In my previous blog, I listed some examples of how respected organisations like the BBC, Irish Times and Business Week can give US housing a big thumbs up in one month and a big thumbs down just a few short weeks later.

The reason, as I mentioned, was because the looked at housing trends over a period of weeks rather than months or years. In addition to that, those particular weeks (between June-July 2010) were particuraly volitile because homebuyers were rushing to meet a government imposed deadline.

The well publicised first time homebuyers credit expired on June 30 and so a property sale must be completed by that date if the new owner wanted to get his or her tax credit.  As any economist would easily have predicted, the average for June and July was normal, but sales that would have naturally closed in July were pushed forward to June. 

And so, June sales were higher than they should have been “Sharp jump!” and July sales were lower than they should have been “Record low!“

Let´s take Tampa Florida as an example (which is near our stunning Waterside at Coquina Key development).

If you look at the June (2155) and July (1486) sales for 2010, they average 1820 sales per month.  Sales in June and July 2009 were 1876 and 1885 each. Sales in June and July 2008 were 1481 and 1431 each.

Nothing too exciting there - this year was same as last year and much better than 2008. The expiry of the tax credit simply meant that June and July this year are particularly bad months to examine housing trends.

The six monthly figures for Tampa are a little more useful

Feb-July 2008:  9,497 sales

Feb-July 2009: 9,651 sales

Feb-July 2010: 10,731 sales

Doesn´t exactly lend itself to dramatic headlines does it?

The national figures are even more illustrative. There were 4.58 million properties available for sale in July 2008. In July 2010 there was 3.98 million. In other words, even with record foreclosures in the past two years, there were so many people buying properties that housing inventory levels had fallen by 600,000.

Let´s look at an even longer timeframe (and I´ll stop boring you with stats after this!). Even allowing for a poor July, Annual housing sales in the USA should be approx 5 million in 2010. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years.

The point I´m trying to make is that comparisons always need to be put into perspective and useful ones are always over a longer time frame. 

You don´t have to be Warren Buffett to realise that reacting to monthly movements in activity and price levels makes for exciting headlines but it is unlikely to make you rich. You´d be better off researching a few things very well, making a medium to long term plan, and then sticking with it.

That´s what Torcana do in Florida, and investors have very kindly started to thank us for it online.

Kind Regards

Colin

August is usually a quiet time of the year for newspapers and magazines and so the latest housing figures in the USA received wider attention than they usually do.  Judging by the way the headlines were complied however, it would seem summer silliness isn´t quite over yet.

Consider the headlines from last week:

I hope everybody had an enjoyable summer break. I was fortunate enough to spend a few weeks in the north western coast of Spain, in a lovely Galician fishing village called Sanxenxo.

Winding down somewhere scenic and reading a few interesting books* is a great way to relax and recharge the batteries, but thank heavens for Blackberries and wireless internet connections.

Oh they have their faults, I´ll grant you that, but I´d never be able to bring the family to the coast for a few weeks without them.

Like it or not, I can see this type of “working” vacation becoming ever more popular as the years go by.

* My holiday reading

1. The Big Short, Michael Lewis

2. Race of a Lifetime, Heilemann & Halperin

3. False Economy, Alan Beattie

Kind Regards

Colin

Some positive housing market indicators taken from the Florida Realtors Association website

Florida existing home sales: Up 15%
(month-to-previous-year comparison)

Florida existing condo sales: Up 33%
(month-to-previous-year comparison)

Florida existing home median price: $143,400

Florida existing condo median price: $95,000

National existing home median price: $183,700

National (Freddie Mac) mortgage rate (all housing types): 4.44%

…………………….. 

Details on all of Torcana´s Florida real estate listings can be found here.

I received an excellent article on the Spanish market in my inbox today from www.globaledge.co.uk - one of the best providers of property news and opinion in the market. Anybody active in the overseas property industry should subscribe to their newsletters. Please see an extract of this article below.

…………………………..

If you think the market you’re working in is tough, spare a thought for the hard working agents on Spain’s costas.

For most of us, the one positive about a working in a smaller market is that many of our competitors have fallen by the way side and there’s less competition for each potential buyer.

Agents selling overseas property in Spain have no such luxury.  Buyer volumes have fallen dramatically, but in many cases competition for business has actually increased, forcing even some of the best run agencies to close their doors.

Once we were friends…

An agent’s main competition on the Spanish coasts is now increasingly the Spanish banks, companies who used to work (more or less) happily in partnership with the industry.

Imagine this scenario:  You work hard “closing” a deal.  Your buyer agrees and approaches the bank for a mortgage.  However the bank deliberately offers tough terms (40%+ deposits) but offers your client 100% finance on another similar property and is also prepared to discount heavily to get the property it owns off its books.

This is exactly what’s happening in Spain and it is not only putting agents out of business, it’s disrupting the whole middle market as agents who want to make a living only have two choices:

1.    Target cash buyers who are in a minority but at least can be closed
2.    Sell high-end properties where the competition from banks is less (the majority of bank stock is low to
mid end apartments in sub prime locations)

Tight-fisted bankers
The obvious third option is of course for an agent to work with the banks but the banks seem unwilling to allow agents to make even a meager living from the process.  GlobalEdge spoke with a property agent recently who sold 26 below-market value apartments for €110,000, a €90k discount from their peak valuation.  The agent was paid $500 a sale which equates to 0.45%.  He worked his socks off and made €13,000 in six months.

Desperate and reactive

Although the situation is clearly terrible, it would be wrong to accuse the banks of cutting agents out through a cynical and well-thought out sales and marketing strategy.

According to a number of Globaledge contacts, banking staff have been told to get properties off their books and in many cases seem willing to accept almost any price. This is a conversation one of their contacts had with a bank manager last week:

Bank manager:  You seem to like the property.  It’s €100,000

Potential buyer:  I’ll pay €70,000

Bank manager:  [pause] …….OK

Judging by this conversation, some of the properties the banks hold may be totally worthless. 

The banking industry needs to act

It is no secret that the banks are hiding huge property losses on their balance sheets.   Prices are being kept artificially high (at least officially) because properties are not being put on the market.

The Spanish economy depends disproportionately on construction. The property sector and wider economy will not recover until the real estate market fully corrects.

That correction could be dramatic (if banks start dumping properties onto the market because of a rise in reservation ratios for example) or it could be slower and less painful. 

A slower correction is better for everyone and for this to happen, banks and agents must work together.  Banks cannot sell properties alone, they don’t have the time or expertise; and their unilateral reactive approach is not in their interests, or the interest of the wider economy.

A very positive article on the Florida Tampa Bay coast was published earlier this afternoon in the USA Today. Please see main extract below.

Florida is a huge second-home destination. It seems to have something for everyone: secluded beaches and urban buzz, golf communities and marinas, high-rises and bungalows at prices from ultra-luxury to shockingly affordable. It’s also diverse. The mansions of Palm Beach are far removed from the beach towns of the Panhandle and theme parks of Orlando.

But if everything that Florida offers came together in one place, it would be on the coast of Pinellas County. This includes Clearwater and St. Petersburg, just outside Tampa. It’s known by other names, including the Tampa Bay Area.

“We call it the ‘Nature Coast,’ ” says Debra Nobile of Innisbrook Real Estate Services. “The east coast (of Florida) is all big buildings and parking lots. Here, everything is nestled among the trees. There’s more beach. It’s more laid-back.”
Anthony Jaquinto, a longtime Realtor with Re/Max Realtec Group, says the area has great appeal to part-timers.

“The second-home market is big, about half my business,” he says. “It’s because of the beaches and the country clubs and all the other amenities.

“The Tampa Bay Area has an enormous amount to offer. There’s a really terrific airport, and within 35 minutes, you can be at towns up and down the coast or in premier golf communities. We have professional football, baseball, hockey, a big downtown and lots of cultural happenings.

“It’s much more cosmopolitan than Jacksonville or the Panhandle but much more affordable than Naples or Palm Beach, and a lot more natural than the entire East Coast. There are so many choices and amenities, and it’s all very user-friendly.”
It even has major theme parks: Busch Gardens and Adventure Island.

In much of Florida, only the deepest pockets can afford waterfront. But Pinellas County — the strip of coast from St. Petersburg north to Clearwater and beyond — invites a wide range of buyers.

“There are more or less luxurious communities, gated or non-gated, condos, single-family homes and townhomes,” Jaquinto says. “The price range allows almost anyone access to the Gulf. I can show you a smaller two-bedroom condo right across the street from the water for $150,000 or penthouse apartments on Sand Key for $2 million. Whatever your purchase price, we can probably accommodate you.”

That’s more apparent since the BP oil spill in April caused jitters on Florida’s west coast, and prices for some listings dropped 5%.

Condos along the water begin around $150,000, and single-family houses, even those with boat docks, can be found in the low to mid-$300,000s. Inland property is even less. Condos in the area’s premier golf communities begin at just $100,000, Nobile says.

The combination of low prices, beaches and urban amenities attracts buyers largely from the Northeast and Midwest. Jaquinto says many properties are used just for spring break and winter holidays. Thanks in part to affordability, they are often rented out at other times.

For people that purchased property in the USA between 2003-2007 it´s been a pretty disastrous 3 years. Don´t think anybody will disagree with that.
 
What about the people that bought in 1980 or 1990 or 2000? As the chart below illustrates, they are looking just fine. The red line is property prices adjusted for inflation every year and the blue line is average property prices in each of those years.

 
 
 
What about the people purchasing today at the 2001 prices? Where will they be in 10, 20 or 30 years?
 
Buying at historical lows means the rental yields will be high and once financing becomes available the supply of buyers (and property prices) will increase dramatically. If you purchase in 2010 at 2001 prices and sell in 2015 at 2005 prices, you´ve more than doubled your money.
 
However, the longer term view will depend a lot on interest rates and inflation too.
 
Unlike the Greeks, the US government can inflate its way out of trouble. Whatever your opinion is of the US debt (53% of GDP by the way), it´s ability to borrow is greater than any other country on the planet thanks to the unique status of the dollar.
 
Borrowing levels will have to stabilise though, and although there are lots of ways of doing that (some painful, others problematic) inflation is going to be a side effect. 
 
If inflation does take hold in the US, that means interest rates will go up, which means higher mortgage payments for people. That´s not good if you have a mortgage.

Historically, that has also lead to higher rents.

It has also led to higher property prices. 

So where will that leave the proud owners of distressed Florida properties with no mortgages in solid locations with steady renters?
 
Laughing probably, all the way to the bank.

Kind Regards

Colin Murphy

Harsh as it may sound, there are several ways those who are still liquid can profitably take advantage of a global downturn which is still causing much suffering to others 3 years after the credit crunch began.

One of these ways, which Torcana identified more than two years ago, is to purchase highly discounted and undervalued properties from distressed sellers. To maximise the return and minimise the risk of these types of properties, they must be purchased
 
- in wealthy, democratic economies
- with a history of renewal and recovery from recessions
- in fundamentally sound cities and neighbourhoods
- where locals rent long term
- where locals have and are currently purchasing these properties

Apart from that, the properties must be fully completed, cashflow positive and in well located and well run buildings or communities.
 
I´m sure there are plenty of other types of properties that can make you a healthy profit, but these are the ones we´ve identified with the best risk/reward ratio. It´s difficult to see how these kinds of properties will give any serious problems over the next 5 years and the potential benefits are huge.

So our criteria is very strict, but we´ve found plenty of properties that tick all these boxes and the latest is Arbor Lakes in Orlando. Here you can buy for 30 cents on the dollar in a beautiful and pre tenanted condo with 7-9% net rental yields.
 
If you haven´t received an information pack, please send an email to investments@torcana.com and request one.

Kind Regards

Colin Murphy

“Too much” is a very vague term. It would be more accurate to say “What happens when people don´t want to lend to governments anymore”.  Nonetheless, if a debt or a deficit is perceived to be too high, a country needs to borrow less, spend less and/or grow more. These are very difficult options.
 
For Ireland this meant higher income taxes, higher VAT, lower public salaries, higher retirement ages, lower capital spending and less state support for the elderly and children. Tough medicine to be sure, but I´m proud to say we had the stomach for it, unlike lots of other (mostly Mediterranean) countries that should be taking similar measures.

France is a good example. There was a massive public uproar recently when the retirement age was increased … to 63 years ….in small increments between now and 2018. They´re getting no sympathy from me!   
 
Germany, on the other hand didn´t need to do anything nearly as extreme as the Irish because they are a conservative and prudent economy with low wages and high productivity. Between 2001-2006 they were drinking diet cokes while the Irish, French, British and Spanish were downing straight whiskies and margaritas. Their finances were fine and thanks to their awesome economy they can grow their way out of a recession a lot quicker than everybody else.
 
These are among the reasons we´ve started promoting multi tenanted German properties in key locations. 
 
Feel free to call or email me (investments@torcana.com) if you´d like to learn more.   

Kind Regards

Colin Murphy

A government’s debt is simply the total amount a country owes to its borrowers and the total amount owed is often expressed as a percentage of GDP (the size of its economy).
 
Governments usually borrow money by issuing a bond, which are mostly bought and traded by banks and investment funds.  If it is a 10 year bond, the country pays a fixed interest rate to the bond holders every six months and then pays back the principle after 10 years.
 
For example, let´s say a 10 year old country with a €100 million economy has been borrowing €10 million every year. It´s total debt will be €100 million, which is 100% of its GDP.
 
Greece has been making headlines lately because its debt has reached 113% of GDP, which is one of the highest in the world and almost double the 60% limit imposed (in theory!) by the EU.
 
Government Deficit & EU Crisis
You could be forgiven for thinking a government deficit is something weird and complicated, but it´s not at all. It is simply the difference between what a country earns and what it spends in a fiscal year.
 
For example, let´s say Country A earns €100 million in 2009 from taxes collected and profits on government funds. During that year it also spends €110 million in health, education, defence and other public services. Its deficit is €10 million or 10% of its GDP that year.
 
The fact that pretty much all countries in the EU not just broke but tore up their own rules regarding debt limits (60% of GDP) and deficit limits (3% of GDP) has caused all manner of jitters in the financial markets this year.
 
Greece was the worst offender overall in 2009 (debt 113% and deficit 13.6%) although countries like Italy had a higher debt ratio (115%) and Ireland had a higher deficit ratio (14.6%). 
 
So there are 16 countries in the eurozone all using the same currency, but they have very different levels of debts, deficits, unemployment levels and recovery measures. That worries people.
 
The same could be said for the USA (Texas is quite healthy, California is certainly not). Of course, this overlooks the fact that the USA is a single political entity whereas the EU is anything but.
 
A US President is quite restricted in domestic and economic policy though. Republicans don´t want to increase taxes and Democrats don´t want to decrease services.
 
Messy compromises in both Brussels and Washington then! 

Kind Regards

Colin Murphy