Time to dive in?

Jo-ann Hodgson takes the temperature of the American property market

Existing US home sales have recently fallen to a ten-year low and the median price for a single-family house recently fell by 7.6 per cent.

Although negative growth is widespread, conditions vary from state to state and region to region.

"The most robust markets in terms of stability have been the more leisure/holiday venues where demand remains good and prices have flattened accordingly," says John Prior of Undiscovered Properties. "It's difficult to predict the bottom of the cycle, but feels like about now, as the US entered negative property growth some good 12 months before the UK."

As has been well documented, the US property market has continued to suffer from problems with lending practices, which has resulted in an over-supply in many areas. Mark O'Sullivan, director at Currencies Direct, warns that "the days of buying properties to 'flip' [sell on quickly] for a quick profit are over."

"Instead, we should see a return to the original ethic of investing in real estate – that is as a long-term investment, seeing steady, moderate growth."

Indeed, the downturn creates a good opportunity for 'bottom fishers' who look to purchase a property at lower prices than they will be able to when and if the next up cycle in prices begin.

Rental market
"A record number of homeowners who cannot sell condominiums and houses are now competing for tenants," says O'Sullivan. Because of this demand for tenants, to help pay off mortgages on unsold investment properties and new builds, rents have remained pretty static throughout the US over the last year. Only in New York, where demand for housing exceeds supply, has seen rents increase at a rate of any significance.

"Unsold properties being turned into rental units are creating a shadow market that's driving up the vacancy rate and slowing the growth of rents," O'Sullivan comments. "Vacancy rates for rental apartments rose to 6.1 per cent in the US during the first quarter of 2008, the highest level in almost two years, even as the average monthly rent reached a record $991.

Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents. The increase in competition from landlords is spurring apartment owners to offer enticements."

Renting can side-step credit and mortgage issues in this turbulent economical climate and can be very favourable to those with good credit histories (that's assuming newly arrived emigrants can persuade lending institutions to accept their UK credit history. "Most owners are willing to accept lower rentals from a credit-worthy tenant," says David Giles, director of Property Deals Florida.

The rental market in leisure/holiday regions has remained strong in the US, particularly in Florida and other established holiday areas. America remains a popular holiday destination among Brits and many Americans stay within the country when holidaying.

Currency concerns
"Economic releases confirmed the recent pattern of uniformly bad news from the UK and the EU and slightly more encouraging news from the US," Mark Bodega of currency specialists HIFX told Emigrate America. "The oil price continued its slide to $116 a barrel (from $147 just a month ago) and this certainly contributed to the Dollar's strength.

"The mood of traders was that with oil, gas and coal prices all now well off their peaks and declining, all the central banks, bar the Federal Reserve, had room to cut interest rates sometime during 2008, leaving the Dollar as the default safe haven."

These changes meant a six-cent decline in GBP/US$ in one week in August from 1.9750 to 1.9150. So, if, for example, you had transferred £150,000 to the US in January 2008, you would have received $299,370; Now, if you transferred the same amount, you would only receive $285,450 – a difference of $13,920.

Fluctuating currency rates can make a huge difference to the final price you end up paying for your American property.

Currency exchange companies allow you to lock into exchange rates for up to two years, protecting your money from adverse currency movements.
 
"This means, no matter which way the exchange rate goes, you'll always know the final price of the property," says Bodega. "You'd never agree to buy a property in the UK without knowing the final cost.  If you agree to buy an overseas property without fixing the exchange rate at the start that's exactly the gamble you're taking.  Bear in mind that the average off-plan property takes two years to be built."

What to look for
Those looking to buy and sell on for profit, "should select a location and area where they will be comfortable living for at least three years", Giles advises. "It may take this long for the market to get buoyant again."

If you're looking for a holiday home to rent out when you're not there, established tourist destinations – particularly areas popular with Americans – will offer a better chance of achieving rental returns.

"Distance from international airports is important," says Prior. "Some agents offer property a three-to-four-hour drive from the international airports which is a long way after a six-to-eight-hour flight."

Also, investigate what leisure amenities and facilities are available and what is available in each season to ensure year-round usage.

If you're looking to make a more permanent move, local amenities such as healthcare and schools should be carefully researched before property purchase.

"It is also important to understand local planning permission and how it could limit the ways in which you are able to renovate or expand on older property," says O'Sullivan. "Similarly proposed new developments in the same area should be researched in order to assess the possibility of current or future competition with your investment, as well as disruption from ongoing building works."

Local property taxes also vary from state to state so be sure to ask your agent how much these will amount to each year for your chosen property.

For more information:
www.undiscoveredproperties.com
www.propertydealsflorida.com
www.currenciesdirect.com
www.hifx.co.uk

Related articles:
New York vs Chicago
The American mortgage maze

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12 December 2008