MHN Blog

Will A Soft Dollar And Strong Foreign Interest Save The Housing Market?

The dollar is weak--it fell against the euro by the biggest amount since March last week due in part to increased credit market issues and oil costs--which means foreigners can get big deals on U.S. products, vacations and property.

In April, the National Association of Realtors said a U.S. home could be bought by a foreigner for an average discount of 30 percent, according to USA Today.

The foreign-buyer trend isn't exactly a new one:

• The euro been stronger than the dollar lately; but the foreign buyer wave dates back to the housing boom. According to the NAR 2007 Profile of International Home Buying Activity, non-U.S. buyers were heavily interested in the market during the 2000 to 2005 real estate boom.

• Between April 2006 and April 2007, 30 percent of non-U.S. buyers were European, a NAR survey found.

• The results were especially prevalent in vacation areas. In spring 2007, 7.3 percent of all Florida home sales were to foreign buyers, the NAR said.

Yet now, in some areas-- such as beach and ski towns, which had previously shown significant second-home buyer appeal--foreign investment isn't as enthusiastic, according to the New York Times.

They're looking--according to agents, more overseas buyers have been physically seeing beach and ski properties this year.

But because of the shaky U.S. economy and widely publicized housing slump, they're not eager to actually buy in pricey places like East Hampton and Beverly Hills.

However, even though there's no official record of how many people from outside the U.S. bought second homes here, economists feel foreign buyers are helping to give the overall market a boost.

It may not be as big as sellers had hoped for, but it's a boost nonetheless.

"The circumstantial evidence strongly argues that global investors are indeed supporting these second-home markets," chief Moody’s Economy.com economist Mark Zandi told the Times.

• According to the National Association of Realtors, one-third of the country's agents worked with one or more international buyers last year.

• Mexico, Britain, Canada, India and China's residents were the most interested, MSNBC.com reported in early June.

The trend is becoming so prevalent, according to MSNBC, that some agents are setting up satellite offices in places like South Korea and Dubai.

For foreign investors, condos--which are a fairly low-maintenance second home--in American cities seem to have a huge draw.

Perhaps that's why one Maui-based Keller Williams agent told MSNBC that 90 percent of the crowds at his recent open houses have been Canadian; or why developers of Dallas' 120-unit Museum Tower luxury condo project plan to "actively market ... in Monterrey and Mexico City."

Just look at New York City. For months, some areas escaped the national housing decline--eight-figure apartments are still selling well in Manhattan, according to the Washington Post.

And, not surprisingly, foreign investment is still strong in the city. It has helped keep Manhattan apartment prices at astronomically high levels, according to the Times.

Housing isn't the only market that is benefiting from overseas intervention in New York.

A sales clerk at the NBA store at 52nd and Fifth in Manhattan recently told the Washington Post that two-thirds to three-quarters of the store's customers were foreigners. "We'd be dead without them," another store manager confessed.

Like a pair of new, high-tech sneakers, New York real estate is, for some, a pleasure purchase.

A resident from London or France may not need a summer condo in New York--but if they've ever wanted it, now is certainly the time to buy. Home prices are down; and the exchange rate is in their favor.

The question is: Aside from setting up an office overseas--which realistically isn't in every developer or real estate agent's budget--how do we market to this thriving group of buyers? In this case, word of mouth probably just won't cut it.

What would you suggest?

The U.K. Housing Market: A Mix of Demand, Declining Prices--And a Possible Slump?

It looks like the housing trouble across the pond is growing--could it echo the U.S. housing decline in a matter of months?

Maybe. The housing market in the U.K. has been slowing for awhile--and just yesterday, the Royal Institution of Chartered Surveyors (RICS) released survey results that showed 95.1 percent more surveyors found home prices had fallen, rather than risen in April--a 79.4 percent increase from March.

And today, one of the biggest U.K. builders, Redrow, became the first to cut jobs because of the decline, according to the Telegraph. Redrow to date has axed 15 percent of its staff.

Even the government is beginning to acknowledge the problem--albeit begrudgingly. Prime Minister Gordon Brown promised this week to help first-time homebuyers in Britain by offering 100 million pounds ($190 million) for low-income buyers to purchase homes through shared-ownership plans.

He also pledged that the government would buy 200 million pounds-worth of unsold new homes and rent them to financially troubled residents Bloomberg reported Wednesday.

Yet that offered little hope to a country that heard earlier in the week (courtesy of RICS) that the housing troubles had spread to all regions--and found out the full extent of the government's concern over the market issues when housing minister Caroline Flint was photographed walking into Downing Street holding papers that read "We can't tell how bad it will get."

(A note to Flint: It just got worse. Invest in a folder.)

And many feel the housing decline will, in fact, get very, very bad. A recent Reuters poll of 30 economists, analysts and fund managers found they feel property prices will fall at least 5 percent this year--possibly twice as much.

Like the U.S., the U.K. is suffering a correction of sorts after some areas, like London, saw huge gains in recent years; but the country is also undergoing a widespread property shortage--the government plans to build 2 million new homes by 2016, although it is already behind on its 240,000-a-year goal, according to the Independent--and it's not clear how its housing decline will play out.

One thing is for sure: The current U.S. housing troubles are on the minds of most U.K. real estate industry members. How could they not be?

The question is, how can the U.K. property market learn from our mistakes--and there were some big ones--to prevent history from repeating itself overseas?

What would you advise U.K housing officials and builders to do in order to ward off a prolonged housing slump?

U.S. Housing Disaster--Unfortunately--Likes to Travel

An article in today's New York Times discussed the impact that the U.S. housing crisis has had on the world--and it's not a good one.

In countries like the U.K. and Spain, housing is starting to suffer.

• Much has been written in recent months about British housing woes, and Ireland is experiencing a correction, as well.

Almost a year ago to the day, Bloomberg reported that residential real estate in Northern Ireland--after years or unrest--was finally catching up to the rest of the kingdom, with home prices increasing at one of the fastest rates in Europe.

Not so anymore. Britain's biggest mortgage lender, Halifax, said last week that home prices had dropped by the largest amount since the early 1990s, when Britain experience a property crash, according to the Times Online.

However, the correction isn't limited to Europe.

• China and India are also seeing lower housing prices after a period of steady increases: The Chinese market was growing so fast that the government had to institute lending curbs to cool it off. (That successfully brought home price increases down to 10.9 percent in February from 11.3 percent in January.)

But--as in the U.S.--those astronomical gains were to be followed by big drops. And now, fear is rising that several countries could be in for the same housing market decline as the U.S.--if not worse.

A string of housing market collapses could cause a number of problems. For one, we've seen how devastating a true housing market implosion can be on a country's individual economic growth. It reduces personal wealth, then hurts consumer spending, which in turn slows the economy and could (and may already have) cause a recession.

But a housing market ripple effect could hurt more than just individual economies--it also could damage general global economic growth.

Part of the reason areas like the U.K. and China are experiencing a correction is because prices got just too darn high; but they've also felt the effect of the U.S. housing decline via our financial markets. Other countries had invested in items tied to or backed by our mortgages; and we do the same.

And what about our building material companies? Strong growth overseas has helped them offset the impact of the U.S. housing slump--but that's another industry looking at some serious trouble if the U.K., Spain or other economies fall into housing disarray.

More housing market issues are likely to have a huge effect on all kinds of sectors--including private companies.

Just ask Ikea. The U.K. is its fourth biggest market. Its 17 U.K. stores accounted for almost 10 percent of the largest home-furnishings retailer's euros 19.8 billion of sales in 2007; on Wednesday Chief Executive Officer Anders Dahlvig said that the U.S. housing crisis had reduced Ikea's global growth "quite a lot."

Could it do the same for other economies around the world? We certainly hope not...

The Next Subprime Target

Last weekend, finance leaders from the Group of Seven nations met in Tokyo. The overwhelming verdict: The subprime fallout is not over--and no one is sure which country it will impact next.

The U.S. seems to be the most optimistic about the global economic situation--Treasury Secretary Hank Paulson said this week he believes the U.S. will see growth next year--but, then again, we have already seen a good deal of the subprime fallout's force.

The Federal Reserve had already more than doubled its original $50 billion estimate for subprime damage; German finance minister Peer Steinbrück said this week that the amount could actually be a whopping $400 billion.

Although the G7 talks indicated everyone felt the subprime crisis was sure to trouble some economies and industries in the future, which ones will be affected? A few possibilities:

• Taiwan and Korea. Regulators and investors have been examining financial institutions in Asia recently, and both Taiwan and Korea have been fans of buying structured products in the past few years, the Financial Times reported today.


• Insurance companies. Because insurance companies have been highly involved with structured credit in the past 10 years, they're attracting close scrutiny, the Times says. Asset insurer AIG's stock fell yesterday by the biggest amount in two decades after the company announced that writedowns from credit-default swaps sold to safeguard fixed-income investors were four times larger than previously thought.

• European banks. Although some are emerging seemingly unscathed--such as Credit Suisse, which today announced subprime-related losses of just $1.8 billion because, as investment banking head Paul Calello said, the bank reduced its exposure to subprime earlier than most banks, in late 2006--concern is mounting that other banks may show big losses.

• Chinese banks. Hong Kong shares were down Monday because of subprime impact fears, spurred by the G7 meeting news. That's a tough situation for Chinese banks, which gain a considerable amount of their total income from stock investments. In addition, to prepare for a potential subprime hit, last week, China's largest bank--the Industrial & Commercial Bank of China Ltd.--announced that,  to cover any losses, it was holding reserves equivalent to 30 percent of its $1.2 billion subprime holdings.

So who's next? Mario Draghi, governor of the Bank of Italy and chair of the Financial Stability Forum, thinks we'll have a better idea soon.

“The next 10 days to two weeks will be crucial because we are going to have the first audited accounts [from financial institutions] since the crisis started,” Draghi said.

The coming weeks will surely reveal some clues--and we'll be watching. 

Will Canada Have a Housing Slump?

For the past year, Canada's housing market has been steadily rising.

Prices for condos, two-story properties and detached bungalows all rose more than 11 percent last quarter from 2006, according to a Royal LePage Real Estate Services report released this week. The Canadian real estate company, which has more than 600 locations in the country, said the fourth quarter saw large housing gains, The National Post reports.

"The fourth quarter 2007 was surprisingly strong with unseasonably high price increases and unwavering demand," Royal LePage CEO Phil Soper said.

In addition, the Toronto Real Estate Board said 2007 was its best year ever, with the average sale price increasing by 7 percent to $394,931 last month from a year ago, The Financial Post reported Tuesday.

Basically, pretty much the opposite of what's going on in the U.S. And yet, our housing slump has undoubtedly affected Canada; the U.S. and Canada have the world's largest trading relationship, according to the BBC.

Canada's housing situation eerily echoes the U.S. market of years past. Could Canada suffer the same fate?

Things were rosy for the U.S., too--until the residential industry began to collapse under the pressure of mortgage defaults, property value decreases and a national home sales slowdown.

Which has left us with an awful lot of property: Although the NAR said in December that the housing supply had dwindled slightly, we still have enough to last for more than 10 months at the current rate.

For now, Canada's residential rise continues. However, the nation would be well advised to consider the U.S. housing decline a valid learning experience--and to carefully monitor and control its own housing expansion. Some thoughts for our neighbor to the north:

• Watch regional growth. Areas like Orange County, Calif. and Las Vegas saw some of the largest home value increases during the boom and some of the biggest drops after. They're now seeing high office vacancy rates, indicating the slump is continuing to spread, according to The Wall Street Journal. Keeping an eye on areas with rapidly rising home prices and values may help identify an oncoming bust once those prices begin to waver.

• Lend carefully. It's hard to say if home prices could have continued rising if risky lending practices going on at the same time hadn't prompted so many defaults and foreclosures; the lending frenzy was undoubtedly influenced by the rush to buy housing as residents across the country began to view it as a sure-fire investment.

However, the U.S. now is encouraging lenders to more carefully do their homework. The recent Fed guidelines offered what may seem like simple logic--requiring proof of resources and ability to pay, among other things--but it isn't always.

Thanks to the current U.S. foreclosure situation, we've all learned that getting someone into a house they can't afford isn't helping them--or the economy. (What are we going to do with 10 months of homes to sell if we keep adding repossessed properties to the pile? It's certainly not going to spark residential building.)

• Hold on to equity. Homeowners are more easily able to weather market fluctuations if they haven't cashed out some of their home's equity. Consider homes an investment; not a way to fund a lifestyle.

Will Canada see a housing bust after its boom? It's hard to say.

However, consider the U.K.'s current situation. Average home prices soared by 182 percent over the past decade, according to Halifax, a U.K bank. The country now seems poised to get a severe housing correction along with its daily tea and crumpets. (Or whatever they're serving with tea these days.)

The situation is so dicey that the Bank of England recently cut interest rates for the first time in two years. Lenders gave out the fewest mortgages in three years in November. Home prices just rose in December for the first time in four months--and by only 1.3 percent, according to Bloomberg.

Home prices could fall up to 10 percent in 2009, according to Morgan Stanley economist David Miles, who advised the Treasury on the British property market.

Commercial property values are even suffering in the U.K., falling at a record rate in November.

As a result, lending options have tightened. Consumer spending has started to drop off.

Phil Soper, chief executive of Canada's Royal LePage Real Estate Services, recently said prices are expected to rise more modestly in 2008, leading to a strong, stable market. Hopefully, he's right.

But just in case he isn't, keep a close eye on your neighbors and friends, Canada: It could save your economy some serious distress.