173: USA - making money on the down market - outlook
11-24-2007
PropertyInvesting.net team
Beyond any doubt, the sub-prime market woes continue as rates are re-set higher and bad loans work 
their way out of the system. We’re likely about 40% of the way through this period of major instability in the US housing market. Before things improve, the market is likely to worsen.
However, the US market is both huge and variable. The areas most affected by the market correction are where the largest price spikes have been in the last five years. Florida, California and parts of Arizona have seen price drop, by as much as 5% to 10% in the last year. Other areas such as the NE and the eastern sea-board have been less severely affected. Most Metro area actually saw prices rise slightly in Q3 2007.
The resetting of rates is likely to be 70% finish around end Q3 2008 and things should improve after this. But the build up of unsold inventory is likely to worsen up until this point. The peak of the woes is likely to be end 2008 after which we believe the market will stabilize and could then start moving into positive territory.
![[Reset]](http://s.wsj.net/public/resources/images/P1-AJ666_RESETS_20071123193645.gif)
So what does all this mean for the canny real estate investor? It’s both a threat and a massive opportunity. For all those cash rich real estate investors, there are many opportunities to be had from foreclosures and the distressed sub-prime sector. Many real estate developers are needing to offload condos and homes they cannot sell because of cashflow problems. Non of this is very pleasant – investors can help by taking properties off the market at low prices awaiting a period when prices start rising again.
The Fed could well reduce rates further as the US economy starts heading towards a recession. The chances of a recession are probably about 35-50% - most economists expect a marked slowdown without an actual recession. Interest rates dropping should start supporting the housing market into 2008. Baring many banks going into receivership which is probably unlikely, it could be a very good buying opportunity in early 2008.
The dollar is likely to weaken further and this will put pressure on inflation, along with higher oil and gas prices – which will limit the extent to which the Fed can drop rates. But we believe the US economy will eventually come out of this difficult period because of the following key reasons:
- Highly motivated workforce
- Well educated workforce
- High levels of innovation, technology and fast adaptation
- Entrepreneurial spirit and business framework
- Few people pulling on social security - little drag on the economy
Yes, the USA is going through a rough patch because of previous excesses, but it will pull out.
Very importantly, the USA also has huge resources of:
- Water
- Land
- Farming
- Oil (half of it’s needs)
- Coal (far more than any other country in the world, much of it high grade)
- Forestry
- Sun (for solar)
- Hydro (for electric)
- Wind-land (for wind electric generation)
- Minerals
- Gas (for half it’s needs)
USA will eventually adapt to higher oil prices – like it did in the 1970s and early 1980s. By making a push in technology, clean coal-technology, fuel efficiency and alternative energy sources likely oil sand from Canada and Oil Shales from Colorado it will likely change its energy balance to start weaning itself off cheap imported oil and reduce its dependency on unstable supplies.
We see this taking a few years to work through, but are relatively confident that the USA’s economic basis will start improving as long as oil prices stay below $150/bbl. This is a key risk we will keep you posted on. And note – we expect oil prices to rise to $125/bbl by end 2008.
But to seize on this new energy order – you need to consider purchasing property in the new energy boom areas of the USA that will benefit from high oil prices. These are in Wyoming, western Colorado and NE Utah. These areas will benefit from expanding jobs in the coal, oil shale and gas sectors. We predict a shortage of homes in Casper and surrounding areas. If you can pick up some foreclosures in this area before the boom kicks off in earnest, you will reduce your risks significantly.
But one needs to avoid suburban areas exposed to high oil price – a long way from city centers and jobs. Areas exposed to the US auto industry will also suffer like Detroit. But Houston – the energy capital of the USA should prospect despite its massive use of oil per head of population. Global oil, gas plus local refining jobs will help protect it.
In the longer term Florida and California should improve as retiring baby-boomers move to the sun, sand and sea. The USA’s economy will become less dominantly globally as China and India continue to boom. But looking back in history, 300 million highly motivates and innovative people with an expanding population is not a society that will sit back and see itself into a prolong recession. Innovation will take hold, the excesses in consumption will be worked through and eventually, the dollar will start rising again. The big problem is the deficit. But as the dollar declines, the deficit would reduce and a more orderly economy can be expected by 2009.
Meanwhile, expect a bumpy ride, with many opportunities to be had for purchase of below market value real estate and high returns for the shrewd long term investor. As they say, the money is made when things look most depressing. Expect this to be around August 2008 – so the fearless investor should be taking the plunge then, or just before, and not waiting until things start looking rosy again – it will be too late by then!
Log of PropertyInvesting.net’s favored US investment areas (ranked highest first):
- Green River Wyoming
- South-west Wyoming
- Western and NW Colorado
- NE Utah
- Dallas-Fort Worth-Irving
- Houston
- Arizona – Phoenix
- North Dakota (southern)
- Florida – west coast and Miami
- Florida – coastal panhandle
- Oklahoma City
- Austin - Texas
- Southern and SW California
- North Carolina
- South Carolina
- Portland Oregon
- Seattle
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