Summing up the state of the American property market in a few words is almost as impossible as summing up the country. It’s confounding, bizarre, admirable, risky, safe and nearly ideal. Since the 2008 global financial crisis and massive price corrections the real estate sector has rebounded, slower in some areas. Whether or not spots like Las Vegas — where prices dropped as much as 70 percent — ever get back to pre-2008 peaks is a matter of time. For now it’s slow and steady, which should win the race.
Regardless of what 2025 may look like, right now the United States is the world’s biggest economy and it wields the most influence. Despite some lingering obstacles like a sluggish construction sector (which should pick up by the end of the year), a few oversupplied markets and a trade deficit that’s still too high, most agree the US is on the road to recovery. “For the most part the fundamentals today are fantastic. The financial allocations ratio has never been lower than it is now. Borrowing is starting to increase. Housing markets are still weak but we’re expecting a surge because ownership rates have hit bottom,” explains Christopher Thornberg, founding partner of Los Angeles-based Beacon Economics and a Blackfish consultant. “Credit is easier to get. Yes, six million people are not working but the vast majority are low skill and you do have to worry about them from a social standpoint. The fundamentals are fine.”
Even if they do need tinkering. The GFC of 2008 was somewhat independent of the housing disaster that followed. “I wouldn’t want to over-emphasise things. 2008 was not a real estate cycle. That was part of it but the problems were far more widespread than just real estate,” cautions Thornberg. Beneath it all was the issue of consumers picking up US$9 trillion of new debt between 1997 and 2007 and leveraging it, leading to credit problems and collapsing banks. Wall Street is another issue. Thornberg: “The problem isn’t the quantity of debt, it’s the quality.”
Economies and property markets go hand in hand and though the US seemed on the brink of disaster a few times recently (remember the great government shut down of 2013?) Thornberg doesn’t see any true danger. “For all the screaming and hollering, there’s no fear of default. The debt burden on the US economy today is 2 percent of GDP. It was 4 percent during the Reagan administration. And on supply and demand for capital, well, we’re awash with [cash]. China is growing by leaps and bounds and it’s pouring money out into the world.” The economy is generally heading in the right direction, and most property markets hit rock bottom in 2012 according to Hong Kong-based Sam Van Horebeek, director of East-West Property Advisors. “In the last 20 years … there has been a higher correlation between increase of [property] prices and jobs and economy overall than between prices and interest rates. This basically supports the idea that a strong economy and job creation are more important factors affecting real estate than rising rates.”
Yes, the Fed
The hand wringing over the American economy is drowned out only by the hand wringing over what the Fed might or might not do to interest rates in the coming months and years. To most people’s ears, a couple of basis points means your house here becomes unaffordable and markets everywhere will come crashing down again. Thornberg, for one, boggles at that line of thinking. “The Fed is far more powerful in the imagination than they are in reality. They obviously have certain levers and controls over some things but they do not control long-term interest rates. They control one interest rate. The Federal Funds Rate, which is a short-term inter-bank lending rate. That’s it,” he stresses. Yes, a rate hike is imminent. It’s been low since 2008 and will go up in order to prevent the potential for inflation, but the influence will be minimal. Van Horebeek agrees. “Well [rates] can’t decrease any more so the answer is yes. It’s a matter of time. The economy is going well right now but they need to start stripping down the supply of cheap money,” he says, adding quickly, “It doesn’t matter too much to investors overseas. They borrow in Hong Kong at low rates.”
The fuss over interest rates might be confused with quantitative easing, the concept of which is to encourage spending by lending at low interest rates. Hike the rates and the spending stops. “The theory is that with quantitative easing it would draw a lot of capital from the world economy when they turn it off. It’s amazing the stories you hear …The money the Fed has produced is not in the financial markets.” Eighty-six percent is sitting in banks in the form of excess reserves. “This money doesn’t exist. The 14 percent did just enough to prevent inflation. These ideas turn the Fed into this monolithic beast,” scoffs Thornberg. If the global economy grows the way analysts predict it will rates will stay low, even with a hike. “I see no dramatic changes,” says Thornberg.
While the US and China may be mortal economic enemies on paper, in practice the healthier they both are the healthier they’ll both be. And their rival status hasn’t stopped Mainland investors from investing heavily, both institutionally and privately. Hongkongers have been purchasing property in the US for decades but China is new to the game — and Chinese investors have very different needs. As Van Horebeek sees it, Hong Kong investors are looking towards the numbers and are willing to consider more remote suburbs or second-tier cities — Houston, the suburbs of Chicago, Philadelphia and Orlando for example. Mainland investors prefer low-risk gateway cities they’re familiar with. In actuality the US is many small markets, some boasting rental yields as high as 10 percent, some boasting the same in appreciation.
“Since 2012, on a national level, real estate prices have been increasing at 4 to 6 percent per year. This is a healthy real estate market because, based on almost 100 years of US real estate data, prices typically go up 4 to 6 percent per year,” Van Horebeek notes, admitting mitigating factors for faster increases: the economic diversity of New York, San Francisco’s tech industry and so on. Syracuse provides some good perspective. It’s grown at roughly 3 percent annually, and wasn’t particularly affected by the GFC. American real estate works on a city-to-city basis. “Generally speaking, if you are investing in US real estate now, you are buying property at the beginning of a long upward trend. The majority of economists in the US agree that real estate prices will continue to appreciate at a healthy rate. Even if you buy a property located in the ‘middle of nowhere’ you can assume at least a 3 percent increase if not the national average,” he finishes. Still, Florida property remains 50 percent under peak levels, and delivers strong yields with more people moving there every year: retirees still favour the location. Houston is drawing interest as an energy industry hub as well as for its education and biomedical industries. Mainland China, like many countries and multinationals, is doing a lot of business with Houston as a city due to its strong resources industry and foreign nationals that need homes are underpinning the residential market.
Ultimately the US is an economic giant with lots of physical space and an equally diverse population in a pro-entrepreneurial environment. And it will remain high on investors’ preferred destinations list. “It’s still a quarter of the world economy. From a financial standpoint it’s still a big market and when things ramp up there it’s a nice boost for the world economy,” finishes Thornberg. “For investors … it’s easy to think of all the stellar growth rates and wealth creation in emerging markets. But they still lack fundamentally stable institutions. As mucked up as the US can be, you still get your day in court. There are systems in place to preserves property rights and they work pretty well … If I had my nut and want to protect it, I’d be looking at the US too.”