Grab a slice of the American dream while it's still cheap
House prices are tumbling in tourist hot spots in Florida, but there are still potential pitfalls for buyers from the UK. Laura Howard reports
Sunday 04 July 2010
Today in 1776, the United States of America signed a declaration of independence from the Kingdom of Great Britain. But 234 years later the two countries are still inextricably linked.
The effects of the 2007 credit crisis, which was triggered by subprime mortgages in America, are still rippling throughout the UK. And, as unwritten economic laws state that the UK's housing market is six months behind that of the United States, recent figures from the US Commerce Department won't make pleasant reading. They reveal that sales of American homes fell by 33 per cent in May to a record annual low of 300,000 as President Obama's homebuyer tax credit recovery measures came to an end.
A glut of homes on the market is putting further downward pressure on property prices. The average US home is now worth $164,600, according to data from the Realtors (estate agents) group, compared with its peak of $230,300 in July 2006. And experts are forecasting further price drops of nearly 4 per cent this year.
Simon Pyle, the sales manager at UK-based property agent Countryside International, which specialises in Florida homes, said that price falls have been unprecedented. "In Cape Coral, Florida, for example, four-bed condos that were worth $800,000 four years ago are being marketed for as little as $200,000 under a 'short sale' agreement with the bank. This is the step before the more expensive route of foreclosure (repossession) where the bank just claws back as much money as possible."
Clare Nessling, the operations director at overseas mortgage broker Conti Financial Services, says: "We know of a two-bed property in Orlando being sold for $65,000, when in 2006 it was priced at $210,000 – and new homes are being sold for less than they cost to build."
But rock-bottom prices could present the perfect opportunity for Britons to invest in a holiday home on the other side of the Atlantic – especially as, triggered by the recent emergency Budget, the pound has started to reclaim strength against the dollar. Currently £1 is worth $1.50 compared with $1.35 in January. The US is the fifth most popular country for Britons to buy an overseas property, according to data from Conti – up from seventh this time last year. The top four spots are occupied by France, Spain, Portugal and Turkey.
Most Britons buy in Florida which – so long as the accommodation is within an hour's drive of Disney in Orlando – means a year-round rental opportunity. Orlando, which is also home to SeaWorld, Universal Studios and Epcot, receives an estimated 45 million visitors a year. "As only about four million of these are British, there is a constant stream of domestic tourists, which makes renting your property as feasible as it gets," says Mr Pyle. You may also be able to offset mortgage interest payments and other expenses against any rental income.
However, while tourists may be in steady supply, there are restrictions when it comes to the frequency at which you can rent out your home – and this will vary according to which of the four counties surrounding Disney your property is situated in.
"In Orange County, for example, there is a blanket restriction on short-term rentals of less than three months," says Mr Pyle. "So if you rent out the place for two weeks, it will be another two and a half months before you can rent it again, which is no good if you are looking for regular income. It's important that you find out about rental restrictions before you buy."
But in spite of apparent favourable conditions, there is no stampede of British buyers. "Compared with just two years ago, British buyers of American property are down by more than 70 per cent," says Mark Bodega of currency exchange specialist HiFX. "Those remaining are cash-rich investors who can afford for property prices to fall at least in the short term."
If you need a mortgage, don't expect plain sailing. In theory, there are no restrictions to foreign nationals owning property in the US so long as you can put down a minimum 30 per cent deposit. Interest rates on US mortgages are also still reasonable; a variable deal will cost 4.5 per cent and a three-year fixed 5.5 per cent, according to Conti. However, your total existing UK liabilities, such as mortgage payments, credit cards and even school fees, must not exceed 38 per cent of your gross monthly income in order to qualify for a loan.
Even if you can meet these stringent criteria, lenders are simply fussier these days, says Melanie Bien, a director at brokers Private Finance. "It is much harder to borrow in the US than it was before the credit crunch. Lending criteria are tighter and the maximum amount you can borrow as a proportion of the property's value has also fallen. In many states you will need a deposit of at least 50 per cent."
There are associated buying costs too. For properties bought with a mortgage, buyers should budget for about 4 per cent of the assessed value of the home in taxes and fees, says Mr Pyle. If you are buying in cash, you should factor in between 1.5 and 2 per cent.
If you buy a condo within a development you will also have to pay Homeowners' Association (HOA) fees which cover ongoing expenses such as buildings insurance, refuse collection, garden maintenance, water and cable TV. "For a typical three-bed condo in Cane Island, Florida, HOAs will cost between $300 and $400 a month," says Mr Pyle.
It will cost you to transfer money across the Atlantic to pay for your property, but using a specialist currency broker, such as HiFX, can be cheaper than a high street bank.
"This is especially important if you are buying off plan and need to make several stage payments," says Mr Bodega.
Using a specialist broker also means you can opt to "lock in" your exchange rate. This is a gamble in itself but at least you know exactly what payments are going to cost you in pounds.
In terms of the property itself, it's advisable to buy a new home in Florida, says Mr Pyle, as they will be better equipped to withstand hurricanes.
Mark Bodega, HiFX
The US housing market should be treated with a healthy dose of caution. As well as rising fore-closures (repossessions), other risks include a high unemployment rate and the possible increase in the Federal Reserve rate. Many analysts expect house prices to fall by between 5 and 10 per cent from Q1 of 2010 to Q1 of 2011. This is why returning buyers are the cash rich who can afford for prices to decline.
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