Want to start a brawl on this pathetic blog? Just type the words, ‘Don’t bet against America.’ Go have a few Mooseheads. And wait. It never takes long.
Most Canadians believe what most people coming here are convinced of. The US is in decline, a fact ‘proven’ by millions on food stamps, more millions out of work, evisceration of the middle class, outsourcing of jobs, record public debt and the systematic enrichment of the overlord class. Like Oprah. And Al Gore. Jamie Dimon. Nancy Pelosi. And Springsteen.
There’s been no better symbol of the American descent than the death of the American dream. Yup, home ownership. So the fact there are 16 million vacant homes in the States and a quarter of all families are under water, owing more than they own, or that $6 trillion in equity was lost when real estate gave up about 35% of its value, is all the proof most of us need. US dumb. Canada different. The people to the south earned their misery. We, however, deserve our bounty.
But this is the beer talking. I wouldn’t get too smug.
Yesterday I outlined a bit of what a hard landing looks like – a scenario which seems increasingly likely given what Ottawa did last week, and the recent wobbling of key markets like Vancouver. All it will take in coming months is for interest rates to start normalizing, and anyone who bought a house in 2011 could regret it until 2020. Meanwhile, I have said for a year that smart people (who understand the process) would be wise to do this: Sell Canada and buy America.
Here’s Bruce, thinking of exactly that.
“Hi Garth I’ve found your blog to be insightful and surely an eye opener. Few weeks back you said you’ll be writing more on the prospects of US real estate. I’m seriously considering investing their particularly in Atlanta and Houston. However, what deters me, is the skeleton foreclosure inventory that is yet to hit the markets, and that it’s an election year. Can you please provide your thoughts in your next writing? I’m sure a lot of Canadians will benefit :) Please and thank you.”
As addicts will know, I have touched on this topic several times. Besides my abiding belief the US will bite all the doomers in the butt, I’ve cautioned inexperienced investors about diving into Phoenix or Miami or Seattle without knowing the pitfalls. Most Canadians won’t get financing. You have to worry about title. File two tax returns if you tenant. Pay cap gains tax when you sell. In addition you need hurricane insurance in Florida and a protective sniper in parts of Atlanta. Plus a management company to find renters without records. And the border? Any pissed-off USCBP officer can refuse you entry, for any reason. Like trying to enter America in a Kia.
Despite these and other problems, the pull of cheap real estate is infectious to many. Especially when gasbag Canadian prices are destined to deflate. So, would it not make sense to reduce your exposure to property here (likely to fall) and shift that net worth into American real estate (certain to rise)?
As a tenet of financial theory, you bet. And especially now, when evidence is building Yankee housing just bounced off the bottom.
Don’t believe me? Hmm. Explain this. Pending home sales in the States shot ahead almost 6% in May. There are bidding wars for properties under $200,000 (which is $30,000 above the current US average) in places like Phoenix, where one realtor recently fielded 40 offers on a single listing. Prices have jumped 12% in Seattle, 11% in Tampa and 8% in San Diego and Miami, according to the latest Case-Shiller home price index.
In fact, said Shiller, that price appreciation is escalating rapidly. Since April values in San Franscisco are ahead at an annual rate of 16%, and in Phoenix it’s 26%. This is happening just months after affordability levels for American real estate reached the highest levels in history – the combination of historic low mortgage rates and an unprecedented six-year collapse in prices. Meanwhile, the US population continues to grow (America accepts more immigrants every year than all other countries combined), and so does demand for shelter as people do human stuff like get married, have babies and crave granite.
The key factor is confidence. It’s coming back as jobs do. By one estimate (Vancouver economist Doug Smyth) a little more than 80% of the 8.4 million jobs lost in the GFC have now been restored or (more likely) replaced. In San Francisco, for example, 12,400 professional jobs (mostly tech-related) were added in the past year alone. As a result, housing starts which have languished in the 400,000-per-year range are forecast to balloon to 1.3 million.
So is the financial storm over? Hardly. The US has a massive debt to reconcile. It’ll take years and years of incremental growth to inch its way back to the day when being middle class means being hopeful.
Sure, there’s shadow inventory to hit the market still, which should keep prices from rebounding too spectacularly. Obama has to win again, but (like it or not) that’s already in the bag. And maybe it’s time we measured America not against Heaven, but against a country where shopping malls collapse and body parts are mailed to the prime minister.
Just sayin’. Don’t bet against America.