us report 1 pdf

US REPORT March 2015

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Contents

Washington’s exit strategy paying dividends ..................................... 3

Executive summary ................................................................................ 6

S.W.O.T. ..................................................................................................... 9

Economic overview ............................................................................... 11

I. The recovery: driving jobs growth ......................................................................................................... .11

II. Economic outlook: Energy u-turn provides solid growth platform ....................................... 16

Housing market overview ................................................................... 21

I. Review: The sub-prime crash and its legacy ..................................................................................... 21

II. Current trends: The next stage of the recovery ............................................................................ 26

III. Market outlook: Rental sector holds promise ................................................................................ 31

Regional Insight ....................................................................................36

I. Florida: A late bloomer ................................................................................................................................36

II. Orlando: The table topper ........................................................................................................................ 41

Conclusion .............................................................................................46

Prime Asset Investments Haldenstrasse 5s Baar, 6342 Switzerland Phone: (0) 41 766 3150 Fax: (0) 41 766 3159 www.primeassetinvestments.com


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Washington’s exit strategy paying dividends

Already, ‘the breakaway’ is shaping up as one of the major geopolitical themes of 2015.

January began with Switzerland’s decision to unpeg the franc from the euro with keeping up

with the ECB’s accelerated rate of money printing promising to be prohibitively expensive.

This was shortly followed by news of victory by Syriza in Greece; the party hell-bent on

challenging Greece’s subservience to Brussels and sparking renewed fears of a potential

defection from the eurozone.

From a UK perspective, spring will see secessionist rumblings grow louder as the country

gears up for the general election. With neither Labour nor the Conservatives heading for an

overall majority, the self-styled breakaway parties, UKIP and the Scottish Nationals will likely

find themselves in a stronger position to promote their agendas.

Increasingly, governments are starting to recognise that the safest way forward through the

global economic slow-down may be to go it alone. China, for so long the World’s factory, is

focusing its economic strategy inwards as many of its key export markets suffer with anaemic

growth.


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In the United States, whose consumer-dependent economy is often cited as its Achilles Heel,

increasing self-sufficiency has allowed the country to cocoon itself from the rest of the world’s

problems.

As emerging markets have slowed, Obama’s early idealism surrounding an export-led

recovery have faded into the background, particularly as the dollar has continued to

strengthen against other world currencies.

The focus has instead turned to job creation, and initiatives – including universal healthcare –

that free up poorer households to channel spending back into the economy.

Prices have recovered around 90% of their value lost during the downturn

The US labour market has also diverged from wider global trends in employment.

Unemployment fell to 5.6% in January, its lowest level since July 2008. Compare this with the

eurozone where unemployment remains troublingly high at 11.4% as its members struggle to

find a way out of their current malaise.

A U-turn in energy policy has meanwhile allowed America to wean itself off its foreign fuel

dependence as the shale energy has filled the void. Plans to export natural gas to Europe have

been held up as Congress debates the merits of splitting all-important reserves with other nations.

As the series of articles that are to follow will illustrate, the US housing market has been

one of the main beneficiaries of this incubatory growth model. House prices have to date


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recovered around 90% of their value lost during the downturn while sales and construction

activity are both normalising.

As Americans prepare for home-buying season, the market finds itself in a more stable

condition than it has arguably been for several decades. Prices are still at an affordable level

relative to income, and, baring a few exceptions, have fallen into a sustainable, albeit more

moderate rate of growth.

Yet, despite the improvement seen over the past few months the mood across the market

remains cautious, even conservative. Almost a decade since the beginnings of the subprime

crash, memories are still fresh. Moreover, there are fears that an impending interest rate hike

will upset the balance of the recovery.

Safeguards against irresponsible lending practices are in place, yet many millennials

are still reluctant to enter a market that has only ever brought bad news. With the rate of

homeownership in gradual decline, more than a third of US households are now renters. This

figure is expected to steadily inflate over the coming decade.

For investors this may well present a window of opportunity. Houses remain undervalued

throughout the majority of the 50 states while mortgage costs remain at historical lows for

now. For absent landlords there is a growing pool of renters supported by high levels of

employment and job security.

With its own fair share of challenges to face, the US may not be the safe haven that some claim

it to be. All things considered, however, it represents a pretty safe exit strategy right now.


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Executive summary

While its dependence on the American consumer is often cited as United States’ Achilles

Heel, the increasing self-sufficiency of the US economy has allowed it to cocoon itself from

the rest of the world’s problems.

As emerging markets have slowed, Obama’s early idealism surrounding an export-led

recovery have faded into the background, particularly as the dollar has continued to

strengthen against other world currencies.

The focus has instead turned to job creation, and initiatives – including universal healthcare –

that free up poorer households to direct spending back into the economy.

The US labour market has also diverged from wider global trends in employment.

Unemployment fell to 5.6% in January, its lowest level since July 2008. A U-turn in energy


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policy has meanwhile allowed America to wean itself off its foreign fuel dependence as the

shale energy has filled the void.

As this report will illustrate, the US housing market has been one of the main beneficiaries of

this incubatory growth model. House prices have to date recovered around 90% of their value

lost during the downturn while sales and construction activity are both normalising.

As Americans gear up for home-buying season, the market finds itself in a more stable

condition than it has been for several decades. Prices remain at an affordable level relative

to income, and, baring a few exceptions, have fallen into a sustainable, albeit more moderate

pattern of growth.

The market finds itself in a more stable condition than it has for decades

For investors this may well mean opportunities. Houses remain undervalued throughout

the majority of the 50 states while mortgage costs remain at historical lows for now. The

buy-to-let market finds itself supported by a growing pool of renters with strong long-term

employment prospects.

The potential rewards must be weighted against the risks, however. Almost a decade since

the beginnings of the subprime crash, memories are still fresh; it would not take much to

knock the new-found confidence that the market has built over the past 12-18 months.

As the economy and employment return to health, the return to a ‘normal’ interest rate


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environment can’t be far away with the potential to stymie home buying activity.

With its own fair share of challenges, the US may not be the safe haven that some claim it to

be.


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S.W.O.T.

Strengths

• World’s largest economy with extremely high average income and living standards

• Housing traditionally affordable with low price to income

• Labour market outperforming most developed states

• Energy ‘revolution’ creates long-term self-sufficiency, jobs

Weaknesses

• World’s most publicised housing market: few areas of investment that have not already

been explored

• Among the economies worst hit by the financial crisis and loss of unemployment

• Wealth and home-buying power is unevenly distributed among age and income groups


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Opportunities

• Mortgage costs remain very extremely competitive

• Residential property undervalued on a historical level

• Robust and fast-growing rental sector

• Second-home investment market is flourishing

Threats

• Some regions still at a fragile stage of economic recovery

• Anticipated interest rate hike may dent home-buying activity

• Diminishing involvement of younger buyers in real estate market

• 2016 presidential election threatens return to looser lending practices


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Economic overview

I. The recovery: driving jobs growth

“Sen. McCain is right that we’ve got to stabilise housing prices. But underlying that is loss of jobs and loss of income”

Barack Obama, 2008 second presidential debate (Oct 7, 2008)

As the 2008 US presidential election campaign drew to a close, it appeared the President

Elect had already realised the key objective of his first term in office. The economic crisis may

have begun in the housing market, but it would end with jobs and employment.

Over 2008 and 2009 the US labour market shed 8.4 million jobs, equivalent to 6.1% of the

country’s entire workforce. By October 2010, some 16 months after America officially moved

out of recession, unemployment was still at 10 % and rising.

With both the manufacturing and services sectors shedding jobs, the American middle class


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was quick to stop spending, stalling the main engine of the US economy, and removing a

significant chunk of the country’s total output.

It’s important to note that the US consumer plays a unique role within the economy, with

household spending comprising 70% of GDP compared with 35% in China, 61% in Japan and

55% in both Germany and France. Without job security to support household spending, the

economy would essentially be on life support until people felt they were no longer at risk from

unemployment.

US: net m-o-m change in employees (‘000):

Source: Bureau of Labour Statistics


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The Original Jobs Act

The turning point in the US economic recovery was arguably the decision to bail out General

Motors. At the time of its bankruptcy in mid-2009, the firm was the country’s 21st largest

employer with an immediate payroll of just under a quarter of a million.

With the eventual cost to US taxpayers coming in at almost US$50 billion, many economists

have queried the wisdom of propping up a flailing US industry like car manufacturing.

At best the decision smacked of a desperate attempt by the Democrats to curry favour with

the blue-collar electorate less than 18 months into a bleak first term for Obama.

The decision is estimated to have saved 1.2 million jobs, preventing US$129 billion in potential

lost income during 2009 and 2010. More important than this, however, was the statement

made to the American worker that they would survive the downturn and emerge from the

other side unscathed.

Europe’s Oversight

At just under three million, the number of jobs added in the 12 months to January 2015 was

the highest annual volume recorded since 1999. US unemployment has fallen to 5.6% - its

lowest level since 2008.

America’s focus on preserving and creating jobs throughout its economic recovery contrasts

with the approach taken by the other developed states engulfed in the crisis.

In the eurozone, where the focus has been austerity alone, January’s rate of unemployment


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stood at 11.5% with nine million more people out of work than there were in 2008.

Unemployment rate of selected developed states (%):

Source: OECD

In failing to foresee and plan for the impact of austerity on employment and consequently

consumption and inflation, many states are now staring into a deflationary sinkhole. Unless

the rot is stopped, Europe faces potential ‘lost decades’ of growth similar to those suffered by

Japan in the 1990s and 2000s.

With job losses continuing to mount across much of the region, there appears to be little end


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in sight. The European Central Bank’s Quantitative Easing programme is aimed at restoring

confidence to the private sector and consumer markets, however, there is no guarantee that

this will result in increased job creation.

Obama may not have followed through on plans for an export-led recovery, but at least he’s doing some things right

With an estimated 15 million Europeans under the age of 30 currently unemployed, only

a handful of governments, such as Ireland’s are taking direct measures to stimulate

employment.

While some have criticised the US’s continued dependence on internal rather than external

demand, as a relatively self-sufficient economy it has more room than most in which to do this.

Obama may not have followed through on plans for an export-led recovery, but at least he’s

doing some things right.


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II. Economic outlook: Energy u-turn provides solid growth platform

Fracking has its opponents, not least in the US. Yet few can deny the positive impact that

development of the US shale energy sector has had on supporting employment.

A quick glance at recent US job data makes for a convincing argument, with the majority of

energy intensive states enjoying below average jobless levels. In November 2014, Nebraska

registered unemployment of 3.1%; Colorado 4.1%; North Dakota, 2.7 % and South Dakota 3.3%.

The effects of the so-called US energy revolution extend much further

The effects of the so-called US energy revolution extend much further, however. While growth

in domestic oils and gas production may appear rapid, the US has been slow to address the

impact of the predominantly import-led energy policies throughout the 1980s and 1990s.

America’s dependence on overseas oil, which grew from just 22% in 1986 to 60% in 2005,

cost the country more than just jobs. A 2000 study for the Department of Energy calculated

the annual cost of overseas energy supply to the US economy at US$233 billion a year, or

about 13% of the Federal budget for that year.

Since starting to address this black hole in its finances, Washington has managed to reduce

overall petroleum imports by a third. Recent U.S. Energy Information Administration (EIA) data

shows that overseas imports currently account for 40% of total US petroleum usage.

With consumption levels gradually recovering to pre-downturn levels, states such as

Nebraska and Texas have taken the place of OPEC producers, whose combined exports to


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the US market dropped to a 30-year low of 30 million barrels per day in November 2014.

As the number one energy provider to a population of some 300 million citizens, the US

has now surpassed Saudi Arabia as the world’s largest oil producer. This is a conservative

estimate that doesn’t take into account the considerable spending on military and defence

needed to satisfy the country’s overseas energy demands.

Since starting to address this black hole in its finances, Washington has managed to reduce

overall petroleum imports by a third. Recent U.S. Energy Information Administration (EIA) data

shows that overseas imports currently account for 40% of total US petroleum usage. With

consumption levels gradually recovering to pre-downturn levels, states such as Nebraska and


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Texas have taken the place of OPEC producers, whose combined exports to the US market

dropped to a 30-year low of 30 million barrels per day in November 2014.

As the number one energy provider to a population of some 300 million citizens, the US has

now surpassed Saudi Arabia as the world’s largest oil producer.

The US and Europe: a Diverging Path

Kicking its foreign energy habit has allowed the US increased self-sufficiency at a time when

other developed states find themselves increasingly dependent on imports.

Severe energy dependence continues to hinder the economic recovery of many developed

states, none more so than those in Europe, with spending on fuel imports currently estimated

to be around 5% of the combined GDP of the European Union, of which around three quarters

is spent on oil.


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Net energy imports of selected states (% of energy use):

Source: World Bank

The recent fall in global oil prices may have lessened the cost of energy to the European

community. However, this is likely to prove little more than a temporary panacea while also

placing further deflationary pressure on the local economy.

European Commission forecasts that by 2035 imports will account for more than 80% of EU

gas consumption and over 90% of the region’s oil usage.

In the same 20-year period, the Commission projects US imports to have fallen below 20%

of overall consumption levels. Providing Washington follows through on promises to relax its

energy export policy, the country should also be one its way to becoming a net importer of

natural gas by the end of the decade.

What does this mean in real terms? Compared to their US counterparts, energy costs are


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increasingly an albatross around the neck of European consumers as well as the region’s

downtrodden manufacturing sector.

According to EU data, between 2005 and 2012 the average electricity costs of European

industrial producers rose by 38% while decreasing by 4% to US firms. Average household

energy bills rose by 22% in the EU during the period, compared with 8% in the US.

Cheaper oil and a slimmer national energy bill mean more money in the pocket of US

consumers. Meanwhile European households will continue to pay the price for lack of

investment in local energy sources as vague promises of a renewable energy revolution are

set-back by the region’s economic crisis.


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Housing market overview

I. Review: The sub-prime crash and its legacy

“We can put light where there’s darkness… and part of it is working together as a nation to encourage folks to own their own home”

- President George W. Bush, Oct. 15, 2002

The US sub-prime crash and its aftermath have often been attributed to a series of freak

occurrences linked to the consumer credit boom of the late 1990s and early 2000s.

In truth, at the heart of the crisis lay a fundamental flaw both in mortgage underwriting as well

as the way this process were regulated.

According to independent real estate consultant Daniel Duran, the various parties involved in

profiting from the sub-prime market ignored one of the basic rules of real estate: what goes

up must eventually come down.


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Between 1996 and 2006, significant price rises were recorded in each of the US’s 20 largest

cities. At the top of the list was Los Angeles with a price increase of 268% over the period,

followed by San Diego (250%) and Miami (215%).

The fact that house prices growth had been one-way traffic for much of the previous decade

had numbed real estate investors to the potential risks of a reversal in price momentum.

S&P/Case-Shiller U.S. National Home Price Index

Source: us.spindices.com

Mortgage underwriters were safe in the belief that equity in a home would always grow,

regardless of who the owners were. Homebuyers were viewed increasingly as temporary


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custodians of the property. If they defaulted the bank would still get their money back and

more besides.

On Washington’s Watch

Against this backdrop the lending criteria for mortgage policyholders were gradually

loosened to include a wider range of buyers.

In the 1990s, both the Bush and Clinton administrations put pressure on state-supported

lending giants Fannie Mae and Freddie Mac to extend the provision of mortgages to low and

moderate earners.

With a rapidly growing immigrant population, access to home ownership was a potent vote-winning tool

With a rapidly growing immigrant population, access to home ownership was a potent vote-

winning tool, particularly in the key swing states such as Arizona, Nevada, Florida and New

Mexico.

The six-year period between 2001 and 2006 in particular saw rapid expansion to the US

subprime market. For the Bush Administration, increasing home ownership provided an

effective antidote to unpleasant news surrounding an underperforming economy and a rising

death toll in the Middle East.

In 2001 the average FICO score (the leading gauge used by the three main credit ratings

agencies) of US subprime mortgager was 626 while the average combined loan to value


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ratio (CLTV) of subprime borrowers was 80%. By 2007, the average borrower score had fallen

below 614 points while the CLTV ratio has risen to 84.4%.

The growth of the US subprime market and foreclosures

Source: Federal Bank of St. Louis

By the time the subprime market began unravelling in mid-2006, it’s estimated that one fifth

of mortgages underwritten in the US were officially classed as subprime, equivalent to more

than 20 million American homes. However, given the looser classifications in place at the

time, the real total would have been considerably greater by today’s standards.

Once Bitten…

The concern going forward is that the economic recovery and housing market rebound will

support renewed growth in subprime lending.


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Indeed, a recent Obama-led initiative to expand homeownership among low-income

groups by reducing insurance premiums on Federal Housing Association mortgages draws

uncomfortable parallels with Bush-era voter courting in the early 2000s.

There are barriers in place, however. Stricter rules governing mortgage lending, set out by the

Consumer Financial Protection Bureau in January 2014, prevent mortgage underwriters from

lending to clients whose debt to income ratio exceeds 43%.

This stipulation effectively excludes potential home buyers with a sub-660 FICO score.

The biggest barrier to a housing collapse is likely to be the increasing privatisation of the US mortgage industry

However, the biggest barrier in the way of a subprime-led housing market collapse is likely

to be the increasing privatisation of the US mortgage industry, particularly at a low income

level. Ironically, the failures of the major banks and monolith state-back mortgage lenders

to monitor the US subprime market efficiently has led to increased participation by small,

independent providers.

Indeed recent estimates state that the non-bank share of the subprime mortgage market

grew from 28% in 2010 to 66% in 2014. Taking the place of state-wide lenders are small,

independent firms, who can ill-afford the cost of a string of foreclosures.

While house prices will at some stage recede as they always do, the current structure of the

US subprime and wider housing market suggests far greater flexibility to prepare against


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future downturns, not to mention greater awareness surrounding the initial symptoms of a

potential market crash.

II. Current trends: The next stage of the recovery

The media has been sending mixed messages about where US housing market is going.

With every monthly data release comes news of a setback or a renewed acceleration in the

market’s performance.

The truth probably lies somewhere in the middle of these two extremes. The S&P Case–

Shiller Home Price Index showed house prices growing by 4.6% in October 2014 on a year-

on-year (y-o-y) basis, falling from 4.8% in September.

While this rate of increase is in line with historical averages, it shows that the rate of growth is

certainly slower than that of 2013 when house prices appreciated by 10.5% y-o-y on average

over the full year.

The current rate of growth is what independent real estate consultant Daniel Duran terms ‘normal’

growth. He suggests that the housing market has moved into a second stage of recovery as the

base effects that supported double-digit growth up until the mid-point of 2014 start to tail off.


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US y-o-y house price growth:

Source: us.spindices.com

As Duran goes on to explain, the US market has reached a point in its recovery where buying

and selling activity has balanced out, as the rise in prices attracts sellers back to the market.

Indeed, according to The Federal Reserve Bank of St. Louis, the monthly supply of homes

in the US stood at 5.8 months in December 2014, roughly in line with healthy averages,

generally considered to be around six months and some way below the 11.4 month peak

recorded in November 2008.

A stable balance between supply and demand is expected to see house prices appreciate

between 3% and 5% over 2015 on average throughout the country.


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While the market appears to be witnessing a return to historical norms, prices remain some

way off ‘normal’ levels, implying that the recovery still has some way further to run. According

to Zillow.com, the price of an average US home, irrespective of inflation, stood at US$184,000

in January 2015, about 7% of its April 2007 peak of US$196,000.

The Affordability Paradox

According to the real estate market researcher, Trulia, US house prices are currently

undervalued by about 2% on average, compared with an average overvaluation of 34%

before the market crash in Q1 2006.

However, there remain considerable discrepancies throughout the market with double-digit

overvaluations in West Coast markets such as Los Angeles and San Francisco offset by

underpricing along much of the East Coast and Mid-West.

By historical standards, however, US houses remain relatively affordable when measured

against the earning power of the American public. As the chart above shows, in Q2 2014,

the average US home was 13.7% more affordable than at any point over the past 44 years,

stretching back to 1970.

The US has the second highest level of housing affordability of any major developed nation


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Home affordability of selected developed states (based on historical average):

Source: IMF

Excluding Japan, where years of deflation have severely distorted real estate valuations, the

US is currently experiencing the second highest level of housing affordability of any major

developed nation, after Germany.

Paradoxically, while homes continue to be highly affordable on a historical scale, allowing

sales to return to normal, the demographic of those doing the buying is changing.

The past few years have seen s gradual shift in home ownership away from young, first-time

homebuyers to baby-boomers upscaling or buying second properties as an investment.


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Data provided by the National Association of Realtors shows that first-time home

buyers comprised just 29% of sales during 2014, compared with the historical norm of

40%. Moreover, the US Census Bureau records highlights that, in Q3 2014, the rate of

homeownership among the US population dropped to 64.3%.

Home ownership among US population by age:

Source: US Census Bureau

While roughly on a par with developed States such as the UK, France and Australia, the latest

data illustrates a progressive decline in home ownership over the past decade, with the

average rate falling from around 70% in 2004 to below 65% in 2014.

The decline in homeownership among under-35s has been particularly extreme, falling to

around 36%, while appearing to stabilise at just under 80% 55 to 64 year-olds. The gap in

home buying habits between younger American and those in middle or older age is likely to


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widen over the coming years as increased borrowing costs and increased youth migration to

larger, more expensive US cities limit the buying power of young professionals.

III. Market outlook: Rental sector holds promise

On the one hand, falling participation of younger buyers in the housing market seems set to

take some of the wind from the sails of new home sales. However, it also stands to support

the long-term growth of the US rental market.

As independent US real estate consultant Daniel Duran explains, the rental sector will be one

of the main beneficiaries of steady, long-term growth in employment and house prices.

Price to rent ratio of selected developed states:

Source: OECD

Country Average house prices vs rentsAustralia 145Canada 166France 129Germany 91Greece 84Italy 93Japan 62New Zealand 170Portugal 83Spain 104UK 134US 104Euro area 106Total OECD 106


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The costs of renting in the US is relatively in tune with house prices in terms of affordability.

Having climbed steadily over the past few years, average rental costs are currently

undercutting house prices by about 4% (see below) according to OECD data.

US rental costs have proved relatively un-cyclical over recent years, slipping only marginally

during the economic downturn and remaining largely unaffected by changes in house prices.

The steady return potential of the rental market from an investment point of view has not

gone unnoticed by the American public. Wealthy Americans have been looking increasingly at

housing investments as a relatively low risk venture in a low interest rate environment.

Indeed, according to data provided by the National Association of Realtors, US second

properties sales grew by 30% in 2013 to 717,000, the largest annual gain since records

began in 2013. Investors typically fell into high-income households in the 55 and above age

demographic.


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Median asking rents VS sales price (US$):

Source: National Association of Realtors

Indeed, New York came second behind Tokyo in a 2013 ‘World Cities’ by Savills. The report

measured the spread of gross rental yields over 10-year government bond rates with the

city’s estimated ‘net’ return of 3.6% comparing favourably with the likes of Pairs (2.7%); London

(2.2%); Singapore (1.4%) and Sydney (1.1%).

Interest Rates: the fly in the ointment?

The most obvious concern from the point of view of investors will be the seemingly inevitable

increase in interest rates during 2015. While the Federal Reserve has remained coy as to

when the first rate hike will take place, the expectancy is that the first rate hikes will take effect

before the mid-point of the year, with further increments staggered over the next two years.


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The process of returning interest rates to normal levels will hardly be felt by mortgagers

As Duran explains, the process of returning interest rates to normal levels is likely to be so

gradual as to be hardly felt by mortgagers. An economists’ survey conducted by the Wall

Street Journal in January 2015 forecasted the Fed to have lifted the Federal Funds rate to

0.25% by June with a further increase to 0.89% by the year’s end.

US 30-Year fixed rate mortgage average:

Source: Federal Reserve Bank of St Louis

The prospect of higher rates will nevertheless cause some alarm among the investment

community as higher mortgage costs eat into gross yields.


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That said, it’s important to remember that current cost of mortgages in the US remains

extremely low by historical standards. At 3.63% the average rate on a 30-year mortgage has

some way to go to reach the 5.05% 10-year average stretching back to January 2005.

It also compares favourably to the average rates measures in other developed states such as

the UK (3.81%) and Canada (4.04%).

As Duran points out, there would need to be a dramatic shift in order for 30-year mortgage

costs to move outside of the 3-5% range and to begin leading to foreclosures.

Instead, the main fall-out from the Fed rate increase is likely to be on demand from first-time

homebuyers, particularly those in low-income brackets, resulting in further spill-over into the

rental market.

With second homes purchases by older investors increasingly taking the place of younger

buyers, this is not as alarming as it sounds.


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Regional Insight

I. Florida: A late bloomer

With one of the largest construction workforces in the US, Florida was at the epicentre of

America’s pre-crash building boom. It’s therefore little wonder that the progress made by the

state’s housing sector and wider economy since the housing market’s crash has been slower

than most.

With an estimated 277,000 construction jobs lost to the crisis, Florida was one of the worst hit

US states in terms of job losses, with unemployment peaking at 11.4% in January 2010.


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While slower than most out of the crisis, Florida’s economic recovery has started to pick up steam

While slower than most to climb out of the crisis, the Floridian economic recovery has started

to pick up steam. The local labour market added 223,000 new jobs in the 12 months to

November 2014, more than any other state other than California and Texas. Unemployment

currently stands at 5.8%, or just above the national average.

The pace of the recovery owes much to the success of Florida Governor Rick Scott’s 7-7-

7 plan. Launched prior to his election as Governor in 2011, Scott’s plan based itself on the

fundamentals of Obama’s jobs-based recovery strategy. It aimed to create 700,000 new jobs

within seven years and to add US$74 billion to state GDP.

Four years into his term, Scott appears to be on track to delivering on his promises. The

recovery in employment, as per GDP, which grew by 2.2% in 2013, is based on growth

across different areas of the Florida economy, including tourism, financial services and

manufacturing.


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Average annual house price movement among states with 8mn+ population:

Source: Freddie Mac

With employment growing fast from such a low base, the recovery in Florida’s residential

property market has been more extreme than in any other state, bar California. From their

mid-2006 peak, by October 20101, the average price of a Floridian home had fallen by 51%,

clearly outstripping the 34% contraction witnessed nationwide.

The recovery from this trough, if not quite as dramatic as the original decline, has certainly

been substantial. On a state-wide level, the price of a Florida home grew by 7.8% during the

year to November 2014, the third highest increase of any US state.

The Baby-Boomer Boost

Increased demand stemming from Florida’s employment market rebound will be augmented


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by the state’s popularity as a market for vacation homes and investment properties.

While this makes the state’s housing market more cyclical than others in the US, it also

leaves it better placed than most to benefit the current demographic shifts taking place in the

housing market.

With older age-groups increasingly outnumbering under-40 buyers, the baby boomer

generation should have an increasing impact on home buying trends. Research by the US

Urban Institute projects that the number of Americans aged 65 or older to have doubled in

the 30 years to 2040, to reach 80 million or approximately one fifth of the population.

The sunshine state will be enjoying an Indian summer long after growth has tailed off elsewhere

Demand for vacation homes and investment properties should see particular growth from this

shifting demographic. As a traditional destination for US holidaymakers as well as retirees,

Florida is among the states that stand to benefit most.

As the chart below shows, the state currently has the highest volume of vacation housing

stock in the US.


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Housing for seasonal, recreational, or occasional use by state (‘000):

Source: US Census Bureau (2000)

As we are now seeing, the second home market is becoming an increasing target for US

investors looking to take advantage of the housing market recovery.

The number of second homes purchased for part-time personal use rose by 30% in 2013 to a

record 717,000 properties, according to the National Association of Realtors.

The sunshine state may have been late to the party but will be enjoying an Indian summer

long after growth has tailed off elsewhere.


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II. Orlando: The table topper

Given the re-bound in Florida’s house prices over the past 12 months, it’s not surprising that

it’s home to a number of the fastest growing housing markets in the US.

Miami and Orlando rank first and fourth in terms of average house price growth out of 28 US

metropolitan statistical areas (MSAs) with two million-plus populations. They registered a y-o-y

increase of 13.6% and 11.9%, respectively.

What sets the Floridian market apart from most of the country is that, having started their

recovery later, house prices still have some way to go before returning to what are generally

considered to be ‘normal’ levels.

Indeed, in Orlando, where prices fell by a cumulative 51.9% between 2008 and 2010, the

average home price (US$145,000) is currently resting at around 62% of where it was back

in June 2006. This is in marked contrast with the US market as a whole were median prices

have recovered to 93% of their pre-crash peak.

Rebuilding Supply

While house prices in the city remain undervalued, the recent growth in the market is also

linked to a rebalancing between supply and demand. As the chart below shows, the number

of properties coming to market in Orlando is only just beginning to move into line with

national averages.


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12-month house price growth, US MSAs with 2mn+ population:

Source: Freddie Mac

Data from online realtor Zillow.com shows that in August 2014 there 12,060 houses for sale in

the wider Orlando Metropolitan District, compared with 7,820 12 months previously. The 81%

y-o-y increase in for-sale listings was the largest gain recorded for any of the US’s 146 MSAs.

Current housing inventory, which as of October 2014 was trending at about 4.45 months, has

allowed supply to move into balance with demand, driving an increase in sales. According to

the Orlando Realtors Association, sales of single-family home in the city rose by 18.3% in the

year to in October 2014, while condominium, or ‘condo’ purchases grew by 11.3%.


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For-sale listings: Orlando VS national total (‘000):

Source: Zillow.com

The increase in available housing stock appears so far appears to have had little impact on

stymying house price growth. However, the expectation is that price appreciation will begin to

slow over 2015 as supply falls closer into line with historical averages.

Homebuilders are drawing in potential customers with a range of incentives

The current market dynamic is likely to create a window for new entrants as the current

widening of inventories shifts the balance of power away from sellers to buyers. In the new-


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home market, local media sources report of homebuilders drawing in potential customers with

a range of incentives, including discounts, free appliances and the covering of closing costs.

While such tactics are likely to evoke unpleasant memories of 2006 and 2007, at the current

level of undervaluation there is significant spare capacity (more than 30%) to be regained

before prices return to their 10-year peak.

An Economic Outperformer

A robust local economy should also support housing demand over the next few years.

Forecasting by IHS Global Insight shows the GDP of the Orlando and wider Kissimmee-

Sanford area to grow by 4.1% a year on average over 2013-2020, making it the sixth fastest

growing of the 100 largest US metropolitan area over the period.


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Fastest growing US Metro GDPs, 2013-2020 (100 largest only):

Source: IHS Global Insight

Driving this growth is a diversified economy that extends across tourism, technology, aviation

and aerospace, manufacturing and of course film and television production. The city also has

strong domestic and international transport links, boasting the US’s 14th largest airport as well

as proximity to Port Canaveral, a major international sea terminal.

With all this in its locker, Orlando should have plenty in store for investors over the next few

years.


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Conclusion

When it comes to real estate, the United States represents a unique environment for

investment compared with other global markets. There are few areas of the market that

haven’t already been explored or taken advantage of. No closely-guarded secret or

opportunity waiting to be disclosed.

That doesn’t mean there isn’t value to be found, however. Indeed, perhaps more so than

other Western markets such as the UK, America has historically had a sense of what

constitutes fair market value.


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Its people work longer hours than they do in most countries and take fewer holidays.

Spending, whether on a new house or new car, has to be worthy of the amount of blood and

sweat and sunk into it.

The American dream is founded on the belief that everyone should have the right to own their own home

It is hardly surprising, therefore, that price to income ratios of US property have traditionally

been among the lowest in the Western world. The American dream is founded on the belief

that every working man or women should have the right to own their own home and drive

their own car.

One of the greatest tragedies of the subprime crisis was that America lost sight of these basis

principles. The reward of homeownership became twisted and turned into a political pawn.

The right to own one’s own home was extended to everyone, regardless of whether it was

earned or even affordable.

As house prices gradually return to pre-downturn levels, America has had to redefine

what home ownership means. If the market has been slower to rebound than those of

other countries, including the UK, it’s because it has been waiting for all the supporting

fundamentals to fall into place.

Only as the economic and labour market recoveries having been dialled up a notch over the

past 12-18 months have we seen the double-digit rates of growth witnessed in South-East

England and other hotbeds for speculative investment. Having had to wait longer for such


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assurances, some corners of the US market find themselves behind the curve.

The overall lending environment in the US is far more conservative than it was going into the

crisis. Mortgaging has shifted from the larger national banks and state-run mortgage giants to

smaller, independent firms in a better position to judge the merits of each decision.

As the housing market enters the next stage of its recovery, investors can look forward to

long-term sustainable growth coupled with an affordable entry point. The US may not be the

next, great undiscovered investment opportunity, but there is still plenty of value to be found.

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