US Housing Market Set To Suffer For Several Years
The US Real Estate market seems to be a constant source of conversations lately. With the meltdown the market went through over the last several years, many areas of the US have seen prices drop drastically and in many cases, they can only be best described as steals when compared to prices just five years ago.
Now I cannot deny that the prices are incredible, especially when you make a direct comparison between properties in our region of Alberta with say Scottsdale Arizona. Just doing a quick search on the internet, I found numerous 3 bedroom, 2,000 square foot properties in the Phoenix area around the $200,000 mark. They even include swimming pools! Similar properties here would be worth two, three or even four times that amount. It’s the proverbial “no-brainer”, or so it appears.
I cannot argue that the values are low, but Real Estate, just like any market, is driven by supply and demand and this is why having a brain is important. In this case, the demand simply isn’t high enough to justify the prices being higher in Arizona. Perhaps more importantly, this will likely be the case for quite a few more years. This means we will see very little change in pricing during that time.
The great deals that are available now will still be there later. The issue is that the problem still isn’t over in the U.S.
According to a recent study by Harvard’s Joint Center for Housing Studies, as recently as March of 2011, there were over 2 million home loans at least 90 days delinquent in the US. Those numbers are staggering enough, but on top of that there are another 2.2 million properties stuck in the foreclosure process with no action being taken. Of those 2.2 million properties, 67% of the homeowners haven’t made any payments in the last year and 31 percent haven’t made any payments in two years.
There may be a percentage of people in the first group who will recover, but this will likely be a very small percentage. As for someone who hasn’t made a payment in over a year? We can assume they won’t suddenly be flush with cash and running to the bank to catch up.
This leaves over 4 million homes that will be need to enter the market at some point, likely at significant discounts, just so the bank can get them off of their books. You have to understand, this won’t have a very positive effect on market pricing and will just help keep prices deflated.
When you also throw in that 15% of all homeowners already owe more on their property than they are currently worth, it paints a very sad portrait and is just one more dagger into the market’s ability to recover any time soon. Some areas have definitely been hit harder than others, and there are areas that will with stand the underlying problems, but these areas are also not going to provide what appears to be the deal of the lifetime that people are looking for.
Perhaps the best way to look at this is to reflect on prices locally here through 2008 to 2010. There were significantly more homes up for sale than there were buyers, this placed us firmly in a buyer’s market and at times, there were as much as 12 to 16 month’s worth of inventory for sale. This took us several years to recover from and we still aren’t completely there. Thank goodness, our resource based economy is pulling us along and allowing us to recover so quickly.
In comparison, some areas of the US, have over 40 months worth of inventory! If it took us three years with a good economy to start to recover, imagine how long it will take that inventory to get chewed through with a stagnant or dying economy? The important point to remember, if you are considering purchasing in the US, is that you will see very little return on your investment for a very long time and if you were to wait a few more years there should still be plenty of opportunity, it simply won’t disappear overnight.
Investors Perspective – Buying US Property
I’ve said this a few times, so I hope it doesn’t get to repetitive, but if you are buying in the US for an investment, you will be waiting for a long time to get anywhere. It’s not impossible to make some money, but there will be many challenges.
There are so many roadblocks in the way of the US economy recovering, your entire focus would need to be on cash flow. This may make it initially appear viable, but after all the headaches of buying out of the country and paying managers to deal with day to day issues and having to deal with tax issues both in the US and Canada, it may not be worth it. Do your homework on this.
Especially when there are so many opportunities locally here right now. It might cost you a little more, but over the next three years the market outlook is definitely much rosier right here. It should be quite possible we see values increase by at least 15% in the next three years as the economy continues to gain steam and that translates into a $90,000 increase , (ooops I made a horrible math error here, that should read like this, thanks to Nasreddine for pointing that out!) a $45,000 increase on a $300,000 property.
In three years that would allow you to sell your property here and be able to buy your property in the US at most likely the same price as today, but with a very sizable down payment amount in hand. Perhaps it’s something to think about, before you get sold on how much greener the grass is south of the border?
Hi Bill,
Thanks for this. I hope your article gives our fellow Canadians a reason to at least pause & think before jumping into the US market. I was recently talking to a friend in LA, who has some real estate interests & he was saying there has been a huge push in marketing to Canadians in the last few months because Canadians have money to spend. He also said he thought that the US was years away from any kind of decent Real Estate recovery. I’ll be sharing this article around. Thanks again.
Hi Theode,
The market always looks far different when you look in from the outside. The Americans see what is happening around them and aren’t too optimistic about recovery, the outsiders (Canadians in this case) see low prices and not the entire picture.
An excellent example of this from the other side is the number of foreign investors that are sinking money into Alberta, from buildings to oil sands projects we are seeing some significant infusions of cash which translate into increased prosperity for the region. We forget how good we really have it here far to often.
Thanks,
Bill