The upside of the weak dollar
by Craig Studnicky
Foreign investors are taking advantage of falling real estate prices in the US and will continue to, so long as the dearth of liquidity there persists.
My Irish mother used to say: “There is no ill wind that doesn’t blow something good to someone.”
This is clearly the case with the shrinking US dollar. A declining dollar is, however, a mixed blessing. On the one hand it reduces the power of US investors and tourists overseas; on the other, it’s a boon to US exporters because it makes our products cheaper overseas. It also makes our real estate cheaper for buyers from abroad.
That’s good news in today’s real estate environment, since foreign buyers could help soak up the housing surplus that is forcing prices down. Across the pond For realtors in major US cities – especially those with strong international links such as Washington DC, Miami, Las Vegas and New York – foreign nationals have typically helped bolster the buying population.
But these foreign buyers have been disappearing for a number of reasons, the main one persisting troubles in mortgage-financing for foreigners. The sub-prime mortgage fiasco has led to financial services firms tightening their lending criteria in response to growing concerns about borrowers defaulting on their mortgage repayments and subsequently facing repossession.
Foreign buyers are regarded by lenders as investors rather than homeowners and it is investors who are most likely to wind up in this predicament. Consequently, lenders want investors to stump up additional equity – as much as 40% – to buy a property.
Many US cities are woefully overbuilt, with inventories that will take 12 to 18 months – or even longer – to reduce. Take Miami, the poster child of overbuilding, with a two- to three-year inventory. The problem is not so much the overbuilding, or the interest rates, which have returned to lower levels. It is the national credit crunch, which has resulted in a severe lack of liquidity. For homebuyers, this means limited funds for new mortgages. This lack of liquidity is now a top priority in Washington, and there are several initiatives under way to mitigate the situation.
In the meantime, we are in a real estate recession and probably have been since 2005. Consequently, prices are dropping and when you factor in the value of the euro – at the time of writing it was $1.57 (80p), up from less than $1.20 just two years ago – you have a huge rise in buying power for Europeans, who, predictably, are looking hard at US real estate. After all, the rate of euros to dollars basically means they can buy at a 50% discount. The Europeans also perceive US real estate to have hit almost rock bottom, in terms of pricing.
Of course, Europe has its own recession problems on the horizon – as its luxury-brand goods are becoming more expensive for the rest of the world, its exports are falling. Europeans interested in US real estate are, of course, now wondering whether the dollar has already reached its lowest point and is set to rise. Some predict the euro will be back to $1.20 or $1.25 (60p) in a year. Combine that with the sense that US real estate is a bargain now and you understand why Europeans feel compelled to make a move and invest. I’ve seen buyer interest from the UK, Spain and Russia, with interest from Italy expected soon.
Buyers want standing inventory, not preconstruction that will take three years to come on line. So in terms of the buying opportunities, the value is clear. One large condominium project was recently sold at $375 (£190) per sq ft. So, a 1,300 sq ft unit cost almost $500,000 (£253,000). You can now buy the same unit from the developer for $275 (£139) per sq ft, or for $357,500 (£181,000). Add in the euro discount and it totals closer to $200 (£101) per sq ft or the equivalent of paying about $260,000 (£131,000). Competitive price Most developers with excess inventory are doing the same – marching forward at $300 (£151) per sq ft or less.
Not only is it a highly competitive price for buyers but it allows developers to avoid the cost of letting the supply sit there, paying maintenance fees, taxes and construction interest. And it’s not just the euro which stands to benefit from the weak dollar – all currencies are strong against the dollar right now, from the Japanese yen to the Brazilian Real. That’s why there are pockets of foreign investors buying packages of units with the intention of letting them until market activity returns. The biggest problem is finding the funding to match investor appetite. So, the quicker liquidity returns to the market, the quicker there will be an end to the US real estate recession.