Thursday, August 4, 2011

US Real Estate is on Sale! What to buy?

Hello friends!

Before I get into discussing the US market, there appears to be a rather remarkable correlation between the Canadian and US real estate markets.  At AlmaVesta, we're focused more on the US markets at this time for many reasons.  I'll hint at some of the reasons here:  

"In Economics, the Majority is always wrong"

Food for thought here is that it was John Kenneth Galbraith who astutely noted that, "In economics, the majority is always wrong".  Total household mortgage debt increased by roughly a factor of 2.5 in both the USA and Canada from the period 1999 - 2010.  The above charts reflect this clearly, with the lower chart one showing USA figures.  Oddly, it seems that the "majority" in Canada still believe that real estate is a great investment and they just keep on buying and buying at ever-inflated prices.  Does this type of behavior seem familiar to any of my American friends?  The majority tend to behave in predictable patterns and that's why understanding technical analysis of markets is so essential to the serious investor.  Technical analysis measures quantitatively, mass psychology and we can get a glimpse into the future through this understanding.  It's not by any means 100% accurate as nothing is, but it is highly effective for decision making.

Anything that can be considered an investment is great if you're on the right side of the market, and only if you're on the right side of the market.  We want to buy low and sell higher, right?

Average Cost of Property in Major Cities

The average cost of a home in Toronto is now is $485,520, which is up 9% compared to $446,593 in May 2010.  We're just out of a recession barely, and sales prices are up 9% in just one year!!  This is not a normal occurrence, and when one sees this type of pattern, you have to be aware that a correction is likely on the horizon.  The average price of a home in Houston, TX is now $228,650 and in Chicago it's $209,600.  These figures courtesy of the Toronto Real Estate Board, MLS Houston and Zillow.

All three of these cities have populations in excess of 2 million people and are similar in terms of their economic make-up.  Toronto's population comes in at roughly 2.5 million, Houston at 2.3 million and Chicago near 3 million.

Understanding Mass Psychology

In a previous article, I wrote about applying technical analysis to analyze real estate using various methods.  The above two charts do not discuss pricing, however they do give a glimpse into what has transpired in terms of economic activity in real estate.  Clearly, the debt load that homeowners in the USA and Canada took on for the same period from 1999 - 2010 is almost identical in terms of percentages.  Real Estate is just like any other traded instrument be it a stock, bond, currency, or even a comic book.  Supply, demand and mass psychology determine value, and as we know from history as well as the famous words of Mr. Galbraith, the majority is truly always wrong.  He didn't say that the majority is sometimes wrong in economics.  He said, "always wrong".

So, now we have seen charts that show that average sales prices in real estate typically go in long cycles of up and down, but understanding now that the debt load % increase in both countries is almost identical over exactly the same period of time, should make one wary of buying in a market that has been appreciating for some time and now has experienced unusual short term appreciation as well.  In my view Toronto is not a market to be investing in right now based on the information at hand.  If you're selling in that market, now would be a great time to divest and move your money elsewhere where opportunity exists.  When the magazines, tv and newspapers are telling you how hot the market is, it's probably a good time to sell, and when the same groups are telling you how bad things are, then it's probably a good time to buy.  Of course this is superficial, but you get the idea I'm sure.

Can I buy at the Bottom?

Now, the US markets have probably not bottomed yet, but when it comes to commercial property, there are tremendous values to be had right now if you are careful and also in residential if that's your focus.  Also, one can almost never hit the bottom anyway, so why would you try to find that bottom?  The chances of finding the bottom in any market are about the same odds as winning the state powerball; forget about that.  You need to focus on finding value with the highest probability of appreciation.  

In the overall methodology of buying low and selling higher, the US markets are effectively on sale right now, and the saavy investors will be the ones to reap excellent rewards for their calculated risks.  You don't just blindly buy anything, but if you take an educated approach, looking at market statistics, the area you plan on buying, comparing recent sales figures in the area you plan on buying in, and then moving forward with the properties that make financial sense short and long term, you will be a winner in the long term.

I know that there will be many people that disagree with me.  I accept that completely.  It's OK to believe in what you believe, but it should be based on facts and not feelings.

What the heck?  What Does Currency Have to do With Real Estate Anyway?

A friend of mine asked me last week about buying a relatively substantial amount of Canadian dollars with US dollars.  I told her to hold off for at least a few days because the debt ceiling agreement in the US hadn't been reached yet.  The US dollar was at an 18 month low against the Canadian at the time.  My thought was that there had to be an agreement before the deadline because the US government could not afford the risk of a default.  The media played up the negative aspects of what a US default could do because the media loves negative.  That's what sells their advertising and attracts viewers and listeners (the majority that is). Once the debt ceiling agreement was announced, the US dollar shot up against the Canadian.  Two factors played here, and the reason I mention it is that mass psychology works, and it appears in the form of price charts for the ones that want to understand and learn from them.  Two decision making factors came into play at the same time:

Factor 1) 18 month low for US/CAD currency pair
Factor 2) Major news announcement which was a 99% probability of non-default.

These two factors swayed a major currency purchase and allowed a very short term 4% + gain over just a couple of days.  My friend now is 4% + in her investment as opposed to just last week.  She took my advice and gained from it.  I'm not a guru, but I am calculated and I analyze investments before making the decision to proceed.  If I see danger, I walk away.  You should too.

If you are interested in higher yield, 14%+ returns secured by multi-family real estate, please see our website:  

Until next time, have a great day!

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