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10: US Property Investment - Advice and Insights


08-18-2004

Real Estate Investment in the USA – some helpful advice and insights

I would like to share with you some advice and insights based on the analysis of socio-economic trends in the USA - I believe these will drive market price fluctuations and rental demand for the next decade. There are very many variables, but essentially the key concept to refer to is the 'supply and demand' balance.

 

 

Trends that lead to increasing demand and trends leading to reducing supply, and the combination of these together – will drive market prices up. The converse is also true.

 

Markets can be incredibly localized – even within a street, or small part of a town. The same is true for rentals – the less rental properties coming onto the market and the more renters looking for property in the area will drive prices up, and vice versa.

 

I will also provide a number of specific examples of areas in the US, as well as help you identify the better real estate investment areas in the USA. That said, rather than specific investment areas being important, it’s more the concept of why an area is good versus not which is key.

 

The concepts provided below can be applied to any area in the world because they are essentially based on supply and demand. Where demand outstrips supply, prices go up, and where demand does not outstrip supply, prices go down. Simple. So the key is to see which factors and trends will lead to demand going up and supply coming down for a specific market segment in a particular area. These trends include social, demographic, economic and structural changes in the lifestyle and aspirations of people that represent the largest US Real Estate markets.

 

Positive Change

Now, the key variable that would lead to strongly underpinned capital value increases – and indeed sometimes stellar increases is “positive change”. What is a positive charge? An improvement in an area that increases demand for property. Examples include:

These forces tend to drive prices up – if you get all four together, you will experience stellar rises such as has been seen in the Bronx area of New Year since the 1980s.

 

Individualism and Independence

 

The size of the average household has reduced over the last 30 years because families have become smaller, an increased divorce rate, more women living independently and more elderly and independent “empty nesters” living on their own. Furthermore, widowers are often living on their own for longer, often many years after their spouse departs. There is also a general trend towards independence and individualism. Often people stay single until later in life, then get married but may maintain two homes for financial security, in part to mitigate the risks in case of separation, divorce or other factors such as change of job for dual careers couples. Women are buying more property on their own, particularly those with professional jobs. Another trend is the increasing number of what has been described as “Mouseholer” – retirees that downsize from a large family home to three homes – one by the sea, one small country home and one pied-de-terre apartment or condo downtown.

 

The “materialism” of the late 20th century has contributed to real estate often being viewed as a material possession – in a similar way to cars. People’s individualism (rather than collectivism borne out of old institutions) has led to a greater aspiration for individuals and couples owning their own property – there is likely an element of “security, status, power and/or prestige” in this psyche. These factors have led to increasing demand for real estate, exacerbated by the big increase in population and greater environmental restrictions on development. There could also be a general trend away from cars and gadgets to real estate as aspired possessions, as more wealth resides in the middle to old aged population as the baby-boomer generation gets older. 

 

Here are some key trends that I believe will affect US real estate investment prices now and in the future:

Demographic Trends and how they affect Real Estate Investment Potential

Demographics: ' the quantity and characteristics of the people who live in a particular area, especially in relation to their age, how much money they have and what they spend it on'

Baby boomer: 'somebody born during a baby boom period after World War II - between 1946 and 1965 in the USA'

 

US Demographics

 

The US population has increased from 152 million in 1950 to 287 million by 2002. The population is project by the US Census survey of March 2004 to increase to 309 million by 2010, 350 million by 2025 and 420 million by 2050. This is a huge sustained increase in population caused by people living longer, sustained birth rates / fertility and net immigration.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

People are living longer than previously mainly due to improved health care, working conditions and less pollution – albeit counter to this trend is that fact that many people get less exercise and are more overweight than 50 years ago. If the trend of people gaining weight over the past 30 years is reversed, one could expect to see average ages and hence population grow even higher.

 

Another important trend is immigration – immigrant families tend to have more children when they settle and hence support population growth – something which also supports higher sustainable economic GDP growth whilst preventing wage inflationary pressures building – of course higher inflation leads to higher interest rates and often a drop in real estate prices. The general US demographic situation is well known, is fairly deterministic and should help support house prices and demand for real estate in the longer term. On a smaller scale, expect the following demographic trends at US regional level:

There will be a shift of low earning rural people to the cities/suburbs and wealthy city folk to the select coastal areas and areas with the most scenic beauty. There will be a considerable increase in demand for homes (whether permanent or second homes) with sea/coastal views as the baby boomers start to retire in earnest in 2008 (the oldest baby boomer is now 58 years old) - continuing for a further 20 years.

 

The good news for the US economic outlook in the next 30 years is that the expanding population base should be able to support the increasing number of retirees, and taxes should not have to rise significantly to pay for the retired as long as the economy stay robust, competitiveness is maintained and unemployment does not rise significantly. The youthful demographic outlook compared to European and Japanese economies might be expected to stimulate change, innovation and economic prosperity – all of which should support real estate prices and prevent a real estate crash or long period of real estate price doldrums.

 

The two risks of concern are the current account deficit – which is running at about $ 50 billion a month, and increasing energy prices. The former is likely to put pressure on the value of the dollar although for US resident citizens, this should mean exports get dearer and domestic goods relatively cheaper. The pensions deficits is likely to add pressure on the dollar in the next ten years. Oil prices in August 2004 are $46 per barrel – expect this to rise steadily as demand increases above supply – since the international oil infra-structure and global tensions and supply disruptions support prices. This will make traveling by car and airplane more expensive in the USA – as well as heating and air conditioning. In real terms though, oil prices would have to rise above $80 / barrel before they got back to their early 1980s levels.   

 

Predictions for Real Estate demand up to 2050

Based on projections of an aging population and increasing population from 290 to 420 million by 2050, I have prepared a few types of real estate that will be in demand, and those that will not be in demand as this demographic shift takes place from now until 2050:

Real Estate In Demand

Real Estate In Less Demand

PropertyInvesting.Net in general expects a migration of home-owners from northern colder climates to more southern areas (to take advantage of sun and warmth) and coastal area (to take advantage of sea, beaches, boating and scenery). There will also be a migration from suburbs back to secure downtown apartments and coastal retirement apartments as families reduce in size and empty nesters purchase apartments rather than large houses. A further decline in agricultural jobs will likely cause a further shift from cooler and flat (non scenic) country areas such as the Dakotas to the cities. Migration of Hispanic speakers to Florida and southern California and possibly SE Texas and Arizona/Utah will also likely add to real estate demand in these areas   

 

“Baby Boomers” Demographics and Desires

 

A key consideration in future real estate investments is “how will the baby boomers affect market prices and demand”, and “which segments will this be in?” The baby boomers are those born between mid 1946 (end the World War II) and 1964. This was an unprecedented baby boom period in the USA – as well as in Europe. Immediately after the war, a surge in babies resulted from servicemen arriving home late 1945 and this continued at rather high levels through the 1960s. It led to the real estate building boom of the late 1950s and 1960s when 4 bedroom homes were built in subdivision to house rapidly expanding families – in the 1970s there was a further exodus from downtown areas to more secure subdivision in many large US cities because of the increase in drugs related crimes and theft.

 

The baby boomers are just starting to retire now – the first wave are now 58 years old in 2004 – most retire between 62 and 67 years old. Most of the personal wealth in the US now resides with the over 45s. In the next twenty years there will be a huge opportunity to service these baby boomers – they are the ones who have benefited most from the booming economic years (1980 to 2000) and have already driven house prices to record highs. They are currently in their peak money generating years (40s and early 50s). So what’s next? My prediction is that these baby boomers will want the following:

Sun, sea, sand, surf, south, sailing

These new baby boomers will “not” want to sit out their retirement – most will be active, sporty, fit, desire the café culture, want to travel extensively within the US and possibly on foreign travel - and will be independent. They will “not” desire boring warden assisted retirement complexes in the middle of nowhere – what they “will” desire is fun, the sea, culture, a community spirit - with most requiring close proximity to their family and friends. They will avoid high crime areas, demand high security, want to be close to airports and avoid traffic jams and pollution. They may also desire to return to where they or their family grew-up – where they had fond memories, or move to where they enjoyed family holidays. In summary, they are likely to either:

I believe the ideal investment to service their needs is a medium-high end two double bedroom apartment with balcony overlooking the sea or marina, or golf course. There will be more and more baby boomers chasing less and less real estate in popular areas where environmental regulations restrict supply. The suburban large detached houses – so called commuter real estate – will probably become relatively less fashionable, though the increasing population will likely also support prices of this type of real estate.

 

I believe the biggest increase could be in coastal areas, particularly in select areas where real estate prices have not risen too much already and where environmental regulation restricts supply. Cities with gambling and casinos are also likely to prosper, such as Las Vegas and Atlantic City. Some of the more historic seaside towns that are being regenerated could do particularly well such as Atlantic City, Miami and Charlestown. Established resorts would also do well such as Fort Lauderdale, Cape Cod, coastal towns in the Carolinas, San Diego, Santa Monica, Destin, Tampa Bay.     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What about investing in US Real Estate for someone with Euros or UK Sterling?

Be careful investing in the US Dollar if you may one day convert wholesale to Euro or UK Sterling – primarily European and UK investors in the US market.  UK Sterling and the Euro have risen strongly against the US Dollar in the last few years in part because the US has had interest rates at 1% (as opposed to 4% for the UK and 2-3% for the Euro) and the US economy has had a mushrooming budget deficit. One would normally expect to see some correction over the next five years as the US economy motors ahead and the interest rates become more aligned with those of the UK and Euroland – but this is not guaranteed. In fact, the Dollar could decline further as capital inflow reduces due to worries over the high budget deficit. An option would be to get a mortgage or borrowing money in Euros, UK Sterling or a combination of Dollar/Euro/Sterling to hedge against the currency risk – though this might be expensive and complex. Most UK investors in US Real Estate are currently borrowing in US Dollars since they believe the US Dollar value is likely to rise again. Just to highlight that real estate prices might go up 20% in three years, but if the currency declines 20%, you make no capital value appreciation if you were a UK based investor who financed a mortgage in US Dollars. If the US Dollar appreciated 20% in this period, of course in this scenario you would make 40%.

 

If you are a UK or European resident planning to retire to the USA, then purchase of US real estate in US Dollars might be attractive as a hedge – it would matter less if the US Dollar dropped further since you would be using US Dollars to live on eventually.  

 

US Interest rates

US interest rates are bound to go up – probably starting from the current 1% mid 2004 in fairly gradual movements so say 3% by mid 2005. This will be required to suppress inflationary forces. Since unemployment reduced by 1 million in the first half of 2004 and annualized GDP is running at about 5-6%, the Federal Reserve Chairman Alan Greenspan has signaled a tightening of fiscal policy from record low interest rates in the medium term – rates went up to 1.25% in July. However, interest rates are likely to remain historically low in the foreseeable future because of:

 

·         Productivity improvements in the US economy – much technology driven

·         Healthy competition for goods and service  

·         Increasing globalization of manufacturing, goods and service keeping prices low

·         Wage earnings growth restrained by the threat of loss of employment

·         Despite oil prices in the US$ 40-47 range, oil as a proportion of GDP is low compared with the 1970s and 1980s – it is thought an extra US$ 10/bbl might have a –0.5% impact on US GDP growth – not significant when the GDP growth rate is projected to be 5%

 

Unless oil prices sky-rocket to say $US 80-100 / bbl or the global economy overheats, most experts do not believe US interest rates will rise to more than 4 or 5% in this economic cycle – many believe they will peak at say 4%.

 

The low interest rates and competitive variable and fixed rate mortgage deals are likely to support house prices in the future as long as employment and GDP growth stay healthy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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