Before we start our investigation into Florida property it’s worth looking at the broad picture.
What are the facts about the US property downturn? Screaming headlines attributing every single financial woe to the US housing market might lead a reasonable person to believe that US property was in a depression.
The slowdown began in 2006 and has worsened but it is so far a manageable problem. Relaxed lending criteria that allowed borrowers access to credit on so-called "Ninja" terms (no income, no job, no assets) suggests that recent tightening of lending terms will precede a slowdown in demand for credit and could weaken the economy. But the Federal Reserve is unlikely to want housing to be depressed for too long.
The data on foreclosures, ie sales of properties seized by finance providers, is sobering but not alarming. In April 2007 approximately 140,711 properties entered foreclosure, a level of nearly 32% higher than the average for the six previous months (November 2006 to March 2007). The phenomenon seems to be skewed towards five states, California, Florida, Texas, Colorado and Illinois which account for 55% of foreclosures. In Florida, one in 298 properties is being repossessed and it accounts for 17% of the total nationwide. However, in quite a few other states repossessions are running at around one property in a thousand. The US average is one foreclosure per 822 households, which does not seem that high.
According to the National Association of Realtors, prices of US homes are expected to grow by under 3% in 2007. Recent data from the US government put the average house price at $299,000 in April 2007 a 3.6% fall year on year, but a valuation on a par with December 2005. Prices have not collapsed rather there has been a slowdown of activity and reduced expectations. The real pain is happening at a finance level. The rate on a 30 year mortgage is now 6.68%, the one year adjustable rate is 5.59%. Borrowers are getting hurt when their fixed rate deals agreed three to five years ago expire. The most obvious effect of higher interest rates is to reduce property speculation, by making it more costly to hold property portfolios.
Everyone loves Florida
But a place in Florida has always appealed to me, ever since my visit in 1992. Arriving at Miami airport on a flight from JFK, a friendly lady passenger advised me to "Watch the gators". I only understood later that she was referring to the Florida Gators basketball team rather than the one million alligator population that live in the Sunshine State. Incidentally, the Florida Fish & Wildlife Conservation Commission handle over 18,000 "gator" complaints per annum, mainly "gator in the pool" incidents.
Florida is an ideal US holiday. Palm Beach, Key West, the Everglades, Disney World, Cape Canaveral, Key Biscayne, Miami Beach, the list rolls on.
Immortalised by the presence of Ernest Hemingway, numerous movie stars, Presidents, Florida is a top destination for retirees, family vacations, and the world’s wealthy. Nearly 4.4 million overseas tourists visited Florida in 2005, a similar number is expected for 2006. Demand has held up despite the tougher visa and customs checks at US airports post September 11. Whilst hard to beat for a holiday, does it make a good investment?
Hurricane effect and high condo supply slows market considerably
In 2004 a series of devastating hurricanes, Charley, Frances, Jeanne, Ivan were followed in 2005 by Dennis, Katrina and Wilma. The images of devastation that flashed around the world resulted in a change of perception. In the age of climate change, was Florida a safe place during the June to November hurricane season? Even Floridians were asking this question.
There is of course no answer to this, other than to say it is a risk factor. Some might call it the natural hazard of living in a tropical climate. It might take a few years for Florida to shake this image, assuming good weather returns for good. The effect of the hurricanes was to dampen investor enthusiasm for Florida which slowed down the property market in 2006/2007.
There are other differentiating features. Around 20% of Florida’s workforce is employed in the construction sector. The Sunshine State has experienced large scale building of homes, offices, leisure and transport facilities since the 1980s. A relaxed approach to permitting new construction led first to thousands of $50,000 homes in the 1970s, but more recently "high rise, high end" condominiums priced between $200,000-$800,000.
The high end condo market is very focused on attracting the second home international clientele in particular wealthy Mexicans, Latin Americans and recently Russians. Browsing through the Miami Herald, one gets the impression that the locals are concerned at the prospect of being priced out of their home market.
A large proportion of buyers of Miami and Orlando condominiums are "flippers", ie nonoccupiers and speculators looking to sell properties at a profit often in an 18 month window. There is evidence of distressed selling by flippers in the local agents and on the property websites such as www.primelocation.com. It seems flippers have been caught by the sudden market stagnation of 2006/2007 and higher interest rates. Hence there is a large overhang of property. Local flipper activity on the buy side has virtually evaporated as investors wait for prices to hit bottom. The general consensus is prices could fall further, but heavy buying could emerge when the property overhang starts to clear. It could take 12 months for this to occur, presenting us with a window of opportunity.
The supply issue is being exacerbated by the weak US property market which deters buyers. America’s top house builder, Miami-based Lennar Corporation (NYSE: LEN), is trading at multi-year lows and recently reported losses for Q2. A visit to the Lennar Corp website (www.lennar.com) reveals a long list of unsold properties. It also provides brochures for some pretty luxurious new developments at very affordable prices for UK buyers. Basically £150,000–£250,000 buys a top condominium or house ranging from 1,000 sq ft to 2,000 sq ft. Obviously prices vary according to location but the general bracket is around £100 to £250 per sq ft. Recent hot spots such as Key Biscayne, Vero Beach, Miami and Naples have seen prices adjust rapidly whilst other areas, (usually more family occupier orientated) have held up.
US builders have large inventories of new finished properties and semi-finished developments that are already on the market. In many cases the builders have concluded option agreements with flipper buyers that are likely to lapse leading to even higher inventories of unsold properties. Generally, prices are being marked down for new properties. If the advertised mark-down is 20% it’s a pretty safe bet that a buyer could negotiate a further reduction. One great place to find listed property is on the website: www.floridagreatbuys.com (a Taylor Woodrow subsidiary) but also www.miamiherald.com. The advantage with Florida is its appeal to retirees, young families and the climate.
A weak US dollar is positive for UK/EU investors
The depreciation of the US dollar, the most consistent financial trend under the Bush Administration continues unabated. With sterling at $2.04, a 26-year high, and up around 10% since 2006, buying US assets is cheaper for UK investors than it has been for years. The currency factor, viewed in isolation, has knocked 15% off the cost of a Florida home compared to 2005. This provides a nice immediate incentive. Incidentally, as you will know, our view remains that weakness in the US dollar will persist in the medium term. The US currency could experience periods of strength, but these are likely to be shortlived.
A buyer of US assets therefore should consider that the US dollar could easily go lower to US$2.20/US$2.30 over the next five years. As such, the easy way to benefit from further dollar depreciation is to have a US dollar mortgage.
The idea of buying a Florida property at a big discount is what interests me and I believe the timing for Florida is good now, and could be for another year. It is definitely worth considering. But it is advisable to do further research, take a few weeks holiday there to really get the sense of a preferred area, whether it be a condo on the coast or a home.
The Sunshine State has an army of "realtors" who are only too happy to explain the nuances of Federal and State taxes, etc. Furthermore, there is the small detail of residency, in that owning a property in the USA does not in itself allow the owner to outstay his six-month tourist visa. Still a top quality condo on South Beach could be a terrific bargain, as a regular holiday destination with letting potential as well to help it pay its way. Low prices will attract UK and EU buyers. If you’re considering buying abroad now’s the time to consider Florida. It certainly merits a few weeks of local investigation!
Action to take: For further information on buying a holiday home in Florida check out these websites: www.primelocation.com, www.floridagreatbuys.com and www.miamiherald.com
