Canadian property investors looking south may find merit in the US property market. According to Forbes, 2017 was a bumper year for the US property market. Home prices are continuing to rise, and inventories are declining. This indicates a sellers’ market is on the cards. Snowbirds from Canada looking for a real estate investment south of The Great White North will find that the US property market offers many worthwhile investments. Of course, the decision to invest valuable CAD into the US property market is not one to be taken lightly. There are many considerations which need to be factored into the equation, not least of which are the following:
- Job growth prospects
- Real estate appreciation over time
- Interest rates and their impact on mortgages
National housing demand increased sharply after 2009 when prices plunged, and homes became affordable. However, since 2015 there has been a slump in national house demand. One of the most notable trends in the US market has been the gradual increase in interest rates since December 2015. Presently, the Federal Funds Rate (FFR) is 1.50% – 1.75%. This figure is sharply higher than the interest rates following the global financial crisis when the Fed slashed rates close to zero.
The next meeting of the Fed FOMC is on June 13, 2018, and there is a 99.5% likelihood of the Fed increasing interest rates by 25 basis points in the region of 1.75% – 2.00%. This is important for several reasons. Firstly, the cost of financing mortgage loans will increase as the interest rate continues its upward trajectory. This increases the urgency of purchasing real estate for investment purposes. As a Canadian investor, there are several important points to bear in mind:
- Las Vegas, Nevada, Fort Worth Texas, Sacramento California, and Ogden Utah showed double-digit increases in home prices in 2017
- Minneapolis Minnesota, Darren North Carolina, Portland Maine, Boston Massachusetts, and Columbus Ohio enjoyed 8% home price increases in 2017
- Job Growth rate increases were strongest in cities like Durham North Carolina (3%) Las Vegas Nevada (2.6%), Ogden Utah (2.7%), Fort Worth Texas (2.7%), and Grand Rapids Michigan (2.3%).
- Home price versus income price differentials were strongest in Minneapolis Minnesota (5%), Sacramento California (15%), Ogden Utah (12%), Portland Maine (9%), Fort Worth Texas (7%), and Boston Massachusetts (7%).
- Washington state reported a 12.1% increase in house prices over Q1 2017.
There are many considerations for Canadian investors to bear in mind, notably: Is it better to invest in US real estate or to have the money sitting in a bank account in Canada? What type of rental income is possible with US real estate? Is it worthwhile investing in low real estate growth states like Washington and North Carolina?
A quick glimpse at North Carolina
The top 5 appreciating North Carolina cities over the past 18 years include: Topsail Beach, Asheville, Eure, Hot Springs, and Kure Beach. The median home value in North Carolina is $163,134, and there are an estimated 3.8 million homes and apartments available in the state. It’s interesting to point out that just 34.94% of homes are priced higher than $224,001. The other 65.06% are $224,000 or less. Other points to consider include How much you’re likely to spend on insurance services with North Carolina providers? Given that home prices are significantly cheaper, home warranty costs and home insurance costs should be less.
A quick glimpse at Washington
Fortunately, the stats are pointing to increasing real estate prices in states like Washington. For example, the state-wide median sales price has increased to $324,300 in Q1– substantially higher than the same period a year ago. It’s not only about buying a home in the US that’s important to Canadian investors, it’s the ability to maintain the home, and protect the property externally and internally. Home insurance is mandatory with mortgages. In Washington state for example, Washington providers of home warranties are another consideration that must be factored into the equation.
These home warranties are used to protect the systems and appliances in homes. Canadian investors who are not on the West Coast of Canada (and further away from WA state for example) will find these to be useful ‘insurance’ against the inevitable wear and tear on home systems and appliances. All in all, there is merit to be had in investing in US real estate, provided that it is in the right location, there are significant job growth prospects, and median home prices are increasing across the state. Several other considerations must be factored in, such as the impact of rising interest rates on mortgage approvals, and how that may impact the rental market.