Cash buyers and investors are playing an increasingly significant role in Cook County’s weakened housing market, especially in high-foreclosure areas, according to findings in a new report by the Institute for Housing Studies (IHS) at DePaul University.
Residential property sales financed with mortgages plummeted and cash transactions increased, as access to credit tightened following the collapse of the subprime mortgage market and the onset of the foreclosure and economic crises, said Geoff Smith, executive director of IHS and co-author of the report.
“In the short term, cash buyers and investors are helping stabilize the county’s housing market,” Smith said. “But in the longer term, improving access to credit for potential owner-occupants and small neighborhood investors will be critical to creating stable and strong communities.”
Between 2005 and 2011, financed home purchases declined by 76 percent and all-cash purchases increased by 12 percent. By 2011, 45 percent of the total residential property sales in Cook County were cash purchases, up from just under 15 percent in 2005, according to the study.
In areas hardest hit by the foreclosure crisis, the vast majority of residential sales are cash transactions, the study shows. Nearly 70 percent of residential property sales were completed using cash in high-foreclosure areas in 2011, compared to roughly 30 percent of residential sales in low-foreclosure communities.
“The weak economic recovery and difficulty accessing mortgage credit are keeping many potential home buyers out of the market,” Smith said. “But low prices and a demand for rental housing are enticements to buyers and investors who have access to cash to purchase properties.”
Other key findings from the study, “Cash or Credit: The Role of Cash Buyers in Cook County’s Housing Market,” co-authored by Smith and Sarah Duda, assistant director at IHS, include the following:
● Distressed sales made up a substantial portion of transactions in high-foreclosure areas. In 2011, distressed sales accounted for roughly 36 percent of total sales in Cook County. In high-foreclosure areas, however, distressed sales accounted for 58 percent of total transactions. This is compared to 43 percent in areas of moderate-foreclosure activity and 17 percent in areas with low foreclosure levels. Distressed sales include sales out of lender real estate owned (REO) status, sales at foreclosure auction and short sales that occur during post-foreclosure filing.
● Purchases out of REO status are most likely to be made using cash, particularly in high-foreclosure areas. Nearly 90 percent of the properties purchased out of REO status in Cook County’s high-foreclosure areas were paid for with cash. In moderate-foreclosure areas, 71 percent of REO sales were cash transactions, and in low-foreclosure areas 56 percent were cash transactions.
● The number of very-low-value cash purchases increased dramatically after 2008 in high-foreclosure communities and accounted for a substantial share of overall transaction activity. In 2009, nearly 25 percent of sales of detached one-unit and two-to-four-unit buildings in high-foreclosure areas were cash transactions of less than $20,000. In 2010 and 2011, the share of transactions that were very low value declined slightly but remained near or above 20 percent.
● Buyers of condominium units and two-to-four-unit buildings face unique challenges around access to credit. Unique characteristics associated with lending for condominium units and two-to-four-unit buildings have made it more difficult for potential buyers to obtain loans to acquire these types of properties. A much higher share of buyers of condominium units and two-to-four-unit buildings uses cash as compared to buyers of single-family properties. Between 2005 and 2011, the share of single-family homes purchased using cash increased roughly 25 percentage points, from 13 percent to 38 percent. By comparison, the share of condominium units purchased using cash over the same period increased roughly 36 percentage points over the same period, from 17 percent to 53 percent. The biggest increase in cash buying was seen in two-to-four-unit properties. The share of two-to-four-unit buildings purchased with cash increased by nearly 43 percentage points, from roughly 13 percent in 2005 to 56 percent in 2011.
“Recent proposals such as REO-to-rental strategies have underscored the importance that investors and cash buyers play in both absorbing excess inventories of distressed properties and providing affordable rental housing,” Duda said. “It is important, however, to track the ownership strategies of these investors to ensure that they are acting as responsible owners and landlords.”
The study, which can be found at http://www.housingstudies.org/, is part of a series of IHS reports designed to provide affordable housing practitioners, government housing agencies and community organizations with reliable, impartial and accessible data about the state of affordable rental housing in Cook County. This work helps guide collaborative efforts to preserve this type of housing and understand conditions affecting the recovery of neighborhood housing markets in the wake of the foreclosure and economic crises.
About the Institute for Housing Studies (IHS)
IHS is a multidisciplinary academic and applied research center situated in the Real Estate Center at DePaul University. IHS provides data and analysis to inform affordable housing-related policy and resource allocation decisions. More about IHS and its research can be found at ihs.depaul.edu.
With more than 25,000 students, DePaul University is the largest Catholic university in the United States and the largest private, non-profit university in the Midwest. The university offers approximately 275 graduate and undergraduate programs of study on three Chicago and three suburban campuses. Founded in 1898, DePaul remains committed to providing a quality education through personal attention to students from a wide range of backgrounds. For more information, visit depaul.edu.