Falling dollar hurts USA BUSINESS
26 | NAR VIEWPOINT WORDS | Cindy Fauth
www.opp.org.uk | JUNE 2011
The U.S. dollar has been weakening for the past two years and its depreciation could continue for the remainder of the year. The dollar is weaker not only against the major currencies of the Euro, Pound, and the Yen, but also against the Ruble, Zloty, Won, Baht and Rand. Why ... and what are the implications for property?
a safe, reliable haven. Today, with the fi nancial market recovering quite strongly, the ‘panic’ impact on the dollar is no longer in play. Instead, things are in decline. Investors around the world seem to have lost confi dence in the dollar and while the U.S. still has strong growth prospects - and has historically always rebounded strongly from economic downturns - the country has lost competitiveness.
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The country also has a sizeable trade defi cit. To help rebalance this persistent trade defi cit, the weakening U.S. dollar – in theory – is supposed to encourage exporters by cutting their prices overseas. It is also supposed to discourage imports, forcing Americans to buy fewer foreign products. John Deere, for example, can now sell its tractors to Brazil at lower prices. Also, many Americans may reconsider travelling abroad when a struggling dollar means that you have to fork out more than $10 for a Big Mac meal in
raditionally, global fi nancial panic has always forced the dollar up as investors search for
Rome, compared with $4 in the United States. However, the weakening dollar could actually worsen the trade defi cit if Americans keep buying foreign products at higher prices. Imported oil is one example where Americans are buying out of necessity … even at higher prices.
Whichever way one’s take on the desirability or undesirability of the falling dollar goes, one thing is clear as related to the dollar’s impact on real estate. Right now U.S. real estate
“Expect around a 5.7% average rate on a 30-year fi xed mortgage by the year-end”
is cheap, from the perspective of a foreign buyer, which may mean more international purchases this year. According to NAR chief economist Lawrence Yun, the U.S. housing market continues to show fragility. Home sales have risen broadly - by more than 20 percent from their low point last year. At the same time, home prices slid down after the homebuyer tax credit expired last summer. A review of several local MLS data indicates a
fairly consistent downward trend in the ratio of the “fi nal sales price”-to- “original listed price”, implying that homes are not being priced to sell from the start. The most recently available data is mixed. While existing-home sales – which measure actual closings – fell 9.6% in February, pending sales – which measure contracts to purchase – rose slightly. Severe winter weather in a number of areas of the country hurt both closings as well as pending contracts – as evidenced by deeper downturns
in activity in the Midwest and Northeast regions.
Look up | Job numbers are increasing and confi dence levels are starting to improve
For buyers debating whether or not to purchase new or existing homes, an existing home is a far better buy right now. New home sales are stuck in a rut. Only 19,000 newly constructed homes were sold in February. That translates into 250,000 new home sales (at a seasonally annualized rate) across the whole of the USA, which would represent the worst activity in at least 50 years. New home sales are also selling at a higher price than normal in relation to the price of existing homes. Existing homes are being discounted by 30 to 40% off the price of new homes. Historically, the price differential between existing homes and new ones has been 15 to 20 percent The faster pace of incoming distressed inventory into the marketplace does not necessarily mean a further slump in the housing market. The key is demand. If these distressed inventories are quickly picked up by buyers, then no worries. But if they linger in the marketplace then we can expect a notable further decline in home values. All indications point to plenty of ready buyers for foreclosed homes, not uncommonly with multiple offerings. So housing demand appears to be present at the moment and could grow
as the economy turns for the better. Last year the demand arose from the tax credit offered to fi rst-time homebuyers. This year the demand will come from improving job market conditions. The latest jobs fi gures (released April 1) show that a net 216,000 new jobs were created in March alone, with 478,000 job creations in the fi rst three months of this year. We are on track for 2 million new jobs for 2011. Yes, mortgage rates will surely rise – but not alarmingly. Expect around a 5.7% average rate on a 30-year fi xed mortgage by year-end up from the current 5% rate.
The second-home market should also begin to show a recovery this year. Stock market gains are providing the fi nancial wherewithal for wealthier households to buy vacation homes. Investors, looking for diversifi cation and an infl ation hedge, are looking at deeply discounted homes to generate rental income. The median price of an investor purchased home in 2010 was cheap – at $94,000. That is certainly better than putting money in the bank and getting essentially nothing in return, as well as protecting against the possibility of devalued currency from potential rising infl ation and very high budget defi cits. One thing that was lacking for the second home market in the past two years was mortgages to buy non-primary occupant homes – because government- backed mortgages are not there for these properties. An eye-popping 59% of investor home purchases were made with cash in 2010. The U.S. housing market will return to the stability experienced prior to 2000. Until then, it remains a solid investment opportunity for foreign buyers. According to preliminary results of the 2011 International Homebuying Activity report conducted by NAR, foreign buyers accounted for $82 billion of U.S. residential real estate sales – up from $66 billion in 2010. Stay tuned for more on this report and the implications for the U.S. housing market.
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