The economic headlines over the summer very much concentrated on jitters on the world markets which forced dramatic drops in the various international indexes, yet digging a little deeper behind the headlines gives a picture of steady, if painfully slow, growth in the US which ought to be carefully considered against this backdrop of market freefalling.
The US real estate industry is also showing fledgling signs of recovery. Even so, to keep ahead during uncertain times, savvy investors need to appreciate the real meaning of diversification.
Sparked by weaker than expected figures, and fears about European and US debt, the financial markets dropped significantly at the end of July and beginning of August. However there were also important positive moves taking place at the same time, including a resolution to the US debt ceiling situation and strong second quarter earnings from America’s corporates.
North American perspective
Figures from the US housing market aligned themselves with this positivity, with new projects breaking ground at a level not seen since the very beginning of the year. Construction of single-family houses increased 9.4 per cent in June from the previous month, while overall work began on 629,000 houses in June, up 15 per cent since May. May sales in the US also showed surprising strength, with annualised rate of home sales increasing from 4.73 million in April 2011 to 4.86 million in May 2011.
In a recent interview with Bloomberg, Stuart Millar, CEO of Miami-based construction company Lennar,the third-largest homebuilder in the States , was quoted as saying: “It is beginning to feel like the worst days of the housing market are getting behind us… Stabilisation and recovery will continue to be a slow and rocky process.”
Steve Murray, editor of the REAL Trends Housing Market Report was also upbeat recently when he was quoted in May as stating: “The fact that the actual average price of home sales has now increased two months in a row, despite numerous analytic reports to the contrary is another bright spot in a housing market that seems to have found the bottom.”
This positivity needs to be tempered, of course, by the advent of the glut of foreclosures still clogging up the US real estate system. Indeed, in mid-July Federal Reserve Chairman Ben Bernanke said during a testimony to the House Financial Services Committee that “the high proportion of distressed sales are keeping downward pressure on house prices”.
“The demand for homes has been depressed by many of the same factors that have held down consumer spending more generally, including the slowness of the recovery in jobs,” he added.
I believe that the huge numbers of foreclosed properties currently available in the US will only begin to recede within the next two years or so, adding to the slowness of the pace of the economic recovery.
Cayman’s Unique Sellers Point (USP)
Although the US has seen its real estate market hid hard in recent years, the same cannot be said for its neighbour, Canada. The Canadian real estate market has held its ground and the Cayman Islands has displayed this same Canuck-style spirit because both countries have not had the borrowing capacity as the US and Europe.
Up until now, Cayman’s lending policies have done a thorough job in ensuring that the economy has been protected and foreclosures are kept to a minimum. The Cayman Islands government should continue to ensure that this policy remains, by not lending to buyers who cannot afford to purchase; everyone needs to have skin in the game.
In the Cayman Islands we did not see the same devaluation of properties as took place in the US, and volumes of transactions remain steady. Much of the market movement is taking place at a higher price point right now, up an average 25 per cent of property values of a year ago.
The number of deals moving at the higher end of the market indicates one of two things – that prices themselves have moved or that activity has ramped up in the higher price point, with interest by cash buyers seeing value in the Cayman market. I believe the latter to be true as Cayman continues to place itself as an attractive option for US investors.
Diversification is key
Investors who are really able to comprehend the picture will have understood the importance of diversification within their portfolio. Banking giant HSBC highlights the point in its most recent Global Investment Perspective market report when it stated:
“After the recent sell-off, we believe the heightened risks are now reflected in the markets, leading to attractive valuations. Therefore we are comfortable with a tilt towards risky assets, although we continue to emphasise the importance of diversification, given the significant volatility and uncertainty.”
It is important here to really appreciate the true meaning of diversification, which is not simply to diversify the stocks and shares within a portfolio, but to broaden that portfolio to include an entire range of investments, including property, in order to mitigate risks.
Tough times demand a tough stance
Taking this further, I believe it is important to drill down and analyse exactly what type of real estate gives you and your family the best opportunity for growth. Choosing the most reliable, progressive and successful real estate broker is therefore imperative if you want to make the most profitable investment decisions in this sector of the market.
A recent meeting in Colorado of the top one hundred worldwide RE/MAX brokers, to which I was invited, highlighted the aggressive stance that RE/MAX is taking to ensure that our customers and clients are given every opportunity to make the most successful real estate investment available to them during these difficult economic times.