This post is summarized from a recent article in the Globe and Mail (Feb 14, 2011, Special Report)

The resurgence of the loonie and continued degradation of U.S. home prices are spurring more Canadians to invest in property south of the border.

But while this might appear an opportune time to snatch up a retirement home or dream vacation property, experts warn that jumping into these major purchases without doing extensive research is a recipe for disaster.

The list of things to consider before buying in the United States is long, ranging from estate taxes to property maintenance to insurance.

“There are lots of things that most people don’t think about,” says Laura Parsons, a mortgage expert with Bank of Montreal. “I know quite a few people who went into the market in the U.S. without a lot of knowledge about what that means.”

First and foremost, experts caution that speculative investments in U.S. real estate continue to be a roll of the dice.

“If you are buying a recreational property for personal use, [the situation now is] probably about as good as it gets,” says Bob Gorman, chief portfolio strategist at TD Waterhouse, noting that the dollar is high, prices are low, and interest rates are low for those who need financing. “I draw a distinction, though, for those people who ask me about buying for investment purposes, who are not going to use it themselves.”

A key reason is real estate prices. As low as they’ve sunk, it’s still possible they could sink lower. And even if they don’t, no one expects them to bounce back quickly.

As a result, speculators who might be thinking of investing in a place to rent or flip might be wise to hold off. “We’re not quite sure it’s the bottom, and there’s no rush because once it does hit bottom it’s going to stay pretty flat for an extended period of time,” says Sam Sivarajan, head of private wealth management in Canada for UBS.

High levels of unsold homes are overhanging the market, Mr. Gorman said. Historically, the number of homes for sale at any given time in the U.S. has been equal to about fourth months worth of sales. Right now, it’s closer to 10.

But that hasn’t been scaring away investors, who accounted for 19 per cent of purchases in November of 2010, up from 12 per cent one year earlier.

Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce, agrees that speculators need to be more cautious. “If you’re using it for personal use, then I think the resale potential is not as important,” he says. “No one wants to lose money, but if you’re really buying it because you’re going to enjoy it with your family – then if you find something you like and it’s a reasonable price range, and interest rates are low if you need to borrow money, and the dollar’s relatively high – then you may want to consider it.”

In other words, favourable conditions or not, it’s still a gamble, but one that might be worth it for a property you will enjoy and would love to own.

For those thinking of taking the chance, one of the first considerations should be taxes. Be aware that in some jurisdictions property taxes for foreigners are higher than for local residents. If you rent the property out, the rental income could be subject to withholding tax. A key consideration for wealthier individuals will be estate taxes.

Brand new tax rules increase the exemption on U.S. estate taxes to $5-million, which essentially means that Canadians who are not U.S. citizens and who have a worldwide estate that’s worth less than $5-million don’t have to worry, says Mr. Golombek.

“It’s really important to get advice before you buy,” Mr. Golombek says. “I would approach a U.S. tax adviser in particular, or a Canadian adviser who specializes in cross-border issues. This may not be the regular accountant who does your tax return; chances are it won’t be, but hopefully that person can refer you to a specialist.”

Another thing to think about is the amount of your total assets that you want to allocate to real estate. A recent survey by the Royal Bank of Canada suggests that Canadian millionaires tend to have about 15 per cent of their assets in real estate (12 per cent for those with more than $5-million of investable assets).

Insurance is another item for the pre-purchase checklist, especially in hurricane-prone areas, Mr. Gorman says.

Sherry Cooper, Bank of Montreal’s chief economist, has another tip if the property is to be a vacation home: check the price, availability and frequency of flights from Canada. “Where we are they fly direct only in the winter, and that’s fine with us,” says Ms. Cooper, who has a rental property, a vacation property and a property for her mother in Florida.

Ms. Cooper knows first hand that property is not always a liquid investment: she bought a small condo in Florida about eight years ago when her mother wanted to start spending winters there. Ms. Cooper later bought another property for her mom but found that she couldn’t unload the first condo. “It was on the market for six months. I cut the price a few times, but never even got a single offer,” she says.

But, she adds, prospective buyers can take heart in the fact that she has found a steady supply of renters. “I listed it on Craigslist and two sites for vacation property rentals and I was overwhelmed with requests. And on Craigslist I got someone who rents it 12 months a year.”

For those like Ms. Cooper who do make the splash, Mr. Golombek suggests considering a separate will dealing just with that U.S. property. “It’s a lot simpler for your executor to deal with a will in, for instance, Florida, with Florida rules than trying to have it dealt with in Ontario,” he says.

And, no matter how much preparation you do and professional advice you seek, be prepared for the unexpected.

As one of Ms. Parsons’ acquaintances discovered, a new climate can lead to surprises. “I would never have thought that you have to put Saran Wrap on your toilets to keep the water from evaporating,” Ms. Cooper says. “They actually have to have neighbours come in and flush the toilets, because it can affect the pipes.”

We're continuing to post new US housing information to help Canadians who are planning to buy vacation homes in the US sun-belt.  The following is a summary of Standard&Poors (S&P) Case Shiller Index ending October, 2009.  For complete and detailed index report results, head to www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/

The Standard & Poor's/Case-Shiller home price index (covering 20 top US cities) released Tuesday (December 19) edged up 0.4 per cent to a seasonally adjusted reading of 145.36 in October from September. The index was off 7.3 per cent from October last year, nearly matching expectations of economists surveyed by Thomson Reuters. The index is now up 3.4 per cent from its bottom in May, but still almost 30 per cent below its peak in April 2006.

For US sun-belt areas, prices in Las Vegas were down -.1%, Miami down -.4%, Tampa down -1.6%, Phoenix up +1.3% and San Diego up +.4% from September to October

“Coming after a series of solid gains, these data are likely to spark worries that home prices are about to take a second dip,” David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement. That happened in the early 1980s, he said, and the current housing recovery appears more solid.

The federal government has stepped in with an extraordinary level of support this year for the housing market. Home price gains since the summer reflect the rush of home buyers trying to close their deals before the original expiration date of a federal tax credit. The Nov. 30 deadline was extended last month to April 30.

Besides a credit of up to $8,000 for first-time buyers, Congress expanded the program to include homeowners who have lived in their current properties for at least five years. They can now claim a tax credit of up to $6,500 if they relocate.

The Federal Reserve is also buying up $1.25-trillion in mortgage-backed securities to help keep interest rates at historical lows.

Canadians considering a purchase of that “home in the sun” have much to consider given the conflicting data coming from various sources.  Buried in all the information coming at us is something called “the shadow inventory” which are homes in the process of foreclosure and not yet counted as available for sale.  Also, we should be aware that although sales volumes of existing homes are climbing from month to month, they’re being sold at lower prices. Below is a summary of what Standard and Poors (S&P) have recently reported.

The economic downturn appears to be over, but Standard & Poors think the recovery will be sluggish. Most importantly, however, the housing market appears to have stabilized. Home prices across the US have risen for five consecutive months, according to the S&P/Case-Shiller index and the number of homes sold also continues to rise. Home sales hit a 14-month high in October, though there are worries that the first-time homebuyer credit may have disproportionately fueled the rise.  And although S&P expect home sales and prices to fall off after November with sales decline more than normal in December and the first quarter of 2010, the worst appears to be over. The extension of the tax credit and its expansion to other than first-time buyers ease fear that sales could drop sharply.

But home sales have to be matched against the properties that are still in the process of foreclosure and could swell the supply of homes on the market. The supply of homes for sale dropped for both new and existing homes by 15% and 37%, respectively, reducing the unsold supply to only 6.7 months for new houses and 7.0 months for existing  homes(close to the rule of thumb of six months). However, S&P believes there is a large shadow inventory of homes in the process of foreclosure and homes that are being held off the market because of the weak prices. This inventory will likely limit any improvement in home prices. The drop-off in sales should bring home prices down, both because of the weaker demand and the likely shift in mix. We expect prices to drop about 7% from their expected November peak in 2010, which will bring the S&P/Case-Shiller index down about 35% from its July 2006 peak.

A recent post highlighted an article in the Globe and Mail focused on financing warm weather vacation properties.  This post is a companio to that article written by Roma Luciw.  Check out the LifePast50 "where to live" post category for more.  And, LifePast50 would sure appreciate responses from Canadians with actual southern buying experience – let us all share the benefits of your experience.

From an article by Lynn Adler published by the Globe and Mail Sept 29, 2009

For Canadians contemplating buying that “place in the sun” now might be the time. US home prices have started to climb for the third month in a row in July more proof a fragile US housing recover is under way.  The Standard & Poor’s/Case-Shiller home price index of 20 major cities rose 1.2 per cent from June to a reading of 143.05. Though home prices are still 13.3 per cent below July a year ago, the annual declines have slowed in all 20 cities for the sixth straight month.  For sun cities such as Phoenix, Dan Diego, Miami and Tampa, prices showed a small month to month (June to July)  increase.  Prices in Las Vegas continued to decline by an insignificant amount.

“We expected another gain but this is remarkable,” wrote Ian Shepherdson, chief U.S. Economist for High-Frequency Economics. He noted the index has risen at an 8 per cent annualized rate in the three months to July, the best performance since early 2006.

The index, however, is down about 33 per cent from the peak in mid-2006. Home prices are now at levels not seen since the third quarter of 2003. And, as noted, prices in Las Vegas as well as Detroit and Seattle are still falling, on a seasonally adjusted basis.

Prices in Las Vegas, one of the most speculative markets during the boom, are down more almost 55 per cent from their peak. In August, almost 80 per cent of home re-sales in Nevada were either a foreclosure or a sale below the value of the mortgage, according to a survey by the National Association of Realtors.

Foreclosures now are being driven by job losses, which are also weighing on the minds of consumers. The Conference Board said Tuesday that its Consumer Confidence Index dipped unexpectedly this month to 53.1 after three months of gains, down from the revised 54.5 reading in August. Nevertheless, there are clear positive trends in the housing markets. Home prices rose in 13 metro areas for at least three straight months.

The Case-Shiller indexes measure home price increases and decreases relative to prices in January 2000. The base reading is 100; so a reading of 150 would mean that home prices increased 50 per cent since the beginning of the index.

 We keep our readers and particularly those contemplating a purchase of a U.S. “place in the sun” up to date by replaying various media articles on the subject of U.S. home prices.  The focus will be on those articles related to prices in U.S. sun belt states.   Here is a recent article.

U.S. mortgage woes break records
J.W. ELPHINSTONE

11:32 EST Thursday, Mar 05, 2009
 
NEW YORK — A stunning 48 per cent of U.S. home owners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure, and that’s not the worst of it, new data Thursday showed.

The reckless lending practices in states like Florida, California and Nevada that were the epicentre of the housing crisis are no longer driving up the nation’s delinquency rate. Instead, the foreclosure crisis now is being fuelled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs.

A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 per cent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That’s up from 10 per cent at the end of the third quarter, and up from 8 per cent at the end of 2007.

Prime and subprime fixed-rate loans saw sharp increases in the fourth quarter, a sign that the problem is now the economy.

“We’re seeing increases in fixed-rate categories and that’s where the problems are coming from,” said Jay Brinkmann, the group’s chief economist. “The foreclosure picture is more clearly driven by the jobs market.”

That trend highlights one of the biggest challenges confronting the Obama administration’s mortgage relief plan launched this week. While the $75-billion plan could help change the loan terms or refinance up to 9 million homeowners, unemployed borrowers will have a hard time qualifying.

On Thursday, the Labor Department said new unemployment claims last week totaled 639,000, lower than expected, but still at elevated levels. Factory orders also slipped for the sixth month in a row in January, the Commerce Department reported.

“There can be no doubt that employers continue to shed labour at a frightening pace, with no end in sight,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a client note Wednesday.

© Copyright The Globe and Mail

On Feb 28, 2009  we are given the following update on the US economy, consumer confidence and housing prices.

U.S. consumer confidence did a swan dive in February with the confidence index down 12.4 points to a level of 25.  According to the Conference Board, this is a level not seen since the survey began in 1967.  This is the third consecutive record low and clearly surpassed expectations by a long shot!

In a separate release, the Standard & Poors Case-Shiller house price index capped off a terrible year with more record moves down.    On a month to month basis and on a year to year basis the declines were the largest ever.  Prices in every city the survey covers remain below year-ago levels with Las Vegas and Phoenix neck-n-neck for last place.  The S&P Case Shiller Home Price Indices (for detailed information go to www.standardandpoors.com)  tracks changes in the value of  residential real estate in 20 metropolitan areas across the U.S.

How much further do prices have to fall to be enticing enough for a Canadian to step up and buy that place in the sun?  Affordability is at its highest in almost 4 decades (ignoring the recent fall in the Cdn $) and on average there is 9 months supply of homes on the market which is 3 months more than “normal”.

Summarized from a Globe & Mail article of Feb 20, 2009 by Thane Stenner of GMP Private Client LP.  Although the article refers to prices of  high end properties, the theme of the article should apply to moderately priced properties as well.

Last week Mr Stenner met with a client who had just returned from Scottsdale Arizona, where the client had been scouting luxury properties.  Like many, this client is interested in taking advantage of the housing meltdown in U.S. sun belt destinations such as California, Arizona and Florida.

The end of 2009 might be an ideal entry point.  U.S. housing prices have been falling for about  two and a half years; by the end of 2009, most of the bad news should be priced in and savy buyers should be able to snap up (high end) properties at a further 15% discount to today’s prices.  The possibility of a stronger Cdn $ is another reason to be patient.