Is it time to buy US residential property?

Posted on 23 July 2009 with no comments from readers

Having travelled half-way round the world to attend the Agora Financial annual investment conference in Vancouver I am sleepless at 3.39am. And what do I see when the TV is turned on? Dean Graziosi selling his new book on how and why to invest in US real estate right now.

These guys have got thick skins. How many folks who bought books from this author are now sat on negative equity? Perhaps not if they followed his original buy cheap idea properly but many will not have gotten that bit right.

Three years ago when I was sleepless in Detroit the TV was full of advice on how to flip property. That I thought then was a major contrarian indicator and a sign of a bubble.

Time to buy now?

So logically if it was wrong to buy then, does that mean it must be right now? House prices have certainly gotten cheaper, and therefore must be a better investment than in the recent past.

The trouble is that I agree with newsletter writer Doug Casey who addressed the Agora event last night and pointed out that if house prices are this low with interest rates right down on the floor, just imagine how much lower prices will go if interest rates rise.

Why should interest rates go up? First, we have historically low rates so that suggests they will have to go up eventually.

Secondly, the US is running a massive budget deficit that just has to cripple the bond market; in short, in order to borrow that much more money the US will have to pay higher rates to savers.

Deficit and interest rates

Any sign of that deficit coming down? The new US president is committed to spending more on health, welfare and education as well as bailing out banking and auto manufacturing.

That money has to be borrowed and interest paid, or alternatively the government has to print money and debase its currency, and that will result in higher inflation and interest rates then have to rise or savers will pull out their money.

I have not read Mr Graziosi’s new book – it is only $19.99 down from $29.99 – and he throws in a free copy of his previous best seller on the subject (which presumably is not in great demand now). It might well have some useful ideas.

Foreclosure deals

From the TV commercial his main insight now appears to be that foreclosures on homes is offering the chance to buy US property especially cheaply. But he then said that rents were shooting up due to falling property purchases – well, in a recession house prices and rents fall, and using rent to pay a mortgage can go badly wrong.

Another speaker at the Agora conference yesterday, Barry L. Ritholtz, author of ‘Bailout Nation’ pointed out that national house prices are 46 per cent down year-on-year and that last month’s 3.6 per cent rise was well within the officially stated error rage of 11 per cent.

So while I can see the point that if you can get a really good deal then now is a great time to buy US property, but the interest rate argument suggests more price falls are to come, and that Doug Casey is right that the lowest prices will not come until interest rates peak and we are just not there yet.