First-time homebuyers looking to become homeowners during this “buyer’s market” are running headlong into a flood of speculators looking to make a quick buck from flipping cheap property.  First-timers, who are mostly relying on conventional and FHA-insured financing and state and federal tax credits to back their purchase offers, are being passed over for speculators who have a nearly unassailable advantage: cash.

This phenomenon is most apparent in lower-tier neighborhoods flush with REOs or bank-owned properties. In some cities, cash purchases by speculators account for over 40% of home sales. Many banks do not want the risk of having another default on their hands if a new mortgage goes sour or the property continues to slide in value, and would much rather have the security of cash in hand.

first tuesday take: “Cash is king,” as they say, but it is best to be wary – if not outright alarmed – at the high incidence of speculator interference in the real estate market.  At this point of the current financial crisis, speculators only serve to lengthen the market correction by continuing to artificially inflate housing prices and withholding property from long-term owners.

Many speculators, banking on overly-optimistic media reports that the Great Recession has come to an end, are purchasing lower-tier property well before the price trough has been realized. This means that the property they hold will remain vacant or in rental status until the market turns around, always to the detriment of the actual owner-occupants in the same area. Speculator folly merely exacerbates the downward decline of many neighborhoods already in distress from the recent flood of foreclosures and lack of owner-occupants.

Re: “‘Cash is King’ in market for foreclosed homes” by San Francisco Chronicle