Investors and property agents were jumping for joy last week when billionaire Warren Buffett said the U.S. residential real estate slump will end by about 2011. 

According to Buffet’s latest annual shareholder Letter, “the industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data.

Paradoxically, this is good news. People thought it was good news a few years back when housing starts – the supply side of the picture – were running about two million annually. But household formations – the demand side – only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.” 

Jokingly, Buffet offered three ways to adjust the imbalance:

1. Blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program.

2. Speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers.

3. Reduce new housing starts to a number far below the rate of household formations. 

“Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious,” he said. “Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.”

 

Kind Regards

David Shaw

Sales & US Sourcing Manager

In the USA, the changes are even more dramatic than in the UK. Economic output in the manufacturing sector expanded in August, following 18 months of contraction, which is highly significant.  

The S&P/Case-Shiller index, which tracks home prices in 20 cities, ticked up slightly in May, its first gain in 34 months (see chart below left hand side). New construction of single-family homes rose in July for the fifth straight month.

Sales of existing homes are expected to show their fourth consecutive month of gains when latest numbers are released (see chart below right hand side).
 
Within the State of Florida, sales of existing homes have risen year on year for the past ten months in a row! Sales of existing condos in Florida are up 39% year on year.

In the more depressed regions of Europe and USA, it’s very difficult to grasp just how fast property markets in places like Florida can move. But I can assure you that it is very intense and the landscape changes every day.

For more information, please see www.torcana.com.

Kind Regards

Colin Murphy

Director

Torcana Ltd

 

In complete contrast to Ireland, our cousins in the UK and USA had the ability to pump enormous amounts of liquidity into their financial systems to help kick start their economies. While these countries have huge public debt as a consequence - the ripple effects of this liquidity on their housing markets has been dramatic. Anybody following international business news (or indeed the modest Torcana News Section) will surely have noticed this.  

In the UK for example, every single region in England and in Wales recorded a monthly rise in house prices between June-July 2009. The average monthly increase was 1.7% - the biggest in five years.   

Mortgage approvals are now at a 17 month high and 77% more mortgages were approved in July 2009 compared to July 2008. The number of transactions is also increasing steadily, as illustrated in the graph below. 

For more information, please see www.torcana.com.

Kind Regards

Colin Murphy

Director

Torcana Ltd

 

I watched a great documentary last night about the famous Frost / Nixon interviews of the late 1970s, and after it finished, I couldn’t help but indulge myself by drawing a few interesting parallels between the character arc of David Frost and that of the average property investor over the last couple of years.

 

David Frost used to be a somewhat confident, adventurous and carefree man who achieved easy fame through a variety of lightweight and rather wacky tv shows. He then came up with a brainwave involving an exclusive interview with Richard Nixon. Against all the odds he pulled it off and syndicated a series of groundbreaking interviews with the highly controversial ex President worldwide.

 

During the first three programmes Frost was alternately cautious, fearful and overawed by his subject; but by the fourth programme, a much more focused and aggressive interviewer had emerged. He went onto receive immense critical acclaim for the incredible responses and emotions he drew from the famously shrewd and taciturn Nixon.

 

Confident, adventurous and carefree are also adjectives that could easily describe the mindsets of many property investors purchasing during the high flying years of 2002-2007. Cautious, fearful and overawed would also be an accurate depiction of how most felt towards the end of 2008.

 

It’s all changing now though. Today’s buyers are, if you’ll permit me to finish the narrative, much more focused and aggressive than those who preceded them.  The Irish and the British are still buying properties, but they are much less inclined to purchase for a quick return and are instead carefully analysing distressed properties in US, Spain and Florida. They are also negotiating hard with sellers to achieve a high rental yield and are very focused on timely delivery.

There’s no doubt that it’s still very stormy out there, but as indicated in Issue 2 and in the Orlando Sentinel today, there are many clues out there that suggest we could be in the process of turning a very important corner.

 

Kind Regards

Colin Murphy

Director

www.torcana.com

 

The image of the swashbuckling Irish investor has taken quite a hammering over the last 18 months. Both Irish and non Irish media publications frequently expressed their admiration at the way the Irish purchased enormous amounts of offplan investment property throughout Europe and the USA.

Unfortunately, many of these same investors are now frantically trying to cut their losses and have retreated back to Dublin, Cork and Galway with their proverbial tails between their legs.

 

Where are we seeing market activity?

 

I honestly do think that the types of properties Torcana are promoting (i.e. sourcing high quality finished properties available at large discounts from highly distressed vendors) is the only market niche that has seen an increase rather than a dramatic decrease in activity lately.

The sector was previously dominated by the offplan market for vacation properties, for investment properties, and for a combination of both. In the next post I’ve described why demand for these types of properties has fallen off a cliff.

Markets which did well for completed / 2^nd hand properties, such as Germany and France are both also suffering quite a lot now.

 

Anybody out there agree?

 

 

Kind Regards

 

Colin Murphy

Director

Torcana Ltd