Time to Buy American Real Estate?

If you are Canadian, U.S. real estate is in the bargain bin even more than it is for U.S. citizens. Not only have prices for U.S. houses fallen 30% to 60% (depending on the city) from peak levels, but the Canadian dollar is strong and gaining on the U.S. dollar. Over the past six months or so, the currency-related gain in purchasing power is about 15% (with more to come, according to forecasters). In addition, Canadians can get credit more easily since their economy and banking system wasn’t as devastated by the crisis/recession.

What also might tempt Canadians to venture into the U.S. with their wallets open are signs that U.S. real estate is nearing a bottom. True, inventories of houses for sale remain high, but sales are rising and prices are firming.

One risk is that the U.S. dollar spirals downward after buying a U.S. property. That could depreciate the value of U.S real estate holdings considerably in Canadian dollars. However, according to OECD estimates, Canada’s purchasing power parity (PPP) with the U.S. is close to $0.82 (U.S.). The PPP is normally thought of as the equilibrium level toward which the Canadian dollar will tend to move over the long run. So, with today’s exchange rates above the PPP, there is, in theory at least, some protection on the downside.

Another risk is that U.S. real estate prices may keep tumbling. Indeed, there are still a lot of foreclosures that need to be sold. On the other hand, affordability for U.S. homebuyers is at historically high levels. Plus, the cheapness of U.S. real estate to foreigners should stimulate demand through foreign buying. And any further decline in prices would presumably trigger additional policy responses along lines similar to the $8,000 tax credit now in place for U.S. citizens buying homes.

There are pitfalls in local markets to be aware of. For example, Florida taxes foreign owners of property at higher rates. And hurricane insurance can be expensive. So one needs to research the local market carefully, or find someone trustworthy to help out. For more details on the nitty gritty of local buying, see Julie Cazzin’s article on Canadian Business Online. Also, Ellen Roseman recently did a piece on buying in Florida.

Comments

[Roger Knights:]

"affordability for U.S. homebuyers is at historically high levels."

Are you sure? I've seen some articles claiming there's lots more room to fall before historic levels are reached.

Anyway, affordability depends on very low interest rates, which can't last very long. A year or 18 months, maybe.

Sep 01 05:57 AM

[Dave Wrixon:]

Now I understand why they call it the Loonie.

Sep 01 07:25 AM

[Blair Kuhnen:]

If you are holding U.S. obligations, would you rather put that into real assets of something that is likely to continue to fall ($US)? At the rate our defecit grows, most U.S. hard assets will likely to be controlled elsewhere 20 years from now. Not a good trend unless you are selling real estate to Chinese millionaires.

Sep 01 09:31 AM

[HardwoodFlo...:]

Well RE can be a hedge against inflation...maybe not gold but/and, unlike gold, you can buy it and enjoy the use of it.

OK SAers attack that comment...

Sep 01 02:00 PM

[thiazole:]

The majority of SAers think this is the Great Depression so they aren't worried about inflation. I on the other hand believe that bad inflation is inevitable and that traditional residential real estate investments will provide strong returns over the next 10 years.

(and for the morons who know nothing about real estate investing who are preparing to post that real estate needs to beat inflation for investors to make money - it doesn't. Do your research before you make stupid posts - here is a very simplistic article explaining capitalisthero.com/Hed...).


On Sep 01 02:00 PM HardwoodFlooring wrote:

> Well RE can be a hedge against inflation...maybe not gold but/and,
> unlike gold, you can buy it and enjoy the use of it.
>
> OK SAers attack that comment...

Sep 01 03:22 PM

[thiazole:]

Here is a nice article on that very topic:
www.safehaven.com/arti...


On Sep 01 05:57 AM Roger Knights wrote:

> "affordability for U.S. homebuyers is at historically high levels."
>
>
> Are you sure? I've seen some articles claiming there's lots more
> room to fall before historic levels are reached.
>
> Anyway, affordability depends on very low interest rates, which can't
> last very long. A year or 18 months, maybe.

Sep 01 03:25 PM

[Tony Petroski:]

Mr. MacDonald: Thank you. At last a voice of reason.

And now for that American real estate, I have just the place(s) for you. Bring your friends, the more the merrier.

Sep 01 03:36 PM

[mlonz:]

Residential RE will bottom when the average 30 yr fixed is 8%.

Sep 01 04:30 PM