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Housing On a Cliff?

By: Herb Greenberg | 08/20/13 - 08:53 AM EDT

NEW YORK (TheStreet) -- With our imminent move back to San Diego, we've known first-hand about the housing market there.

The inventory is slight, the prices aren't.

We put a bid on the house we intend to move into (barring the resolution of some last minute glitches that have cropped up) within hours of landing at the airport. We saw a few and picked the best of the bunch.

And we had to move fast because the buzz was that many, if not most, of our competitors were all-cash, and all-cash trumps a mortgage!

Now, as Goldman Sachs (GS) reported the other day, it appears there was more all-cash than we originally thought: More than half of all deals.

Last month, the National Association of Realtors (NAR) said that, in June, all-cash sales made up 31% of all transactions.

Perhaps more stunning: houses in our old neighborhood are fetching at or above pre-crash prices. At the time, much of that was being financed with creative financing that almost pushed the financial system into an abyss. This time, however, it's cash.

Never mind trying to speculate where all of that cash is coming from. Can't argue with cash.

But is there a downside to so much of the market being tilted by cash? Mortgage maven Mark Hanson, among the best of the housing gadflies, thinks there is -- and not in a small way.

In a note to clients, he wrote:

"The 'all-cash' metric is something I consider of paramount importance. In fact, it was one of my top smoking guns even at 30%...half of Goldman's estimates. I used to think they were the 'incremental buyer" cohort, fully responsible for distorting the market. But as it turns out they are the "primary" buyer cohort. Even during the bubble years, those using exotic loans to squash affordability and drive prices were the minority...a true 'incremental buyer'. I have made the case for a long time that when this pool of 'coincident capital' -- that isn't constrained by 'petty' things such as a mortgage lender looking at income, assets, and a of all things, a "residential appraisal report' -- goes flat, then look out. But at 50% to 60%???!!!!...the market will literally crash if even a third of this cohort shuts it down. God forbid if the early in's turn into net sellers.

"And if the guys holding all the supply view the builder stock price rout as a key leading indicator such as I, perhaps this explains why in July I began tracking large up ticks in for sale supply in the most bubbly regions -- the regions institutional money are most concentrated --across the nation.

"Certainly, I knew the 'all-cash' metric was higher than NAR proclaims. Especially in the PE favorite, former bubble, high-beta regions that are responsible for most of the hype and skewing of numbers to the positive. But nearly 60% of all sales nationally being for cash is insanity defined. Even if Goldman is wrong and 'all-cash' is at 43% -- between NAR and GS estimates -- it represents a clear and present danger to 'this' market, near, mid, and long term. It shows clearly just how structurally broken this market is and also why builders can't sell their way out of a wet paper bag, even after years and years of the Fed stepping on rates, the gov't outright outlawing foreclosures, and the banks & gov't creating millions and millions of new-vintage, higher-leverage worse than Subprime loans (Mortgage Mods) in an effort to stomp out supply.

"This pool of coincident capital will go away as quickly as it appeared...and most of it at or around the same time because the lions' share was activated on the same trigger, is coming from the same place, and has the objectives."

What I know is this: With our desire to move back to San Diego, we have been watching the housing market there closely for well over a year. The velocity of the rise in prices in such a compressed amount of time was not just disheartening for potential buyers (us!) but appeared irrational and unsustainable.

Even if cash buyers continue unabated, the rise in rates is already taking the edge off the other half of the buying pool. (Just ask any mortgage broker)

The simple rules of economics suggests a return to the mean. The only trouble is: does that mean falling off a cliff or just leveling off? That's a bet I wouldn't take for a simple reason: I'm not in the business of betting against myself.

--Written by Herb Greenberg.

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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