Although it might be too early for domestic investors in the United States to buy distressed residential real estate, that’s not necessarily the case for foreign currency-based investors in Europe, Russia and Brazil following huge rallies against the plunging U.S. dollar since 2002.
Since hitting an all-time high against the euro in October 2000, the U.S. dollar has crashed 73% against the single currency. The buck has also tanked versus most major and even insignificant foreign currencies, except the Zimbabwe dollar – hardly an achievement. Though the popular press jams home the message about a sharply lower dollar and its ultimate inflation consequences, they fail to look at the other side of the bear-market coin: U.S. assets are cheap!
Long-term Dollar Trend is Bearish, but Dead-Cat Bounce Coming
Market-timing any investment is almost impossible. What matters, however, is the degree of absolute decline in that asset in both nominal and inflation-adjusted terms, the value of that asset’s base currency versus other currencies and supply and demand fundamentals. Plus, interest rates are an important variable supporting asset values over the near-term.
On all scores, it’s impossible and probably reckless to make a bullish long-term U.S. dollar forecast with the nation suffocating from twin deficits, two Treasury-draining wars in the Middle East and a massive entitlement crisis over the next five years as the baby-boomers retire. Also, the prospect of foreign central banks dumping more dollars over the long-term is virtually a guarantee as the balance of economic power continues to shift from the United States to China.
But beware of heavily one-sided trades in late 2007. The dollar is already heavily oversold against all cross-rates, especially the euro and the natural resource currencies of Canada and Australia. A dead-cat bounce is coming, and that cyclical rally might act as the catalyst for foreigners to start accumulating distressed U.S. residential real estate in 2008.
Sub-prime Equals Buy-time for Europeans
With the euro breaking records versus the dollar almost daily and approaching the nadir of its historical bear-market trading band (previously the German mark prior to 1999), value investors in Europe can find huge bargains in U.S. dollar-denominated assets, including real estate.
The powerful euro and other regional currencies in Europe are mighty strong in the United States. Investors seeking beach-front properties can now find premium real estate at 20-35% discounts compared to just 18 months ago with very favorable financing terms, despite the credit-crunch.
Miami Hit Hard – and More Supply Coming
In the United States, sub-prime mortgages have nearly wrecked the real estate markets of the once-hottest cities prior to the peak in values in July 2006; Miami, Las Vegas and Phoenix have been hit especially hard and are still facing more supply issues in 2008 as developers swallow a glut of unsold homes and condominiums. Miami is particularly distressed with over 70,000 units coming online next year on Biscayne Bay, downtown Miami (mostly on Brickell Avenue), Miami Beach and North Miami Beach.
Cranes still litter the Miami skyline as developers dump even more supply in 2008. Many speculators have literally walked away from their deposits, fleeing the scene as prices continue to decline ahead of construction completion. Many developers are now running for cover, converting condo sales to rentals as they clamor to salvage income.
In a word, this is a major bear market.
If you’re seeking a premium property located on the beach, then take a good look at the disasters unfolding on South Beach and North Miami Beach.
Miami’s best values lie in Bal-Harbour, the crème-a-la-crème of North Miami real estate.
Despite the saturation of Miami condos, Bal-Harbour’s values have actually held quite firm – for the most part. The “golden mile” is littered with high-end luxurious condominiums, is spotless and home to a local police force. Although most high-end buildings are still selling at a high premium, prices have declined from their peak last year. But more importantly, two buildings located right on the beach have significantly reduced their offering prices for more than a dozen units – all with beach-front and bay views, large balconies, 24-hour security and 10-foot-plus ceilings.
Europeans, Russians and Brazilians Love Miami
Europeans continue to have an affinity for Miami. The city has become a major international jet-setting destination for not only Europeans and Russians, but Latin Americans, too. In fact, the Brazilian real, a “joke” on foreign exchange markets since the 1970s, has ranked as one of the strongest currencies in the world since 2003 gaining a cumulative 49% versus the dollar.
Miami’s residential property market hasn’t bottomed. But for international investors, current prices expressed in foreign currency terms are undoubtedly becoming extremely attractive, particularly in euro or sterling terms. And for Brazilians and other Latin American investors, the dollar’s big decline presents huge values for distressed property investors. Now is the time to start bargain-hunting ahead of a bottom in late 2008 or 2009.
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