While clearly no one has a crystal ball with definitive answers there does seem to be some general focus around:

1)   The market will hit bottom when the psychology of homebuyers becomes positive, optimism improves, and people are willing to stick their necks out again.  While some areas such as New York are on a decline, clearing other harder hit areas show signs of optimism as Florida’s existing Home, Condo sales rose in February 2009 and other indications that March figures may reflect the same.

2)   The market will hit bottom when employment turns around. While unemployment is clearly still a big problem the pace as definitely slowed.

3)   The market will hit bottom when credit loosens and businesses can borrow for working capital, expansion, and long term plans. This is clearly an issue between banks protecting there capital during uncertain times mixed with capitalization issues with many of the major banks. All indications are this is yet to be resolved.

4)   The market will hit bottom when the stock market turns around and consumers see a positive trend. While many believe the current market rally in March and April may not last, most analyst agree we are in the mist of a bottoming process and many indicators show that Americans are optimistic that despite corrections that may occur in this rally, that the market will generally have a positive grown over the course of the year.

5)   Finally, the market will hit bottom when government stimulus programs begins to work. This will bring back consumer confidence, which will then reduce unemployment, re-capitalize the banks, loosen credit, and bring the stock market back.

It is obvious that all of these problems are interrelated and feed upon each other. But they are all symptoms - the outward manifestations of the problems - and not the causes or the cures. What is scary is the speed at which these symptoms appear to turn around in the pass month once people seem to have developed a sense of optimism in the market.

It seems many buyers are not waiting to find out when the real estate market will hit bottom and have begun buying.

Not too long ago, many real estate speculators made a bundle of money through quick purchases and sales. Speculators and their followers were snapping up real estate without truly analyzing the market and forecasting changes. Then came the sub-prime crisis..

According to an article published on the Wall Street Journal a week ago, most Americans still see real estate as their best shot at wealth despite the current economic downturn. In October 2008, Zillow.com conducted a survey of 2000 adults and 61% believed that the value of their home would either remain level or rise over the next six months. Another survey of more than 1000 homeowners sponsored by Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. An online survey of 5000 people commissioned by Citigroup found that only 32% believed it was a good time to invest in stocks, (One must keep in mind that Nasdaq has declined over 78% since its peak at the internet bubble and many stocks are trading below their cash value) - but 51% surveyed said it was a good time to buy a home.

In the same week, it was announced that the November payroll decline of 533,000 was enormous and biggest since December 1974.  Some economist even predicted that the fourth quarter contraction in GDP could hit 8%., which is 0.2% more sever than the 1980 recession.

In this mix of bullish consumer confidence and bearish economic news, where should investors head?  To real estate investors; research and analysis of the fundamentals must be performed and followed diligently.  Many economists agree that fundamentals data such as immigration, birth rates, size and nature of households are difficult to predict on the long term basis, but it is not difficult to follow the trails of income and employment growth as well as increase in immigration rate to the next “hot” city with potential growth.

The same article quoted William Frey, a demographer and senior fellow at the Brookings Institution, Washington, says that young people and immigrants are likely to flow to Florida, Georgia, South Carolina, North Carolina, Tennessee, Virginia, Nevada, Arizona and more affordable interior parts of California.

Another researching firm, Newland Communities LLC based in San Diego named Washington DC, Raleigh and Charlotte, North Carolina, Atlanta, Dallas, Houston, Phoenix and Las Vegas as their top cities for growth potential.

For someone who are interested in taking advantage of the down market for the purpose of self enjoyment, second home investment, rental income investment; the above areas may be worth a closer investigation. Cities with low growth and falling populations must be avoided.

The real estate market is inevitably cyclical in nature. The market has seen its recent peak and has fallen hard to its bottom (?).  At these conditions, and with a long term perspective in mind, the returns generated from tax deductions, rent, amortization, and property appreciation increases.  After all, investing in properties with great potential in a down market is definitely wiser than buying and “chasing” the market when it is over inflated.

Americans may not be buying homes, but international buyers are finding the U.S. housing market an enticing place to invest their money.

International buyers are driven to the US real estate market by bargains and currency rate advantages. Additionally, as 30 percent of these buyers tend to buy with cash, the mortgage credit crunch is not a worry for them.

Florida, California, Arizona, and Texas are the top destinations for international real estate buyers according to a National Association of Realtors (NAR) survey.

NAR Chief Economist Lawrence Yun says, “the real estate sold to foreign buyers in Texas tends to be modest-priced homes … More than 60 percent of the homes purchased … are priced under $200,000.”

The comparatively strong Canadian economy continues to drive Canadians to look for real estate deals in the US. National Association of Realtor (NAR) Studies show that almost double the number of Canadians are buying US real estate compared to 2007 and that number is likely to keep pace or grow as Canada will lead the other G7 countries in economic growth in 2009 according to a new International Monetary Fund (IMF) study.

While Canada is clearly not immune from the ongoing global financial crisis, the country is expected to see economic growth in the range of 1.2 percent in 2009 according to IMF. While that is less than half of what Canada experienced in 2007 it is expected to be the best performance among Japan, the United States, Italy, France, Germany and the United Kingdom.

The IMF anticipates the U.S. economy will continue to be slow next year, posting an almost zero growth rate of 0.1 percent for 2009.

Applies to: Non-resident aliens (form 1040NR)

If you sell US real property then you have two issues to think about: Withholding tax and a tax return.

US real property, by the way, is not just land and building. It includes any interest in real property other than as a creditor. It includes, among other things:

• Personal property associated with the use of real property, such as furnishings sold with the property. This is quite common with Florida and Arizona vacation properties.
• Shares of a US corporation, where more than 50% of the value is derived from real estate (shares of certain public corporations are exempt).
• An option to purchase real property.

Withholding tax

The purchaser must remit 10% of the gross sale proceeds to the IRS. This applies whether or not the purchaser is a US person or not. However, this FIRPTA withholding can be:

• Eliminated, if the sales price is under US$300,000 and the purchaser warrants that s/he will use it as a principal residence.
• Reduced, if the standard 10% is higher than the actual tax, and the purchaser obtains approval from the IRS, using form 8288.

Filing a return

You must file a US return to report the sale. It doesn’t matter whether there was a gain or a loss on the property, or whether the tax withheld is more than sufficient – you must file the return.

If you have held the property for at least a year, the tax will generally be 15% of the gain, and some may be taxed at only 5%.

This communication is designed for the information only.  Readers should not act on any of the information without seeking professional advice.  This communication does not constitute professional advice.  SF Partnership accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of this information.

This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.  The foregoing legend has been affixed pursuant to US Treasury Regulations governing tax practice [Circular 230 §10.35]

Releasing the full findings from its 2008 National Association of Realtors (NAR) Profile of International Home Buying Activity, Canadian in particular are taking advantage of the current soft U.S. real estate market by buying vacation property or second homes. Percentage of Canadian buyers doubled from last year, from 11 percent to 23.5 percent - now the biggest foreign buyer market in the U.S.

The NAR report also finds that “64.4% of Canada buyers plan to use their U.S. homes for vacation purposes. On average, foreign purchasers plan to stay in their U.S. property 2.6 months of the year. A third intend to use the U.S. home a total of 3 to 6 months”.  Condominiums were popular among foreign buyers from Canada: nearly half of all properties purchased by Canadian buyers were condominium/apartments.

Foreign exchange rates have helped keep US homes more affordable, the value of the U.S. dollar as compared to foreign - especially Canadian and European currencies has dropped over the last several years. The effect net when combined with lower U.S. home prices, means that the true cost for a U.S. property is actually less in foreign monetary terms than in previous years.

Although it is still seen as a healthy number of international buyers entering the market to supplement the declining domestic sector, the faltering markets in the UK and Europe have had an impact on the amount buying in the US this year – predicted to be far higher then current figures would suggest.

Of the 4,000 US-based agents surveyed between May 2007 – May 2008, some 26 percent served international clients in the past year and nearly half of those clients ended up purchasing a home. The primary reasons some clients did not eventually buy a house were home price concerns, immigration laws, and property taxes. “If visa regulations that favor longer stays for overseas buyers such as retirees from abroad were in place, these sales levels would be even higher,” said Tony Macaluso, 2008 chair of NAR’s international business group.

“Many international buyers recognize that real estate is an excellent investment and are drawn today by abundant inventory, low interest rates and a softer dollar. These conditions allow them to own their own a piece of the American dream,” said NAR President Richard Gaylord.

Foreign buying trends in USA
May 2007 – May 2008: Source NAR
- 150,000 – 190,000 properties sold to international buyers
- Florida, California Texas. Arizona, New York, Washington, Nevada – most popular locations
- 14% of foreign bought property cost over $750,000
- Average foreign purchase cost $297,000
- 40% of buyers paid in cash
- Canada, UK, Mexico, China, India and Germany most active buyer markets
- Percentage of Canadian buyers doubled from last year, from 11% to 23.5% - now the biggest foreign buyer market in the US.
Source: NAR

Many savvy international real estate investors are aware of the soft US real estate market right now. Almost every real estate property website and newsletter is filled with hundreds and thousands of bank foreclosure listings.  Many of these listings are in top vacation states or in highly desirable parts of the country. At these deeply discounted prices, one may even consider purchasing one of these properties as a second home or as a vacation rental home for long term investment purposes. But with thousands of websites advertising bank foreclosure properties, beware of the many new foreclosure scams.

Many of these scams prey on suffering homeowners with currently devalued properties. But as a potential investor, the “Bailout” scam is one to look out for.  In this scam, the “Rescuer” gets the desperate home owners to surrender their title to the house, convincing them that they are making a deal to become a renter and will buy back the home over the next few years. Homeowners, are told that someone with better credit can secure new financing to prevent the loss of the property, are cajoled into surrendering the title.

The “Rescuer” then lists the property on the market and sells it to unsuspecting property investors. By this time, a buy back becomes impossible for the original homeowner for they have permanently lost possession, and the “rescuers” leave with all or most of the home’s equity. The property investor now holds title to the dream rental income property, but is stuck with an unwanted tenant that has little chance of fulfilling monthly rental fees and potential litigation costs.

There is no one better to safeguard your future investment than yourself. Doing your research and working with reputable advisors is the best defense against fraudsters.

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