2013-05-31

Miami Vice? Foreign inflows support US housing market


During my recent visit to Miami, I saw that real estate was moving and prices were rising. It seems like only yesterday I was hearing about a 20-year overhang of condominiums and houses. Was I dreaming?

We all know markets work in cycles, but this is ridiculous. How could the biggest bubble burst of recent history i.e., the crash of 2008-2009, be over already and the Miami real estate market be off and running again?

Parts of the answer have to do with the healing power of time and the expansion of the population in an economy, which is exhibiting many drivers of growth, albeit slow growth. The US Federal Reserve’s easy monetary policy is also helping. Even so, it seems as if real estate in Miami may be moving too far too fast.

The usual ingredients we have talked about are at work in this real estate revival as well. Rents have been pushed higher in many markets. In much of the United States, apartment rents exceed the monthly carrying costs of paying for an average single family home. We have also seen growth in the labor market, painfully slow growth, but growth nonetheless. More jobs mean more home purchases.

But another important element is also at work. Money is flowing into the United States. This flow is boosting the value of the US dollar. Once investors see that the US currency is on the move, even more people will want to buy dollars, and the dollar’s value will increase even further.

Right now there are many fundamentally sound reasons to support investing in the United States. Businesses are awash in cash, all industries are experiencing very high returns on equity and many assets are trading and/or selling at historically low prices. These conditions attract international capital flows. And right now many of these attracted flows are coming from emerging market consumers who are looking for a safe place to park their growing wealth. Property markets in many cities with international access are benefiting from this trend. In Miami, homes are being bought like wildfire, many by South American clients and many with cash. San Francisco has seen a similar boom with many homes being bought by wealthy Asians, and again many sales are being made with cash.

So, are we returning to a bubble before the pain of the last bubble has fully subsided? I would answer “no” to that question. This time around, credit standards are more stringent and valuations are low. Also the “price to rent” ratio, which is a good check on the way the housing market is priced, is low.

To me, the “economy” feels better, and I believe another business cycle is underway. Investors need to watch for signs of excess, but I am talking about peaks of excess that could topple the US economy. These peaks are probably months or years down the road.

So for now, I say buy with skepticism and intelligent research, and always match valuations with fundamentals. Euphoria is a bad thing, but what we are seeing is not euphoria. It is just the pleasant relief felt when a nightmare is nearing its end.




No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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