Torcana Investment Blog

The USA property market is recovering: Here is the evidence

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For several years, I have been bullish on the medium to long term potential of the US & especially the Florida market. Many of you have shared this optimism by purchasing the properties we promote at record discounts. Others enjoy reading the newsletters and are more comfortable waiting until the evidence of a recovery is firmly established.  

Whichever category you fall into, I now think we are about to reach a new phase in the US property cycle that will see many more buyers entering the market.

By just about every authoritative measure available, the housing market in the USA is as strong as it´s been for 5 years. There is a real chance that we could be on a cusp of a virtuous circle that could start providing the momentum America needs for sustained economic recovery. 

Consider the following national statistics:

- The apartment market strengthened for a fifth consecutive quarter  

- March pending home sales beat expectations. 

- Home prices rose from February to March, according to Zillow. 

- Home prices rose in February, according to the FHFA. 

- Delinquencies declined in March. 

- New home inventory is at record low levels. 

- For the first time since 2007, prices have increased year on year, according toCase Schiller 

The Wall Street Journal, a newspaper not known for championing the property market, published an eye opening article recently entitled "Stunned homebuyers find bidding wars are back". The theme of the article was the emergence of a new type of bidding war, as buyers were shocked to find so many people competing to purchase the home they had chosen.  

While property prices are still much lower than the last time we had bidding wars, this article is an accurate reflection the acute supply shortages across the country. The WSJ also tracks inventories of homes for sale across 28 different national markets, and reports that every single one of them is declining sharply. 

Nowhere is this recovery more evident than the state of Florida. In major cities such as Orlando, Jacksonville & Miami, the demand for buying property in Florida is as high as it was during the peak of the boom, with prices increasing, vacancies dropping and inventory at record lows.  

The time is right to start thinking about buying property in Florida

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Roughly one year ago, median priced homes in Florida's Broward County had lost 58 percent of their value from the peak in 2006. In Palm Beach County, prices for the median home market had plummeted by 54 percent. These homes have sloughed off over half of their value - this is prime time for investors to begin buying property in Florida. 

Why Florida -- Why Now?

As the United States economy rebounds, Florida is on the radar of many investors. The many attractions from Disney to Universal Studios are always a winter and summer draw for tourists and it´s financial, convention center, technology and aerospace industries are all world class. 

Official indicators show the growth in the real estate market beginning to rebound from the dramatic plunge in Florida property values. Such indicators show spotty gains in certain areas but those gains are certain to spread. Last month, in February 2012, Tampa figures indicated a rise in property values of 0.8 percent, Orlando showed a gain of 6.7 percent and Miami showed a positive growth of 5.4 percent. These prices, when compared to a decline of properties in the Mid-West of 5.2 percent signal a bottom has been reached in Florida metro property values. Buying property in Florida now is going to be a major draw for the smart investor.

Florida Facts

The state is the fourth most populous in the nation and is forecast to leapfrog third placed New York within 15 years. For the past two decades, it is the 3rd fastest growing state in population. The warm climate, easy access to beaches on two coasts and terrific infrastructure have always been an attractive draw for both national and international visitors.

The state also is a headquarters for many industrial giants whose trade relations span the globe from South American countries to Europe and Asia. The aerospace industry has developed there and spawned technology that has spread to other countries and improved the lives of millions. Indications are that, as global economies improve, Florida will continue to move forward as a corporate giant for those who currently call the state home and those whose future plans will invest in the state. Solar technology investment in Florida will also continue due to the strategic location of the sun-drenched peninsula. The population will continue to grow and those buying property in Florida now, will share in the bounty as industry and agriculture continue their economic ascent. 

Retirement Mecca

Industrialists, corporate executives and Wall Street investors have always been drawn to the Sunshine State for getaways, seminars and corporate outings. Those reaping profits in the current stock market will be searching for a second or retirement home. Buying property in Florida will ratchet up in the coming years as these retirees and second-home buyers seek homes southward. The bustling cities of New York, Chicago and Washington will be left behind as these transplanted residents seek out Florida's state-of-the-art infrastructure, lower cost-of-living and mild climate. Retirement communities, in many cases, have developed into self-contained small cities that offer a wide range of amenities. As such communities develop, Florida's economy will continue a vibrant upward spiral, driving up home, condominium and apartment prices. Buying property in Florida now represents a stable and unique investment opportunity.

Other Reasons For Florida Investing

The smart money will be drawn to buying property in Florida for a range of reasons. Here are just a few more of the reasons why buying property in Florida now is such a smart investment:

USA Property: Sourcing the Best Investment Properties

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Meanwhile, those that have been forced into foreclosure, short sales or have simply walked away from their homes have inadvertently created substantial investor opportunities. Depending on where you look, USA investment property is now 30-80 percent below previous 2006 market highs. 

Buying USA Condos

Investors looking for short-term gains should look into well funded condo complexes for sound USA property. Displaced homeowners must have somewhere to live and condos offer immediate availability. With millions of former homeowners seek condos, vacancies are spiraling downward and this is pushing rental prices higher. And, as unemployment decreases, more former homeowners who have less-than-adequate living arrangements will become employed and be seeking their own condos. In certain metro areas, condo demand is currently so high that rentals have skyrocketed.

In such areas, the purchase-to-rent ratio has fallen dramatically. House payments are low and rents are high but, tenants seem to prefer the lower risk and responsibility of renting to ownership.

Those looking for opportunities in USA property should look carefully at condos and other rental property for great short and long-term returns on their investment, particularly in areas where unemployment rates are falling. That is something Torcana can definately help with (see our free report below)

Vacant USA Homes

Despite record buyer activity, there are still plenty of short sales and foreclosures available in the USA property market. Even though the American housing crisis has been massive, population numbers continue to rise. As employment grows, young people will be looking for their own housing -- and privacy -- and will gladly pay higher rental rates to have their own space. Smart investors scanning for USA property opportunities will look at local economic conditions and invest in moderate homes for rental property. Target low crime areas close to good schools and major employers.  

Tenants with Credit Problems

Those looking for opportunities in USA property should also be mindful of the poor credit ratings of many looking for housing. Having lost homes due to lost jobs, many will not have a good credit score. However, once-responsible homeowners will need housing when they find employment. High deposits on such tenants can ensure a trusted renter and can be used as leverage to secure other rental properties. As these renters find housing, they will tend to hold onto it as a long-term and established address while working to repair their bad credit. The trend for keeping responsible long-term renters looks quite favorable for those putting their money into USA property.

Look Southward

One of the areas hit hardest by the American housing crisis was Florida. Certain areas of Florida are already showing a significant return to normalcy in real estate prices. One particular region is Southwest Florida. There are several reasons for this trend that those interested in USA property should consider:

USA Property – A Great Choice For Investors

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Business expansion plans that were shelved during the market crisis are being dusted down and are now stirring into action. Expansion, even slow expansion, is creating pockets of reduced unemployment. As these areas see more job growth, housing will be required. 

The One State To Watch

Florida has been hit hard by the housing crisis. However, the Sunshine State is poised to lead the USA investment property market. Florida has always been a draw for property owners. While it was been one of the worst areas for loss of home values, the signs of recovery in Florida are among the strongest in the country. 

Florida has always been a destination for those retiring. It also has the great advantage of being a premier vacation spot for the young on spring break and the amenities for families on vacation (Disney, Universal Studios etc) are world class. Florida is also the primary agricultural area on the east coast and has world class financial, convention center and entrepreneurial areas.

Those looking for USA investment property should seize the moment. The infrastructure in Florida is unmatched and yet the cost of living is very low. Virtually any attraction in the state is easily reached within hours. Many areas have self-sustaining communities within walking or biking distance.

Consumers & Investors vs Workers & Citizens

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The Financial Times has been publishing an outstanding series of articles based on the theme "Capitalism in Crisis". One of the trends I´m starting to understand a little more clearly is that the financial services industry and the crazy salaries earned by the top people within it are just a small part of the puzzle.

A much bigger part is the role played by investors, consumers, workers and citizens. Many of us fit into all four of these roles - i.e. we invest in stocks, consume ipods, work in a bank and receive basic health, education and security from our government. 

With technology and globalization, almost anything you can dream of can be identified, purchased and sold at the click of a button. A single person in a home office can probably accomplish more today than an office manager with 10 roaming assistants could have 15 years ago. Think about that for a moment. 

This power is presenting opportunities our parents could not even have imagined. There is a flip side to this however.

If we continue to break down traditional barriers and reward companies who provide the best products at the lowest prices, then inequality and job insecurity will rise for those who can´t meet these expectations. 

I think everybody has to try and adapt to this new reality. Experts and laymen alike now realize that rising living standards during the boom were mostly a mirage as they were based on cheap credit and by living beyond our means.

In my view, the next 5-10 years will provide a huge amount of genuine opportunities to increase living standards and our personal wealth for real.

We can accomplish this by teaching ourselves and our families how to get into the right mindset, by leveraging the myriad of tools available to us and by taking advantage of opportunities when they present themselves. 

Investors are saving the USA property market

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"Three cheers for investors!" is probably not something you´re likely to hear the Occupy Wall Street protesters shouting. Nevertheless, the economic situation in the US would be a lot worse without investors. 

It is estimated that investors snapped up a whopping 30% of the total sales of USA property last year. When the property crisis was at its worst, it was investors (many from overseas) who pumped billions into the US economy. They bought when the market was at its lowest ebb when nobody else was interested. They used hard cash to purchase and fix up hundreds of thousands of properties and then rented them out to families.

Nobody else would have had the confidence to buy enough volumes of property to stop the slide in prices and reduce inventory back to pre boom levels in many cities. Investor activity has revived many local real estate markets and it has given potential owner occupiers (and their bank managers) much more confidence. 

I´m not suggesting that property investors have purely charitable motives - they´re in this business to make money and they certainly know how to squeeze a seller. Nonetheless, the actions of the majority of them have had a very positive impact on the market. According to the National Association of Realtors, every home purchased pumps $60,000 into the economy for furniture, home improvements and related items.

Looking forward to your thoughts. 

Will Chinese consumers come to Europe´s rescue?

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If the Chinese can be persuaded to spend more and save less, that might provide the opportunities western economies need to grow and pay down their excessive debts. Try to imagine the sheer quantity of products and services that hundreds of millions of emerging middle class Chinese will need for the first time during the next decade. It´s mind boggling. The rub is that this rosy scenario would require a huge transformation on both sides.  

Germany is often touted as the model to follow and while there is certainly much to admire and learn from Germany´s manufacturing and exporting prowess, it is not easy to replicate. 

For example, telling Greece that it should be more like Germany is a bit like telling me to repay my mortgage by becoming a professional golfer - possible in theory, but not very practical for a high handicapper.   

These are all huge macro economic issues that will take decades to play out. There is no politician or banker alive today who has previously faced a situation like this and no matter how overpaid they might be, I would not want to be saddled with their responsibilities.  

However, it is equally true that the majority of people reading this, who still have a steady job and savings, have never faced an investment environment so ripe with opportunities.  

Opportunities

It is often said that the Chinese use the same word for "crisis" and "opportunity". While the unemployment and suffering that has occurred should never be taken lightly or disrespected, one of the biggest beneficiaries of the economic turmoil is the distressed assets industry.  

A huge range of companies, developments and individual properties have been bought by liquid buyers at prices that could scarcely have been imagined just four years ago.  

For several years, Torcana has been at the forefront of the distressed property industry in Florida sourcing hundreds of deals for buyers all over the world. In 2012, we will continue to work in this incredibly dynamic market. 

Where will the sovereign debt crisis go in 2012?

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There has been no shortage of somber faced pundits and politicians competing against each other to make the direst predictions for the coming year. It is a bit like watching the Monty Python Four Yorkshiremen sketch in reverse. Thankfully, these people are hardly ever right about anything, and if they are all so gloomy, then perhaps we have significant grounds for optimism after all. 

However, it does seem safe to assume that the sovereign debt crisis in Europe will get worse in 2012. I read somewhere that it´s not the debt that gets you, but your ability to service it. That strikes me as being very true. 

Just look at the UK & USA: their debts are equally (if not more) scary than those of Spain & Italy and yet it is safe to assume that the markets will happily lend to both in 2012. Spain & Italy on the other hand, have to raise at least €500 billion between them this year, and I´m not convinced they´re going to get it from the private sector. 

If that happens, then much bigger rescues than the ones handed out to Ireland, Greece and Portugal will be required. Between Germany, the IMF and the ECB, the economic firepower is certainly there to do it, but politically, it will very difficult.   

Banking Vs Sovereign Debt Crisis

In 2008, governments spent billions bailing out banks that couldn´t borrow the money they needed on the open market. In 2011, the sovereign and banking crisis became one and the same because if a small country like Greece defaults, then banks in many countries could go under.  

As has happened many times before, EU institutions can perform all manner of contortions to avoid crossing a line they´ve drawn for themselves. At the moment, one of those lines is that the European Central Bank will not directly purchase eurozone government bonds.  

With a wink and a nod, the ECB is therefore lending huge amounts of money to eurozone banks, who then buy eurozone government bonds. These eurozone bonds are then used as collateral to borrow even more ECB money. Very clever isn´t it? Everyone´s a winner and we all live to survive another weekend, except that these multi billion euro shenanigans do not address the true underlying problems.  

The major issue facing so many western economies is that too much debt has been accumulated and they will need to spend less than they earn for many years in order to reduce it. That´s logic a five year could follow, but life is never that simple. If you reduce spending too fast, then an economy can grind to a halt. 

What makes sense from a personal perspective (cut down debt, don´t buy things you don´t need) is very bad for economies balanced towards consumption rather than production. You can´t export consumerism and you can´t easily transform a country into a net producer.

These are all huge macro economic issues that will take decades to play out. There is no politician or banker alive today who has previously faced a situation like this and no matter how overpaid they might be, I would not want to be saddled with their responsibilities. 

The Financial Crisis - Hollywood Style

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Ironically enough, Hollywood doesn´t seem to have had any problems raising the cash needed to produce a slew of new movies and documentaries relating to the financial crisis. Some of them are actually very good. The best I´ve seen are: 

How do experienced investors identify property in Florida?

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In a previous blog, I wrote about why experienced investors will often pay more for a property with a lower yield. The reason they do this is because they prefer stable yields, well maintained communities and happy tenants with a high disposable income. Now, I´m going to show you how they identify these properties. 

Firstly, in property, as in everything else, you get what you pay for.  

Secondly, the adverts and the glossy brochures generally don´t tell you anything about the stability of the rental returns, the financial health of the community or the disposable income of the tenants.

You have to do a lot of digging to find a property in Florida (or anywhere for that matter) that will supply a steady income stream and can be sold for a premium in the future. Torcana has a checklist the length of your arm that needs to be ticked once a potential deal clears the first few due diligence hurdles.

 However, you´ll avoid the majority of mistakes and nasty surprises first time investors experience if you can locate properties with the following characteristics: 

1. FHA approved financing available (or likely to be available soon) to owner occupiers

2. Low foreclosure levels

3. High owner occupancy and low vacancy levels

4. Low levels of unpaid HOA fees 

5. Little or no evidence of deferred community maintenance

6. An adequate HOA reserve to cover future maintenance work (i.e. those new roofs)

7. Located close to quality schools, major employers and important infrastructure

If your seller can satisfactorily answer the questions above, you may located a very solid deal. If they are reluctant or unable to provide this information, and instead keep referring you to the great purchase price and the great yield, then the property is unlikely to match the key criteria that experienced investors look for (see first paragraph above).  

Conclusion 

Imagine for a moment that you are buying a second hand car. Sure, the price tag and the mileage are important considerations, but most of us would also get a qualified mechanic examine the brakes, the engine, the tyres, the paintwork, the battery, the ignition etc.

The point I´m trying to make is that buying a property solely based on its price and current monthly rental yield is a bit like buying a car because it looks nice. In both scenarios, there´s a high possibility you´ll get ripped off. 

Purchasing a property is right up there with the most important financial decisions a person has to make. At Torcana, we take that responsibility very seriously indeed when promoting products to our clients.  

The subject headings on our promotions might not be as flashy as some of our competitors (14% yields! Guaranteed Finance! From $30,000!) but our aim is to sell great properties with a real income stream and genuine resale potential.  

If you like the sound of that, then we´d really love to talk to you. 

Kind Regards

Colin Murphy