us housing market q4 2012

7/28/2019 US Housing Market Q4 2012

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MARKET ANALYSIS REPORT

A detailed statistical analysis of the US property market for Investorsand Financial Advisors by DGC Asset Management Limited.

US HOUSING MARKETANALYSIS Q4 2012

Author: David Garner | Date: January, 2013 | Sector: Property | Market: United States

Copyright DGC Asset Management Limited 2013. No part of this report may be duplicated without permission.


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FOREWORD 4

EXECUTIVE SUMMARY 5

BACKGROUND 6

CURRENT MARKET ANALYSIS 7-15

Housing starts

Building permits

New home inventoryCompetitive market activity

New home sales

Existing home sales

Property values

Market confidence

Affordability

SUMMARY 16

CONTENTS3


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FOREWORD

David Garner, Partner InvestmentsDGC Asset Management Limited

A report from DGC AssetManagement designed to offer afactual insight into the currenthealth of the US housing market.

This report has been prepared bythe Senior Management Team atDGC Asset Management, and isdesigned to provide Investors and

Financial Advisors with a reliablesource of factual referencesindicating the current state of theUS housing market, and anoverview of current investmentopportunities.

The report has been constructedutilising various credible datasources, and references a range ofresearch sources which are allquoted in the content of thedocument.

UK Investors should seek theadvice of an authorisedIndependent Financial Advisor withexperience of the asset classbefore committing to any financialinvestment. DGC work directly withboth Investors and their Advisors,providing detailed information onthe portfolio risks associated withvarious real-asset alternativeinvestments, having participated ina range of transactions in the

property and real-asset space.

Under currently prevailing marketconditions, many Investors andFinancial Advisors are activelyreducing their exposure tofinancial markets, and seekingalternative assets in an effort toboost returns and reduce beta(volatility risk).

The current environment forInvestors is defined largely by:

n Economic uncertainty (poorvisibility)

n Price volatility in mainstreamassets

n Concerns over inflation

n Poor returns on cash deposits

Consequently, Investors areseeking alternative assets thatdisplay the followingcharacteristics:

n Tangible assets that retaincapital value

n Simple, secure investmentsinvolving direct ownership ofunderlying tangible assets

n Productive assets that generatetax-efficient income

n Assets that share a Low, zero ornegative correlation withfinancial market performance

n Capital growth supported bysolid fundamental trends

Real estate assets i.e. physical,

tangible assets that retain capitalvalue and generate income,display a number of thesecharacteristics, and whilst notwithout its own inherent risks, manyInvestors are now allocatinggreater proportions of theirportfolios to the sector (mostly realestate and natural resources) in an

effort to capture financial gainsthat are not derived from theperformance of financial markets.

A lack of credible, unbiased assetclass analysis, and an inability forfinancial regulators to define real-property as a regulatedinvestment, has made investing inproperty-based alternatives risky,as a poor flow of realisticperformance data and risk analysishas led many Investors to part with

capital in exchange for over-pricedassets, poor management and insome cases, outright fraud.

We aim to position our consultancyservice at DGC as a central,credible point of reference forInvestors and Financial Advisorsseeking reliable information on theportfolio characteristics and realrisks/opportunities associated witha broad range of real-asset

alternative investments.


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5

EXECUTIVE SUMMARY5

With so many Agents offeringproperty investmentopportunities based on theacquisition of bank-foreclosedproperties in the UnitedStates, there remains a direneed for useful, credible

information allowing Investorsand Financial Advisors toproperly assess the risks andopportunities associated withacquiring and utilising physicalreal estate in the US housingmarket as a portfoliooptimisation anddiversification tool.

The main aim of this ResearchReport which is updated andpublished on a quarterly basis;

is to investigate and analyse themarkers and indicators coveringthe key factors supporting theUS property market, from houseprices, affordability, builderconfidence and newconstruction.

In order to properly analyse thecurrent state of the market, wehave used a variety of credibledata sources, all of which arereferenced throughout thisdocument. Furthermore; weconducted informal telephone

interviews with a range ofentities and individuals currentlyoperating in the marketincluding US-based AccreditedInvestors, US-based licencedReal Estate Agents, MortgageBankers, Investment Analystsand active Real Estate Investors.

When assessing the current stateof the market we found that themajority of indicators, including;Housing Starts; Building Permits;New Home Inventories; NewHome Sales; Existing HomeSales; Property Values andAffordability Indices amongstothers, displayed broadlypositive trends, indicating that,in many markets, the beginningsof a slow and sustained recovery

might indeed be underway.When speaking to Investors andAgents operating in the market,we found that the primaryinvestment strategy has changedsomewhat; with US Investors(both Institutional andAccredited Investors) aiming toacquire and hold significantvolumes of single family homesfor the rental market, aiming todispose of the assets at market

value sometime in the next 4 to7 years. This differs fromprevious surveys conducted lastyear where US Investors werebuying foreclosures to sell intothe open market.

We also found that US Investorsfound the majority of dealsoffered to UK Investors viaAgents of poor value; with themajority of inherent equityalready extracted and distributedacross a range of Agents,Wholesalers and middle men.

Considering our research, andbuilding on our existingrelationship s with professionalsoperating at the grass roots ofthe market, DGC AssetManagement has structured anddelivered investment strategiesoffering meaningful riskmitigation, allowing retailInvestors to participate in theinherent profit at the verybeginning of the investmentcycle, alongside Local Investorsand Selling Agents.

DGCs own investmentstrategy; the Secure IncomeStrategy (SiS), in partnershipwith Portland Funding LLC

and the True Wholesalegroup of companies mirrorsthat of US Investors;acquiring high-yield singlefamily homes for the rentalmarket; with disposalplanned within 4 to 5 years.

At January 2013, the SiSportfolio comprised 232properties owned and undermanagement worthapproximately $13 million.

$129,736.14 in gross rentswas collected in January,and of that, $51,164.03 waspaid out to investorsparticipating in the project.Investors currently hold anequity gain above theiroriginal investment ofaround $2,275,000.00

For more information on thisproject; contact DGC AssetManagement Limited: info@

dgcassetmanagement.com.


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2. BACKGROUND

After recovering from theGreat Depression, America hada prosperous 40 years ofeconomic growth. The internetbubble of the late 90s andsubsequent progression madein technology led to anexplosion of financial productsknown as derivatives.

Many finance experts andadvisers insisted that thesemade the market more stable,when in reality they did not.Warren Buffet referred to thesenew financial products asweapons of mass destruction.Along with this, many banksconsolidated to create fewer butlarger firms. Some would saythat the larger the bank, the lesschance the government would

let it go down in a time of crisis(too big to fail), and as such thisgave these institutions adisproportionate amount ofpower.

As a result of this increasedpower, banks were able to forcede-regulation even further. Overthe last decade securitisation ofCDOs (Collateralized DebtObligation) took place. CDOs

were amongst the most deadlyof derivatives and within thesefinancial instruments weremortgages. A high percentageof these mortgages were sub-prime however, they were stillgiven AAA ratings.

With no regulatory constraints,banks, lenders and brokersbegan making riskier mortgageloans. Between 2000 and 2003mortgage loans in the U.S.

nearly quadrupled. Although thesub-prime CDOs were higher inrisk the interest rates werehigher and investment bankspreferred these as a result. Thisled to predatory lending on amassive scale. Brokers wereincentivised to push the higherrisk higher returning mortgages,

placing borrowers in mortgageswithout the means to repaythem. Because these CDOs wereso attractive the Banks startedborrowing more to lend more,some borrowing up to 33 timesthe collateral they actually held.

The Aftermath Incentive structureswhich included paying bank bossesmillion dollar bonuses weregenerated to create short-termprofits but which imposed no

penalties for later losses. Thisencouragement for brokers topush these mortgages eventuallyled to massive consequences forthe U.S. financial system. From2001 to 2007, billions of dollarsflowed through the securitisationchain. Since anyone could obtain amortgage, this pushed the valuesof houses through the roof.

The sub-prime mortgage industry

had increased from 30 billiondollars to 600 billion dollars andhouse prices doubled. This was thebiggest bubble in financial history,only it did not seem to be a bubbleabout to burst, after all the notionwas you cant lose money frominvesting in bricks and mortar, canyou? Many homeowners hadborrowed up to 99.3% of the valueof their homes. This meant thatshould anything go wrong, thehomeowner had very little of their

own money in the deal, they simplywalked away. 1/3 of mortgagesdefaulted, and foreclosures in the

U.S. reached 6 million by 2010.

As a result banks are now holdingback from listing as much as 70% oftheir repossessed homes, in a likelybid to delay absorbing furtherlosses on their balance sheets.Either banks are overwhelmed andcannot get the houses listedquickly, or they are deliberatelyslowing down so they do not haveto take markdowns to actual homevalues on their books.


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3.1 HOUSING STARTS

The term Housing Starts refers tothe number of privately owned newhouses on which construction hasbeen started in a given period. Asany market requires new entrants inorder to support the market;housing starts are seen as the base

foundation of a property market, andconsistent growth in housing starts isa relatively reliable indicator ofgrowth in the market as Constructorsare prepared to invest in newprojects if they are confident ofachieving sales.

In February 2012, US housing startswere up almost 15 per cent year onyear, almost 19 per cent from 2010levels, and 26 per cent from the lowsof 2009. Whilst encouraging and

definitely the start of an upwardtrend, the actual numbers show along recovery ahead (good news) asFebruary starts hit 698,000, still muchmore room to grow in order to reach2005 highs of over 2 million.

On May 16, the CommerceDepartment reported new housingstarts rose 2.6 per cent to an annualrate of 717,000 units in April. AndMarchs figures were revised upwardfrom an annual rate of 654,000 to699,000.

In August, housing starts rose againby 2.3 per cent to an annual rate of750,000, around middle-range of aBloomberg survey of 85 Economistswhich had predicted an annual rateof between 740,000 and 800,000.

Construction on new U.S. homesjumped up 12.1% in December2012 to a seasonally adjustedannual rate of 954,000 - the highestlevel since June 2008 - with gains

across the country, as well as insingle-family homes and buildings

US Housing Starts February 2009 to December 2012

2009 2010 2011 2012

1200000

1000000

800000

600000

400000

200000

0

3. CURRENT MARKET ANALYSIS


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US Building Permits Issued 2004 to 2012 (in thousands)

2004 2005 2006 2007

2,500.0

2,000.0

1,500.0

1,000.0

500.0

02008 2009 2010 2011 2012

Source: United States Census Bureau Building Permit Survey

3.2 BUILDING PERMITS

Because receiving a BuildingPermit is the first step in theconstruction process, the figure isused as the earliest indicator fordevelopments in the housingmarket alongside housing starts.Additionally, because of the high

outlays required for constructionprojects; an increase in BuildingPermits implies an increase ininvestment and corporateoptimism. Finally, the figure offerssome limited insight into consumeractivity since new home purchasesare associated with an increase insales of "big ticket" durablegoods. Given such connections toconsumer and corporatesentiment, real estate generallyleads economic developments -

thriving at the start of a boom andwaning at the onset of recession.

In 2009, there were 583,000permits issued, in 2010 there were604,600, and by 2011 the numberof permits issued had risen againto 624,100. This demonstrates asimple annualised rate of growthof 3.52% since 2009, and the latestfigures published in December2012 a seasonally adjusted annual

rate of 903,000, a growth of 28.8per cent year on year.

The chart (right) clearly shows theimpact of the run up to thesubprime mortgage crisis on thenumber of building permits issued.At that time, Constructors wereless confident in selling newhomes and so were not seekingpermits for new projects; alsofinance for development hadvirtually dried up. From 2009, we

see a point of capitulationfollowed by steady growth in thenumber of permits issued, againindicating that House Builders aregaining confidence in the market.


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3.3 NEW HOME INVENTORY

New home inventory is the numberof new homes available for sale atany point in time. Because thehousing market is seasonal bynature, most Analysts reportseasonally adjusted information.Seasonally adjusted inventory

figures allow Investors, HouseBuilders and other interestedparties such as Financiers tocompare inventory levels for allmonths of the year.

New home inventory figures areclosely watched by homebuildersand lenders. Slow sales and/orincreases in construction can cause

the months of inventory indicatorto rise. A rise of only one month,from 4.0 to 5.0 months of supply forinstance can be very damaging tobuilders given the sensitivity of theconstruction industry to interestpayments on builder profit margins.A rise in inventory is also an earlywarning indicator that sales are

slowing, competition is increasing,and price wars could begin.

At the time of writing, new homeinventories are comparatively low. InJanuary this year, new homeinventories dived to their lowestlevel on record at 150,000 units, andfell further to 143,000 in March,levelling off to 146,000 in April.

According to Analyst Ken Lee atHanley Wood Market Intelligence;Months of new home inventoryremain at levels that are typical in ahealthy housing market. (source:Hanley Wood | May 2012 |www.hwmarketintelligence.com)

The latest figures published in

December 2012 show new homeinventories remained at 150,000units, or 4.9 months of seasonallyadjusted supply. This comparesfavourably with 5.4 months ofseasonally adjusted supply as at thesame time last year indicating a9.3% improvement.

68%Number of homes sales receiving competingbids across 6 States

3.4 COMPETITIVE MARKETACTIVITY

A good sign of a recovering marketis the occurrence of counter bids

between prospective buyers ofspecific properties. Whilst thisevidence is purely anecdotal, it ismore than interesting to see the re-emergence of this kind ofcompetitive activity which mayindicate a healthy sellers market.

Redfin, an internet based real estatebroker with offices in 14 statesreports that agents encounteredmultiple bids on about 50% ofoffers in Seattle, Boston,Washington D.C. and Oregon in theyear to date up until March, and

nearly 83% of offers that Redfinagents have made on behalf ofclients in the San Francisco Bay areathis year and 71% in SouthernCalifornia have had competing bids.Elsewhere, stories of bidding warsare emerging across multiple USStates. BusinessWeek recentlyreported that Matthew and CarinaHensley offered $10,000 more thanthe asking price for a three-bedroom house in suburbanSeattle, then lost out to one ofseven other bidders.

The Wall Street Journal recentlyreported the story of Andy Aley, a

31-year-old attorney from Seattlewho offered up to $23,000 abovethe $357,000 listing price and

agreed to waive inspections andother closing conditions.(Source:Wall Street Journal | April 2012 |http://online.wsj.com)

In June 2012; the number of houseslisted for sale nationwide dropped24% compared with the year prior,sending the supply of homesrelative to buying activity down tolevels not seen since 2006.

That's led to some stiff competitionamong buyers, says Sin-Yi ChaoLambertson, a broker in Glendora,Calif.: "I've had listings get 45 offers."

March 2012Lowest new home inventory level on record


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3.5 NEW HOME SALES

Many Analysts consider that it isaltogether likely that new homesales have declined to a bottom,leaving ample room for growth andrecovery.

In 2011, new home sales fell to302,000 units the worst readingon record. For comparisons sake,in 2005, 1.28 million new homeswere sold. In February however,new home sales were recorded atan annualised rate of 313,000 units,an uplift of over 11% year on yearand in May; the Commerce

Department reported that newhome sales had risen 3.3% to anannual rate of 343,000.

The latest figures for December2012 show that new home saleswere recorded to a seasonallyadjusted 369,000-unit annual rate.It was a notable monthly decline

with sales falling 7.3% sinceNovember, but rising 8.8% abovethe level seen in December 2011.

Most Analysts and the generalmedia have put the monthlydecline seen in December down asa temporary blip, with the general

consensus being that sales aresteady and growing, fuelled bycheap mortgage finance andbargain property prices.

8.8%Growth in new home sales Dec 2011

to Dec 2012

11.2%Annual growth in new home sales to

November 2012

Monthly New Home Sales August 2011 to November 2012 (000s)

1-Nov 1-Dec 1-Jan 1-Feb

390

380

370

360

350

340

330

320

310

300

1-Mar 1-Apr 1-May 1-Jun 1-Jul

Source: U.S. Department of Housing and Urban Development

1-Aug 1-Sep 1-Oct 1-Nov 1-Dec


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3.6 EXISTING HOME SALES

Sales of existing homes are clearly astrong indicator of the health of aproperty market.

The National Association ofRealtors reports that the totalexisting-home sales, which are

completed transactions that includesingle-family homes, town homes,condominiums and co-ops, rose 5per cent to a seasonally adjustedannual rate of 4.61 million inDecember 2012.

November sales were revised downto 4.39 million from an initiallyreported 4.42 million. Thepreliminary annual total for existing-home sales in 2012 was 4.65 million,up 9.2 per cent from 4.26 million in2011. It was the highest volumesince 2007 when it reached 5.03million and the strongest increase

since 2004.

Mark Zandi, chief economist forMoodys Analytics Inc. in WestChester, Pennsylvania said, Thehousing crash is finally giving way torecovery in an increasing number ofmarkets across the country, and thedecline in unsold listings and vacanthomes and the increase in rentspresage better times ahead forsingle- family housing. Accordingto Trulia Inc, Low values and

interest rates have made buying abetter deal than renting in 98 of thelargest 100 metropolitan areas.

Total housing inventory at the endof December fell 8.5 per cent to

1.82 million existing homesavailable for sale, which representsa 4.4-month supply at the currentsales pace, down from 4.8 monthsin November, and is the lowesthousing supply since May of 2005when it was 4.3 months, which wasnear the peak of the housing boom.

The median time on market for allhomes was 73 days in December,up from 70 days in November, but is26.3 per cent below 99 days inDecember 2011.

Distressed homes - foreclosures andshort sales - accounted for 24 percent of December sales (12 per centwere foreclosures and 12 per centwere short sales), up from 22 percent in November but below the32 per cent share in December

2011. Foreclosures sold for anaverage discount of 17 per centbelow market value in December,while short sales were discounted16 per cent.

14.5%Year on year growth in existing home sales to

December 2012

5%Monthly rise in existing home sales in

December 2012

Source: National Association of Realtors

Region Annual Sales M-o-M Change Y-o-Y Change Median Price Y-o-Y Change

Northeast 640,000 3.2% 10.3% $231,600 5.3%

Midwest 1.12m -5.9% 15.5% $144,800 12.3%

South 1.95m -3% 14.7% $161,100 11%

West 1.23m 5.1% 8.8% $239,900 17.3%

Source: National Association of Realtors


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3.7 PROPERTY VALUES

There are two broad measures ofhome prices at the national level inthe United States; the S&P/Case-Shiller National Home Price Index (10and 20 city composites); and theFederal Housing Finance AgencyHouse Price Index.

The S&P/Case-Shiller 20-CityComposite Home Price Indexmeasures the value of residential realestate in 20 metropolitan areas of theU.S. which seeks to measure changesin the total value of all existing single-family housing stock.

As of December 2012; the indexwas at 146.08 (October 2012), andposted returns of 4.3 per cent over12 months and 0.9 per centannualised over 10 years. Thehousing crash was evident in the 5-year and 3-year annualised returnsat -5.42 per cent and -0.9 per centrespectively.

Source: S&P Case Shiller NationalHome Price Index 20 City Composite.

The Federal Housing Finance AgencyHouse Price Index provides a moredetailed analysis of homes prices on anational and regional basis.

In the latest figures to November2012; the FHFA Index showed thathouse prices had risen by 0.6 percent for the month and 5.6 percent year on year on a seasonallyadjusted basis, and the index is15.2 per cent below its April 2007peak and is roughly the same asthe August 2004 index level.

Furthermore, national home priceshave not declined on a monthlybasis since January 2012.

Source: Federal Housing FinanceAgency


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1313

4.3%Year to date rise in S&P 20-citycomposite index

5.6%Rise in home prices year to dateNovember 2012, FHFA

Figure1: Seasonally adjusted and unadjusted monthly appreciation rates - Purchase only index - USA

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0

Source: Standard and Poors

Jun11

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan12

Feb12

Mar12

Apr12

May12

Jun12

Jul12

Aug12

Sep12

Oct12

Nov12

Four-QuarterAppreciation2012Q3 (Purchase-OnlyIndex, Seasonally Adjusted)

-2.6% to 1.5%

1.6% to 3.5%

3.6% to 6.0%

6.1% to 21.1%

Unadjusted Index

Seasonally Adjusted Index


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44

3.8 MARKET CONFIDENCE

Whilst hard to quantify with data,market confidence is seen as thebest anecdotal indicator of ahousing recovery. A number oflarge institutional investors are nowmoving forward with plans toacquire single family homes en-

masse. Colony Capital in LosAngles, which previously investedin over $4 billion of defaultedmortgage loans with the FederalDeposit Insurance Scheme hasraised $750 million frominstitutional clients for a new RealEstate Investment trust (REIT)investing in single family homes forthe rental market, and a number ofpension funds are also setting upinvestment vehicles in order toparticipate in the high yield

opportunities that abound.

Another such Investor - theBlackstone Group; the largestprivate equity Investor in the world,has acquired more than $100million of discounted real estateassets every week, intending toeither rent or sell for profit.

Builder confidence in the marketfor newly built, single-family homeswas unchanged in January 2013

according to the NationalAssociation of Home Builders(NAHB)/Wells Fargo HousingMarket Index, remaining at a level

of 47. This means that followingeight consecutive monthly gains,the index continues to hold at itshighest level since April of 2006.

Derived from a monthly survey thatNAHB has been conducting for 25years, the Index gauges builderperceptions of current single-family

home sales and sales expectationsfor the next six months as good,fair or poor. The survey alsoasks builders to rate traffic ofprospective buyers as high to veryhigh, average or low to verylow. Scores from each componentare then used to calculate aseasonally adjusted index whereany number over 50 indicates thatmore builders view conditions asgood than poor.

According to Barry Rutenberg,chairman of the NationalAssociation of Home Builders(NAHB) and a home builder fromGainesville, Fla; Conditions in thehousing market look much betternow than at the beginning of 2012and an increasing number ofhousing markets are showing signsof recovery, which should bodewell for future home sales later thisyear. However, uncertainties

stemming from last months fiscalcliff negotiations contributed to thepause in builder confidence andcontinuing discussions amongpolicymakers related to spending

cuts and the future of themortgage interest deduction couldput a damper on housing demandin the coming months.

The Indexs components weremixed in January. The componentgauging current sales conditionsremained unchanged at 51.Meanwhile, the component

gauging sales expectations in thenext six months fell one point to 49and the component gauging trafficof prospective buyers gained onepoint to 37.

66%Growth in builder confidence April 2012

to January 2013

18.6%Growth in 6-month sales prospects

in September


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3.9 AFFORDABILITY

As previously mentioned within thisdocument, house prices are sittingaround 30 per cent below previouspeaks, and at the same time rentalsprices are increasing. In fact, theNational Association of RealtorsHousing Affordability Index hit arecord high of 206.1 in January. (A

value of 100 means a family earningthe national median income canafford a median-priced property atcurrent mortgage rates.)

A separate study undertaken byDeutsche Bank reports that theaverage rent is now 15 per centmore than the average home loanpayment up from just over 8 percent in the previous quarter. Thiscreates an ideal buyingenvironment, encouraging new

entrants to re-enter the housingmarket. Its worth noting, too, thatborrowing costs are down about 20

per cent in the last year. 30 yearfixed rate borrowing costs hit anall-time low of 3.87 per cent inFebruary down from 4.95 percent a year ago.

NAR's National HousingAffordability Index stood at 198.2in November, based on the

relationship between median homeprice, median family income andaverage mortgage interest rate. Thehigher the index, the greater thehousehold purchasing power;recordkeeping began in 1970.

With 11 months of data reported,2012 will clearly go down as a recordyear for favourable housingaffordability conditions, and a greatyear for buyers who could get amortgage, according to the

National Association of Realtors.

An index of 100 is defined as thepoint where a median-incomehousehold has exactly enoughincome to qualify for the purchaseof a median-priced existing single-

family home, assuming a 20 per centdown-payment and 25 per cent ofgross income devoted to mortgageprincipal and interest payments. Forfirst-time buyers making small downpayments, the affordability levels arerelatively lower.

For all of 2012, NAR projects the

housing affordability index to be arecord high 194, up from 186 in2011, which was the previous record.November's reading was 2.5 indexpoints below October, but up 1.5index points from a year earlier.

Source: National Association ofRealtors

The National Association of Homebuilders also produces anAffordability index in association

with Well Fargo Bank; the HousingOpportunity Index (HOI). Figures toQ3 2013 show the national MedianHome Price at $189,000 and theweighted interest rate for a fixedrate mortgage at 3.8 per cent,putting the HOI at 74.1 per cent.

1515

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0

Source: NAHB Wells Fargo Housing Opportunity Index

2004 2005 2006 2007 2008 2009 2010 2011 2012


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The general tone of this Reporthas been largely positive, andthe majority of datasets, indices,anecdotal evidence andinterviews conducted with activeInvestors and Realtors, would alllead one to believe that asustained recovery in the US realestate market is underway,

however a note of caution isadvised.

Readers must take into accountthat broad figures such as nationalhouse prices and the like are notan entirely accurate indicator of thereal goings on at the grass roots ofa property market as they arecomprised of ever changingvariables, and one must rememberthat it is in fact purely facilitateddemand that drives growth i.e.

demand for property that turns intosales of property due to theavailability of mortgage financeand an abundance of creditworthybuyers. Therefore for a sustainedrecovery to take place it wouldrequire consistent increases inwages and a consistent decrease inunemployment, whilst alsoensuring a constant flow ofaffordable finance, and as thecurrent low mortgage rates are set

more by political policy rather thanby the market, they will at somepoint begin to increase, making itmore expensive for new entrants tobuy homes.

It is fact that house prices areabout 10 per cent above 1990levels, and the cost of a mortgagein 1990 was about two and a halftimes higher than it is today, andreal disposable incomes haveincreased over 70% since 1990,

housing prices are best thought ofas being incredibly cheap. Thiscertainly presents opportunities forInvestors, but household debt ismuch higher than in 1990, andmany homeowners are still holdingconsiderable negative equity,although these households aregenerally not participating in the

resale market at present.

From an Investors perspective,there are opportunities to profitfrom the US housing market,however acquiring long-termexposure to real estate assetsmight be a little pre-emptive, andultimately end up as a negativecash flow investment that is difficultto sell. If another recession ensuesthen tenants are less likely to meetrental payments, yet the on-going

costs will continue. Entering intojoint ventures with Local Investorswho are prepared to share boththe inherent capital gains and on-going risk offer a solution for thoseseeking low risk exposure to themarket and who might be satisfiedwith lower yields in exchange forrisk mitigation and the sellingagent retaining a vested interest inthe property.

DGC Asset Management Limitedoffer two direct propertyinvestment products designed tomitigate the risks associated withthe US real estate market andproperty investing in general. Formore information on our currentrange of products and services,please contact your Advisor, oremail for a no obligationconsultation on:[email protected] call 0044 (0) 207 043 2592.

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us housing market q4 2012

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