lower.  The pressure imo on the housing market hasn’t even hit 25 percent on a 100 percent scale for ‘amount of pressure on the housing market’. We may just have to get back to 1960’s-1970’s housing prices.  Which is kind of funny since that was the last time our dollar and economy actually made more than it borrowed.

Remember for the past 15-20 years we’ve had in every housing development (basically) that had investors buying up 5-10-20 percent of select new properties.  Then sell, then repeat when a new housing development gets built.  Buying them for 200k, selling them when built for 250k, then next housing development where it repeats.  With investor housing crashing all around, those are now simply bank owned or whatnot and will only add to the problem of relative oversupply given the market price.  

I guess these are my opinions but I don’t think my logic is very flawed on what I suspect.


I can’t be sure that the NAR or MBA numbers are correct but I will attest to the fact that in South Florida investors are buying distressed properties and that many transactions are cash. The number of sales here has definetely been increasing for several months in a row, but as many of the sales are distressed, the average sales price has not increased.

Cash sales in Phoenix were on fire this summer. I do believe there are a few hedge funds deploying significant amounts of cash in the hardest hit areas. Since such a large amount of sales are foreclosures, this would possibly add more credence narrowing the discrepency.

I was at a clients today and he was putting together a sale. These purchases are massive.

Looks like it is trending up to me for 2009, if only slightly. If you place a trend line within the box, you’d see a slow upward trend…

Trying to bottom guess the residential home market is a dangerous game in light of our current economic condition.  Those who have taken the “Crash Course” should recall the fact that every asset bubble (so far) has been symmetrical in time and tends to overshoot in price correction.  If American households are deleveraging and increasing their savings, then housing (an illiquid and non-cash asset) has more room to the downside. Deflation, “Cash is King”, is the new game in town.  Per we currently have 2.1% deflation.  Deflation is the self-propagating way in which debt is cleared naturally over time (Elliott Wave principle and most likely a Kondratieff wave principle since it measures price).  I understand that Bernanke is working hard to fight deflation but we, as of yet have no flow of funds through the economy.   Also I think that the net effect on housing prices will be deflected significantly downward as the Baby Boomers age and eventually die or become dependant on others to provide care and need to move into nursing homes or in with a relative.  Think about how that affects both the demand and supply side of the price equation.  If the conditions which foster healing of our economic plight are put in place, which I do not currently see, then real healing can begin in our economy and that will take time.  As it sits I will not participate in the confidence game but will rely on analyzing to decipher the truth which speaks loud and clear. 

House sales and mortgage is good idea.

Fixed Mortgages