Real estate guide 2008: American dream?

Canadians look for bargains in the U.S. real estate market, but prices are still dropping.

Ajit Someshwar is an investor with a particular fondness for real estate. He prides himself on his market timing, and only invests in deals that guarantee a 15% rate of return. Right now, Someshwar’s eyeing the United States — and he likes what he sees. Home foreclosure rates are at their highest levels ever, and the housing price index is at its lowest point in eight years — down almost 8% from 2005. The loonie is near parity with the greenback, and the U.S. Federal Reserve this year has sliced 200 basis points off the interest rate, now at 2.25%. “The time is right,” Someshwar says from his office in downtown Toronto. “Prices are 40%, 50%, in some cases 60% cheaper than they were a year ago.”

News of great deals is attracting an explosion of interest from Canadians, report U.S. realtors, especially from snowbirds eager to snap up a coveted winter residence in the Sunbelt. While market watchers stress patience — especially since prices in many regions remain essentially flat and the U.S. market should fall further still — many Canadians are finding the conditions too tempting to pass up now. “With interest rates low,” Someshwar argues, “that will increase involvement in the real estate market, and prices will firm up.”

Prompted by such demand — and, no doubt, fewer buyers down south — the Condo Store Realty Inc., a Toronto real-estate brokerage, in February struck an agreement with U.S. developer WCI Communities Inc. to sell empty residential lots in Myrtle Beach, S.C., and Orlando, Fla. The lots cost US$200,000 each, and construction is about US$100 per square foot, which, Condo Store partner John Mehlenbacher points out, compares favourably to the $230 you’d pay for equivalent construction in Toronto. “WCI develops the amenities first — buildings, swimming pools, gates, roads,” he says, “so when people buy a lot they can see the product in terms of the community itself.”

But there may be even better deals to come. “We’re not even close to the bottom in many centres,” says Don Campbell, president of the Real Estate Investment Network, a Calgary-based research organization. “We’re starting to see the adjustable-rate mortgages reset, but there will be another wave of those in July and August, and then another a few months later.” Campbell says the U.S. market is at least 20% from bottom. “I’d wait until February next year before going in.”

Bill Nazur, a California-based expert in foreclosure investment, agrees. “The Sunbelt states still have 10 to 12 months of housing inventory oversupply, so we will see 15% to 20% reductions in prices from where we are today,” he says. Nationally, there were 3,974,000 houses on the market at the end of 2007. That’s about nine months of inventory, almost double the total in 2005. Another indicator that the market hasn’t bottomed out is that the rate of foreclosure starts and the percentage of foreclosures nationwide are at their highest levels ever, according to a survey in early March by the Research Institute for Housing in America, and those rates are still rising year over year, says Nazur.

If you have to buy now, make an offer that’s “at least 15% to 20% off market price,” says Nazur. New home builders will also take less — even if it strips awaytheir potential profit — since they may lose even more if they hold a property for another six months. Nazur also suggests looking at areas seeing upticks in commercial permits, not housing starts. A rise in commercial permits indicates an area is attracting investment and jobs, boosting demand for residential real estate. “What’s more, if housing starts are down, that’s often a good sign, because builders are holding off on adding inventory to the market,” Nazur says.

Market timing aside, non-residents should also be aware of the numerous tax snafus that apply to them, particularly when looking to sell. A withholding tax of approximately 10% kicks in on point of sale, and there are estate taxes, should the investor pass away, says George Dube, an accountant based in Waterloo, Ont., with a business in cross-border real estate transactions. “But the biggest gotcha,” says Dube, “is on income from rental properties.” In the U.S., non-resident owners of income properties must file an annual tax return. If you receive rental income from a property and haven’t filed taxes, you will be required on point of sale to remit 30% of your gross revenue from that property. “You don’t need to be a tax accountant to figure out how that can be financially devastating,” says Dube.

Investor Someshwar, however, dismisses such concerns. “Just like investing in Canada, you have to comply with the laws of the land.” True enough. And some U.S. real estate observers acknowledge that the high-flying loonie and bargain-basement interest rates mean the prospects for Canadians looking to invest in the U.S. are good — if not quite as good as they are going to be. “The time to invest, usually, is when there’s blood running in the streets. And there’s blood running in the streets now,” says Nazur. “But keep in mind that blood’s going tokeep on running — at least until the first quarter of 2009.”