AMERICAN PROPERTY ATTRACTS OVERSEAS INVESTORS
The pound has crashed against the American dollar, but US house prices are still falling.
Tailored Home looks at why Brits are looking to southern states for bargains.
A WORLD of opportunity is out there in the international property markets.
The weakness of the pound remains an issue, impacting directly on expatriate housing and the levels of savings available.
The euro has dropped by around 12 percent against the US dollar since September last year, while the British pound has lost more than 30 percent of its value against the dollar over the last 12 months.
So where’s the appeal in buying into an overseas market when trading with a weak currency?
The answer lies in the state of the US property market, which continues to fall at record levels.
The US property market makes better sense for many British buyers cashing in on states where properties have fallen by almost 40 per cent in the last 12 months.
Foreclosures
This is because the country is dominated by a surge in the number of foreclosures and the prospect of even more redundancies over the next year. The car manufacturing industry in particular looks more vulnerable now than at any time since the subprime crisis began in 2005. Foreclosure notices emerged as a real threat in 2007 as repossessions grew.
RealtyTrac reported 2,203,295 foreclosure filings on 1,285,873 properties in 2007 – a 75% increase on the figures for 2006. The last quarter of 2007 showed the highest number of foreclosure notices that the company had ever seen and December 2007 marked the fifth consecutive month to have seen over 200,000 foreclosure filings reported.
The crash had been fuelled by Adjustable Rate Loans, where lenders had been encouraged to allow struggling borrowers to refinance their repayments.
The availability of credit had previously encouraged more and more people to invest in properties, which in turn led to increasing house prices. A 2007 Census Bureau report shows that in 2004 home ownership in the USA was at an all time high of 69%.
Refinancing
By 2006 interest rates began to rise and house prices started to drop as refinancing became more difficult. This, in turn, directly led to the increase in foreclosure filings.
The US Government has taken bold measures to combat the subprime crisis, including injecting billions of dollars of public money into the banking system. In July 2008 the government brought in the Housing and Economic Recovery Act, which insured $300billion in mortgages with the intention of helping approximately 400,000 borrowers. But the Act was widely criticised with only several thousand people benefiting from it.
At the end of last year American homes suffered their greatest quarterly decline in 18 years, according to the Federal Housing Finance Agency’s quarterly house price index. In a report released in February 2009 the agency revealed that the average house price in America had decreased by 3.4% from the third quarter of 2008 to the fourth and 8.2% for the year.
That’s some way short of the 30 per cent fall in Sterling. But the key is in the detail. ‘Average house prices’ do not reflect what’s happening in areas of significant downturn.
Statistics released recently by the National Association of Realtors show Southern states have seen large falls in house values in the last year.
Hawaii
In Alabama prices have fallen by 35.1%, North Carolina by 34.7%, South Carolina by 31% and in Tennessee by 26.1%.
Even the most exotic and prestigious locations have seen the market tumble. In Hawaii house prices have fallen by 30%, while even Washington’s values plummeted by 35.6% in 2008.
Will the fall continue?
On February 18, 2009, President Barrack Obama announced his ‘Housing Plan’, offering direct help to struggling borrowers.
His overriding mission is to save jobs in order to stabilize property values and halt the growing number of foreclosures.
Obama pledged to commit $75 billion to help up to 9 million families restructure or refinance their mortgages. He aims to encourage lenders to modify any loans they have, which are considered to be at risk before action is taken against those at-risk homeowners.
The plan requires lenders to reduce interest rates for distressed homeowners so that their monthly payment is no larger than 38% of their income.
Relief programme
Lenders who receive funds from the Troubled Assets Relief Program are forced to follow all Treasury Guidelines on loan modifications. The plan also reiterates the Obama administration’s desire to change bankruptcy laws so that homeowners in danger of having their homes foreclosed can seek loan modifications through the American justice system.
Martin Eakes, CEO of the Centre for Responsible Lending, welcomed the president’s new solution as ‘a huge step forward for the entire country’.
“This is an essential and overdue investment in correcting the results of bad lending and poor risk management,” he said. “Previous actions to bail out banks have been necessary to keep the economy afloat, but essentially amounted to bailing out the water in a leaky ship. By addressing the foreclosure crisis directly, the Administration's housing plan finally begins to plug the holes that cause the problem.”
But Obama’s plan has come under fire from financial analysts who claim that it does not deal with the original causes of the problem: spending too much money on short term issues. They argue that attempting to artificially keep the market buoyant will not improve things for the next generation of house buyers who will need to buy into more debt to finance homes.
Although Martin Eakes commends Obama for ‘correcting the results’ of bad lending and poor risk management, detractors insist he is not doing enough to correct the causes.
At the height of the boom, subprime loans accounted for almost 25% of all America’s new home loans. A 2006 study by the Consumer Federation of America showed that 24.2% of males taking out mortgage loans were given subprime loans, whilst 32% of women taking out mortgages were given subprime loans.
That bad debt still has some way to go before it works its way out of the system.
With house prices likely to continue to fall for a few months yet, UK investors have opportunity yet to buy in.
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