Time to buy?

Winter 2008 CSANews Issue 69  |  Posted date : Dec 23, 2008.Back to list

Downturn in U.S. housing presents tremendous opportunity for snowbirds

Catastrophe. Disaster. Fiasco. Meltdown. Train wreck. Call it what you will—when it comes to the state of the U.S. housing market, it's hard to find words that do justice to the scope of the crisis.

Simply put, the market for residential housing in the U.S. hasn't been this bad since the Great Depression. Property values have dropped. Foreclosures are rising. Securing a mortgage is getting tougher by the day, and is next to impossible for those with less-than-perfect credit ratings.

How bad is it? Well, according to the S&P/Case-Shiller home price index, as of October of 2008 (the most recent month for which data are available), every one of the 20 largest metro areas in the United States saw home price declines over the previous year; six of those declines were greater than 25%. Snowbird destinations have been among the hardest hit: Phoenix (down 30.7%), Las Vegas (down 30.6%) and Miami (down 28.1%) place first-second-third in terms of largest declines. Nationwide, housing prices have retreated to where they were in May of 2004, erasing more than four years of appreciation.

What happened?
Good question. Many analysts attribute the current housing crisis to the U.S. Federal Reserve's longstanding low interest rate policy. From 2002 to 2003 Allan Greenspan, chairman of the Fed, drove the trend-setting overnight lending rate down to 1%. Such a move was intended to encourage more borrowing and spending among businesses and consumers, and thereby kick-start the moribund U.S. economy.

The only problem was, low interest rates led to a dramatic loosening of credit standards among banks, credit card companies and other lending institutions. Mortgages, second mortgages, home-equity loans, credit cards—it didn't matter what kind of loan you were looking for, what kind of collateral you could put up or what kind of credit history you had. If you wanted money, someone was willing to lend it to you.

Not surprisingly, such laxity was a recipe for disaster. Once the U.S. economy recovered, interest rates rose and many homeowners suddenly discovered that their mortgage payments were unaffordable. Owners at the fringes of credit eligibility—the so-called "subprime" borrowers—started walking away from homes which they could not afford. This created downward pressure on home values, as banks and other lending institutions tried to unload foreclosed homes at fire-sale prices. That led to more foreclosures, which led to more downward pressure. And so on.

Once the dominoes started falling, it wasn't long before housing developers, investment banks and retailers, virtually anyone who lends or borrows money, were crushed. When the value of mortgage-backed investments plummeted, banks stopped lending money to each other, causing a crisis of confidence that took down some of the oldest investment firms on Wall Street. Lehman Brothers, Morgan Stanley, Bear Stearns, Merrill Lynch—all of them were swept away in a tidal wave of mergers, acquisitions and bankruptcies over the summer and fall.

As difficult as all of this bad news is for Americans, it has snowbirds smiling. With residential real estate in traditional snowbird destinations at multi-year lows, this could be the best time in a long time to go shopping for a home of your own south of the border.

A beachful of bargains
That's certainly the opinion of Peter Zalewski. As the president and founder of the appropriately titled Condo Vultures LLC of Miami, Zalewski has made a name for himself as a savvy opportunist, picking the bones of Miami's condo market.

Unlike many other realtors, Zalewski works primarily as a buy-side specialist in distressed properties; as the Miami property market has gone bust, his business has boomed. But after three years of dropping prices, he senses that things have turned a corner. "We're dealing with a lot of bottom buyers right now," he says. "There's a lot of movement and a lot of excitement. A lot of people are saying, 'Now is the time to jump all in—it's not worth waiting any longer'."

As Zalewski explains, the steps being taken to stem the tide of foreclosures are starting to make a difference—at least in the minds of his clients. "There's a lot of movement to try to keep people in their houses," he says. "As you keep people in their houses, you're going to cut off the inventory that's been flooding the market. And you're going to cut off the desperation [to sell]."

What kind of deals are out there? Depends on what kind of property you're looking for. At the high end of the market, things are looking up. "It's now a battle for quality," Zalewski says. "If it's a quality unit, you'll probably have to pay asking price, perhaps more." That's not as bad as it sounds: Zalewski's own research suggests that today's asking price is on average 35% lower than prices seen at the market's peak back in 2005.

For middle-of-the-road properties ("It has everything you need, all the essential amenities, but not the 'wow' factor," as Zalewski defines it), it's a whole different story. Zalewski recommends targeting a bank-owned property that's been on the market for 90 days or longer—at that point, the bank considers it radioactive. "Then you can come in and lowball and steal at dramatic discounts," he suggests. "It's not the perfect unit—but it's the perfect price. And it's rentable as well."

How perfect? Zalewski cites a recent sale at a 28-storey development in downtown Miami. Away from the water, it's a well-designed building, but by no means a luxury property. Zalewski notes that a 1,000-square-foot unit sold in 2005 for $500,000. That very same unit sold last week for $77,000—a drop of almost 85%.

All of that value has created something which buyers in South Florida haven't seen for a long time: cash flow. Zalewski estimates that this same $77,000 unit might rent out for maybe $1,200 a month. With taxes of, say, $130 a month and maintenance of about $400 a month, even those with a mortgage can potentially stay ahead of the game. "You're cash-flow positive," Zalewski says with considerable emphasis. "From day one."

Do your homework
As good as all of that sounds, Zalewski recommends that potential buyers do their homework before committing to ownership. As many snowbirds know, Florida's tax laws can be onerous. Despite several attempts at tax reform over the past several years, property tax remains the primary source of government revenue; much of that burden is pushed onto out-of-state and international property owners. The resulting taxes are as high as 2.7% of assessed value in some cases.

Another complication: Florida is a well-known target for Mother Nature, with a major hurricane making landfall somewhere along its 1,200-mile coastline about every three or four years. That tends to make home insurance more expensive than back home.

If all that weren't enough, the financial crisis has created a new problem for condo owners: the collapse of condo associations. Simply put, it's hard to take care of the building when a good portion of the units are in foreclosure proceedings. With little money coming in from residents, there's little money for maintenance, repairs, or even cutting the grass.

Such problems tend to make life more expensive for remaining residents; higher fees and special levies have become commonplace. Zalewski even knows of a few buildings in which associations have had to turn to hedge funds for short-term loans, using the building's common areas as collateral.

While he admits that the issue is certainly something which buyers want to investigate, Zalewski doesn't believe that it's a deal-breaker. After all, with prices beaten down so much, most bargain-hunters can easily absorb an increase in monthly fees and still turn a tidy profit if they're willing to stick things out for a few years.

Ready to buy?
When asked what snowbirds can do to take advantage of the current opportunities, Zalewski sees two possible ways to go. "At the end of the day, it all comes down to the Canadian dollar," he says. If you have confidence that the loonie will strengthen, you should wait until early summer, when most out-of-state buyers leave. Sure, prices could firm up a bit by then, but there'll be less competition for prime properties.

On the other hand, if you believe that the Canuck buck will continue to lose ground to the U.S. greenback, Zalewski recommends immediate action. "A buyer trying to compete in this marketplace is going to have to understand the need to move rapidly," he says. "There's been a lot of pent-up demand that's just been building. People are ready to bust through and start picking off stuff."

As for the future, Zalewski admits that he doesn't have a crystal ball, but he's confident that there are better days ahead. "South Florida really went into the gutter long before the rest of the United States," he points out. "It only stands to reason the first market to go down will be the first one to come back up. All the ingredients [for a recovery] are there," Zalewski muses. "Whether or not prices spike—that's probably going to take years. But I think there's already a levelling off in pricing." Good news for realtors like Zalewski. Even better news for the snowbirds who are their clients.