The Feds cut its benchmark lending rate to historic lows Tuesday and promising to combat the U.S. recession head-on and aggressively. By doing so the Federal Reserve served notice that more unconventional actions probably are ahead as it fights to reverse the nation’s economic downturn.

The Fed pushed its rate from an already low 1 percent to a target range of 0 to 0.25 percent. This is lowest point ever for the target rate, which banks charge each other for overnight loans. The funds rate affects the rate for a wide range of loans in the U.S. economy.

In a statement, Federal Open Market Committee said: “The outlook for economic activity has weakened further … the Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

In a step to boost the housing market, the central bank also has been purchasing pooled mortgages-called mortgage-backed securities-and debt issued by Fannie Mae and Freddie Mac. Fed officials said that efforts to purchase mortgages backed by Fannie Mae and Freddie Mac were being ramped up. Experts say, this should have a visible effect on the housing market in the months to come.

The good news this week was the Bureau of Labor Statistics reported that inflation fell in November. The BLS said that consumer prices fell 1.7%, the second straight month with a record decline in inflation. On a year-over-year basis, consumer inflation rose 1.1% from November 2007 to last month.

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.

According to the latest Zillow Home Valuation Research, value of real estate properties in the Charleston, South Carolina area retreated only mildly amidst the credit crisis which swept the whole country. This clearly shows  Charleston is top choice for savvy second home investor who are seeking value, enjoyment and potential for further appreciation in value.

source: Zillow

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

You’ve decided to purchase property in the U.S. What next? Unless you’ve saved up enough to pay cash, your first step is to arrange financing. 

And despite all the news about the U.S. mortgage meltdown, it’s still possible to arrange a secure mortgage on a U.S. property. 

Although most Canadian banking institutions don’t lend money to private investors wanting to buy U.S. real estate, they likely have a U.S. banking affiliate that does. BMO Bank of Montreal, for example, directs clients to its U.S. subsidiary, the Harris Bank, which based in Chicago. 

The process for Canadians to obtain a mortgage on a U.S. property is quite simple, says William Mies, district sales manager of mortgage sales for Harris Bank. Your application can actually be done over the phone through the bank’s team of mortgage specialists who will request the following:

•your credit report
•your income and assets 
•your employment history 
•two years of T1/T4 tax forms 
•two months of bank statements 
•a current mortgage statement (if you have a mortgage) 
•a signed purchase contract (if you’ve made the purchase)

According to Mies, you should expect to pay a minimum down payment of 20 per cent of the purchase price for a home that’s to be occupied as a second home, and 30 per cent for a home that’s to be used as rental property. He also says that you will likely be charged a .25 percent premium over the prevailing U.S. rate for the same mortgage product.

For example, if a mortgage is offered to U.S. citizens at 5.875 percent, Canadian citizens can obtain the same product at an interest rate of 6.125 per cent. Harris Bank provides only adjustable-rate mortgages to Canadians, but these mortgages do provide an initial fixed-rate period of either one, three, five or seven years.

Mies advises potential borrowers to carefully assess their short and long-term financial goals, as well as their payment and equity objectives before choosing a particular loan. “While longer terms traditionally carry a slightly higher interest rate, the difference at the moment is negligible,” he notes. “And longer fixed-rate terms are always the safer way to proceed for security.”

-The Toronto Star (September 27, 2008)

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