In most US cities, real estate prices have returned to their 2006-07 level. But opportunities still exist for investors looking for a strong rental return.
Denver is the American city that has experienced the largest influx of workers in the last twelve months: 706,000 people looking for a job have settled there. At the same time, the average home price in Denver jumped 11.5 per cent during this period to $441,500.
In the United States, the real estate market is spread everywhere. The price of more than half of the homes now exceeds their pre-crisis level. The real estate crisis caused by subprimes, these questionable mortgages granted to poor households to gain ownership, is indeed over in the United States.
The recovery in the real estate market is mainly due to the strength of the job market.
A strong market
In twenty-one of the top thirty-five US cities, prices are reaching a historic high, reveals a study of the real estate site Zillow. And in seven major cities (Dallas, Seattle, Denver, San Antonio, San Jose, Austin and Portland), the price of over 95% of housing is above the peak of 2006-2007.
For the 12 months, the average price of a home in the United States has increased by 8.3% to $217,300. This is 8.4% above the previous peak. Beware, some cities remain devastated though: in Las Vegas for example, less than 1% of homes have regained their pre-crisis value.
While interest rates have begun to rise in the United States, they remain at a favorable level: an average person can borrow at 4.5% over thirty years. For now, the slow rise in interest rates has had no impact on the property market. Another driver of the increase in price is the decrease in the stock of homes for sale, which contracted 4.8% last year. But it is mainly the strength of the job market that explains the rebound in the real estate market. In May the US unemployment rate fell below 4% of the labor force, a level not seen for decades.
Like Denver, other lesser known cities remain accessible and much more profitable like Nashville (Tennessee), Oklahoma City (Oklahoma) or San Antonio, Dallas, Houston and Austin (Texas), even San Diego (California)
In the United States however, there is a close link between the labor market and the real estate market. According to the Bureau of Labor Statistics, a US citizen changes jobs on average every four years. According to a study by the National Association of Realtors compiling data from Linkedin, Denver is the American city that has seen the largest influx of workers in the last twelve months: 706,000 people looking for a job would have settled there.
Meanwhile, the average home price in Denver jumped 11.5% during this period to $441,500. In the capital of Colorado, the median value of a home reaches $397,700, 65% above its peak in 2006-2007, and 99% of homes are worth more than at the time of the housing bubble!
If rates remain accessible, many Americans will be unable to borrow, which is why rental demand remains strong.
Be selective
New York, San Francisco or Miami – the favorite cities of Europeans in the United States – now seem too expensive to allow an investor to obtain an attractive rental return. At best you can expect a gross yield of 5% in these cities. In New York for example, it is difficult to have better than a big studio if your budget is between 500,000 and a million dollars. For a two-bedroom apartment, you need more than a million dollars, and you will not be in Manhattan!
In contrast like Denver, other lesser-known cities remain accessible and significantly more profitable like Nashville (Tennessee), Oklahoma City (Oklahoma), Atlanta (Georgia), San Antonio, Dallas, Houston and Austin (Texas) or San Diego (California). These cities are all the more interesting because the rents have increased much less than the purchase price: it is therefore crucial not to buy too much to obtain a satisfactory rental return. In Dallas a very large house in perfect condition sells between $180,000 $250,000 and yields between 5% and 6% annual yield.
Rents which have increased by only 1.3% in median value in the last 12 months should continue their catch-up, because the rental demand is strong in the United States. But if rates remain accessible and the subprime crisis is over, many Americans will remain unable to borrow. Owners whose property has been seized by a bank can not apply for new credit until at least seven years have passed. Likewise most students who have taken out a student loan to finance their education cannot buy a home until they have finished repaying their loan.
The same is true for those who have fallen into the trap of revolving credit cards. This explains why the average age of first-time buyers in the United States now exceeds 35 years. For those who plan to buy a property to rent it, this is a favorable situation, as it will take many years for these tenants to become homeowners.
Get good advice
What advice to give to those who are considering investing in the United States?
It must be remembered that an owner can evict any unscrupulous tenant in less than a month, but it must however return the property in perfect condition between two occupants, which has a cost. Another American specificity is that some homeowners’ associations can set binding rules. For example they can prohibit short-term rental, or even visiting children or young adults. In many buildings, it is possible to rent an apartment only once every twelve months. The foreign buyer has an interest in carefully reading the rules of the condominium before committing.
If you are interested in purchasing real estate in one of the most affordable cities like Chicago, consult a specialist like Kale Realty. There are opportunities but risks as well, and if you are investing from abroad you need a local broker well aware of all local angles and aspects to consider.