Assetz® News - Why Now Is a Great Time to Invest in USA Property

Why Now Is a Great Time to Invest in USA Property

6th March 2010 |

It is quite common to hear property buyers and investors say they are waiting until house prices start rising before they buy. Whilst this sounds logical it is worth understanding the important difference between house price indices and the prices that investors buy for in times of distressed sales. There is a big difference. Firstly, it is true that house prices in many cities across the USA will probably fall further in 2010, with the worst 25 cities predicted to fall a further 10-13% and the best 25 cities to experience growth of between 2-10%. Most expect an average countrywide fall of a further 5-8% due to the great uncertainty and continued high level of foreclosures at present.

However, what happens to the property investor who waits until house price indices have turned up and started rising, showing that we have gone through the bottom? Firstly, most house price indices are significantly delayed in terms of their data capture by as much as three months. By the time you’ve seen two or three rising months, the property market would have bottomed out as much as six months earlier. Far more importantly for the professional investor or a savvy holiday home buyer, is that the best prices you’ll get are when sentiment is at its worst; when people believe the world is in a terrible place and that there is no solution. Try negotiating with a seller when they are reading the same newspapers that you are reading telling them it is all going to be all right and prices are rising again. Leave that type of buying moment to the amateur.

Professionals need to make a decision and need to act when circumstantial evidence adds together to give an intellectual certainty even though public measures, like house price indices, are not yet confirming that information. Right now it’s quite likely that we are at the low point when it comes to achieving the best possible prices from distressed sellers. The first hints of market correction have tentatively shown their heads. According to the Federal Reserve, who conduct massive research into mortgages and home value changes and report its findings each quarter, there was a net equity rise of $48 billion from 30 June to 30 September 2009. Although it is not a huge amount in Federal Reserve terms, it is in line with Zillow’s report for the fourth quarter of 2009 showing a slight decrease in net equity decline from the first 2 quarters of the year from 22% and 23% to 21.4%. As equity begins to once again grow, less people will walk away from mortgages and foreclosures will decline, causing banks to discontinue their massive holdings of cash and become willing once again to lend those funds. The distressed property market, if it had a house price index, would have already reached the bottom and we are seeing signs that it is beginning to turn up in several locations, including Florida. This is happening quite some time before the main house price indices begin to rise because the dynamics are different.

The distressed sellers market as a whole had its worst pressure in 2009 as foreclosures reached their maximum. However, we are beginning to see negative equity on the decline, foreclosures on the decline and investment from the USA government to the tune of over $4 billion. This investment was made a year ago with the aim of stabilising the market within 3 years of its conception. Investors are beginning to understand that now is the time to take advantage of a market that will disappear as corrections to the recession are achieved. According to the HUD website, the “Neighborhood Stabilization Program was created to address the foreclosure crisis, create jobs, and grow local economies by providing communities with the resources to purchase and rehabilitate foreclosed homes and convert them to affordable housing. Last year HUD awarded nearly $4 billion in NSP formula funds to over 300 grantees nationwide to help state and local governments respond to rising foreclosures and falling home values.” The view of the programme is that “the quick removal of foreclosed homes and increased availability of affordable housing will stabilize the market within three years by arresting decline in housing prices, providing long term affordability rates, and creating new employment opportunities.”

With the massive investment from the private sector as well, time becomes short to take advantage of the market. The main public housing market monitored by the house price indices used to be a purely sentiment-driven set of data, but nowadays it is more affected by the shortage of mortgage finance. Even so, when the latter begins to improve, the former will also improve. The upturn in distressed property pricing that is beginning to show itself is your early warning indicator that the market trend will change in the near future.

As all professional traders are aware, people in the know start to buy first before very obvious indicators say that the time is right. We are seeing those professional property investors enter the USA market, usually with very large cheque books rather than with 100% borrowing. What better indicator to show that the market has turned than the selection of savvy and confident investors who are currently seizing the opportunity to invest in below market value property? After all, it is their money they are spending and they are writing big cheques, not spending someone else’s money.

We will continue to keep you up-to-date with market insider observations, but if there is one recommendation we would make it is to use yield to value as your investment guide and act like a professional investor with a mind of your own, rather than just listening to the herd and waiting until everything is obvious. If you can get net yields up to 10-15%, don’t look a gift horse in the mouth. That is the soundest advice you’ll receive in 2010.

See our USA website at usa.assetz.co.uk

This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.