One in Five Canadians Eyeing U.S. Housing Market
William Hanley, Financial Post · Mar. 31, 2011 | Last Updated: Apr. 1, 2011 12:16 PM ET
The U.S. housing market continues along its dismal trajectory, with overall prices dropping slightly again in February from the previous month. The median existing house price is now $156,100, which is more than 30% below the peak four years ago. Meantime, there is now 8.6 months supply and not one economist on a housing panel sees the possibility that prices will recover in five years to pre-bubble levels.
So what is the reaction of many Canadians to their American neighbours’ misfortune?
Yippee, say some Canadians who have been watching the U.S. housing collapse and rubbing their hands in anticipation of scooping up bargains. A recent survey for BMO Bank of Montreal by Leger Marketing shows that an astonishing one in five Canadians would consider buying a U.S. property.
Canadians are, not astonishingly, interested in the very areas where the U.S. housing depression has hit the hardest. Among the cities in the sunbelt, prices in Tampa have dropped 44%, Phoenix 54%, Las Vegas 67% and Miami 49%.
There’s no doubt the low, low prices and a Canadian dollar above parity are making buying a U.S. property very tempting. The favourable conditions may be a once-in-a-lifetime buying opportunity. And many Canadians have already seized the chance.
However, purchasing a chunk of heaven comes with many ifs, ands and buts. And no one I’ve seen clearly spells out the possible pitfalls and dangers better than Pat McKeough of The Successful Investor, who has a long track record of dispensing sound advice to his clients.
First, from a pure investing standpoint, McKeough reckons that a primary residence is enough exposure to real estate. So he is more skeptical than most. But for many people, buying that piece of paradise is a long-term dream and not just an investment. For those folks, McKeough outlines risk factors to consider that might snap them out of their dreams:
*Watch out for unexpected costs. Some states, such as Florida, can charge out-of-state homeowners higher property taxes than state residents. As well, homeowners in coastal states that face frequent hurricanes and floods (including California and Florida) often face high insurance costs
*Take a skeptical view of bargains in U.S. real estate investments. House prices in some U.S. markets have risen against the national trend. In Los Angeles, for example, home prices have gained more than 20% in 2010. That may indicate that these markets are moving back to more normal levels in the wake of the sub-prime mortgage meltdown and subsequent recession. But McKeough says they still face significant challenges, such as high unemployment and weak consumer confidence. So bargains may not be as appealing as they seem.
*How long do you plan to spend at your vacation property? You’ll have to budget for your home’s care while you’re not there because vacant homes invite burglars and vandals. If you plan to spend shorter periods of time at your vacation residence (less than six months, say), and you’re not concerned about making a return on the sale of the property, you may consider renting, instead. This will help you decide whether you want to commit permanently to a community before you buy.
*Remember that you’re buying a neighbourhood, not just a house. Owning real estate, especially vacation property, McKeough says, is much different than holding investments like stocks and mutual funds. It can involve unique risks, such as rising crime, unpleasant neighbours and other changes in the neighbourhood of your property. These risks can make it hard to find buyers when you are ready to sell. Before you buy, take a walk through the neighbourhood and take a skeptical look at the people you see.
And then there is the whole question of financing. BMO, not surprisingly, says snowbird buyers could finance with a line of credit arranged by BMO or one of its U.S. subsidiaries on their primary residences.
Though the survey says one in five Canadians would consider making a sunbelt property purchase, many of them might not wish to consider putting up their homes as collateral.
Buying a U.S. property is a big, big step, fraught with risks. Consider that between 1996 and 2006, six million Britons bought homes in Spain, which has now been gripped by a real estate depression. So, most of those Britons have learned a nasty lesson in the harshest of ways.
That doesn’t mean that buying a bargain home in Florida or Arizona won’t work out. But, first, a big gut check is in order. And then another. And another.