Making a case for U.S. Residential Property Investment: “Let’s Look Under the Hood”

Making a case for U.S. Residential Property Investment

“Let’s Look Under the Hood”

In the previous 2 weeks, we have discussed U.S. real estate investment’s relative affordability and income potential.

In this week’s Deep Dive, we will look at what the Key Drivers of Property Prices are and make an argument on which U.S. cities represent the best projects for future price appreciation.

The utility of owning a home is greater than any other possession – a roof over your head, it provides a sense of security for present and future generations, the sense of incredible accomplishment that “I have MADE IT in life,” and the list goes on.

However, as an investment, we need to think about its ability to produce income (dividends/rental income, etc.) and future price appreciation.

We start this discussion by digging into what factors drove property prices in the past, what ‘new’ factors exist today, and (drumroll….) we will try to take a stab at where they will be in the future.

We will also introduce a new proprietary index: AM Job Prospect Index

First, what drives property values up?

This is a vast topic that can get very granular – see below for a snapshot of a 2019 article written by the New York Fed about Forecasting Home Prices.

But we will try to keep it simple.

Liquidity is plain and simple. The world has seen an unprecedented fiscal stimulus and monetary easing over the past 20 years.

A commonly accepted money base is M2 (Money in circulation, checking deposits, and savings deposits less than $100K).

Let’s look at M2 money supply over the past 10 years. You can see the amount the U.S. has grown its money base dwarfs any other country, and in fact, it is 4x the growth rate of the U.K. In absolute terms, the current M2 supply in the U.S. is almost twice that in Japan.

Now that we have identified the global macro drivers, we can look into where the money is flowing into – specifically real estate and, more importantly, why.

It’s not surprising that the top 5 states in terms are GDP are:

California Texas New York Florida Illinois
California Texas New York
Florida Illinois

This is consistent with our most popular destinations for real estate investments (see below).

Within this context, we take another cut at the data and look at which cities in those states represent the highest contributors to the overall national economy:

Here are the cities with over 2% contribution to U.S. GDP:

New York City (8%!) Miami Fort Lauderdale Fort Worth Dallas Houston
Seattle Chicago Los Angeles San Francisco Atlanta
New York City (8%!) Miami Fort Lauderdale Fort Worth Dallas Houston
Seattle Chicago Los Angeles San Francisco Atlanta

Now we look at cities with the highest GDP growth rates (over 1% y-o-y growth 2018-2019):

Seattle Los Angeles San Francisco San Jose
Austin San Antonio Portland
Seattle Los Angeles San Francisco San Jose
Austin San Antonio Portland

You can see that these cities naturally are attractive given the size of the economy; hence the probability of finding meaningful employment is higher. Now, the list likely looks much different 2020-2021, which I’m guessing will magnify the growth potential in the Texas cities even more!

Next, we will look at why these cities.

We have identified 3 main factors that raise the demand for properties in an area – 1) Economic prospects, 2) Gentrification 3) The China Effect

1) Economic prospects

AM Job Prospect Index

Our multifactor algorithm includes factors like the number of big companies moving to these cities, market capitalization of the new companies, new headquarter size, etc.

Using our “AM Job Prospect Index, in general, job prospects of U.S. cities appear to be better than other global cities. The average job prospect index for the U.S. is 70, but only 30 for other cities (the higher, the better). In the U.S., cities with the best job prospects are Austin, Dallas, Miami, Los Angeles. Austin, TX specifically, has the highest value as numerous big companies are setting up headquarters there– Tesla, Google, Amazon, SpaceX are just a few. Tesla’s new manufacturing plant in Austin alone will hire more than 10,000 through 2022. We can expect plenty of people to move to these cities, meaning increased demand and elevated home prices in these areas.

2) Gentrification

Gentrification is the process of changing the character of a neighbourhood through the influx of more affluent residents and businesses. When wealthier residents move into a neighbourhood, they often renovate homes, making them more aesthetically appealing and equipped with better facilities, which increases the value of the property. The addition of new and more “hip” businesses in the city also aids in job creation and can attract more people, increasing the demand and prices of homes.

According to the NCRC Research report, taking into account the number of neighborhoods gentrified and the intensity of gentrification, New York, Los Angeles, San Francisco, Houston, Austin, Miami are the most gentrified cities in the U.S. (arranged in order). Therefore, we can expect home prices to appreciate in these cities.

3) The China Effect

Instead of the usual demographic factors like immigration, we’ll look at the percentage of the population who are Chinese. Why do we do so? China has experienced rapid growth in recent years, and its people have gained a significant amount of wealth. It’s no surprise that according to the National Association of Realtors annual report of International Buyers of U.S. residential real estate, China was ranked #1 for the past 5 years.

Excluding predominantly Chinese cities, we see that the average percentage of Chinese the U.S. cities (9.85%) is higher than those in other major cities (8.25%). Thus, we can expect Chinese investors to be more inclined towards U.S. cities, demanding more houses and driving up prices in U.S. cities more than other cities. They will typically choose areas with a significant Chinese population as it offers a sense of familiarity. U.S. cities with the highest percentage of Chinese population are Los Angeles, San Francisco, New York, Seattle.

Based on the abovementioned factors and looking at the “top performers” in each category, prices will likely appreciate the most in Texas, Los Angeles, Miami. This is also in line with the price appreciation data provided by Case-Shiller Home Price Index and Zillow. Prices appreciated by 35.07% in Austin last year!

In summary, the conclusions in this report are consistent with our previous 2 reports. There is a tremendous amount of value in the Texas cities, with its abundant jobs, high wage growth, low taxes, easy of travel, strong ethnic mix, and the list goes on.

New York will always have a premium, and Los Angeles and San Francisco will always have specific attributes which make them unique.

HOWEVER, the high cost of living, home prices, and state taxes are quickly driving residents to other states. Almost every metric we see supports this argument. Gentrification in the U.S. is real and is happening much faster than we can imagine. Just look at new home sales from the largest home building company Lennar. They cannot sell enough homes, and it’s the Gentrification Effect we discuss above.

One area that the U.S. has lagged behind its low-cost international peers over the past 10 years is the vocational workforce – smartphone manufacturing, assembly, etc. This was a growth engine in the 80s before the Japanese began their auto manufacturing dominance. But slowly, the U.S. economy retooled and prospered again. Then in the early 2000s, the steel industry lost millions of jobs to low-cost manufacturers overseas, and those jobs have not returned.

The current trend of technology companies moving major offices inwards (See Texas) not only helps the local economies but it reflects a bigger theme – vocational employment. It may not be assembling smartphones, but it will be something else – smart cars, smart cities, smart grids, distribution centers, cloud kitchens, drone deliveries, and so on. Technology is clearly the growth driver going forward, and if you are thinking of real estate as an investment, you should look at states that offer this type of value. Right now, it is clearly Texas, and I suspect there is still more room to go here.

In next week’s Deep Dive, we will be bringing in a U.S. Tax Accountant who focuses specifically on U.S. Expats to explain how the tax regime on owning U.S. property is not as bad as you think and, in fact, could be the easiest and most flexible in the world!

Keep your eyes peeled and subscribe to our newsletter, so you don’t miss out! www.americamortgages.com

Making a case for U.S. Residential Property Investment: “It’s not Apples to Apples”

Making a case for U.S. Residential Property Investment

“It’s not Apples to Apples”

As you may recall, last week, we looked at the affordability between popular U.S. investment destinations compared to major cities in the world. We argued that the U.S. offered the best “entry price” for real estate investments on absolute terms and when adjusted for affordability.

This week in Part 2 of our Deep Dive Series, we look at the Relative Income Potential of the popular U.S. investment destinations compared to major cities in the world.

Investing in residential properties or buying-to-let is a form of a business, and as a business owner, making a profit is of priority. A common metric that we use to measure the profitability of a real estate investment is rental yield. Net rental yield measures the profit you generate each year from your investment as a percentage of its value.

Same as what we did last week, we shall compare data sets from 2 sample groups:

1. Major global cities:

Toronto Vancouver London Sydney Melbourne
Shanghai Beijing Hong Kong Singapore
Toronto Vancouver
London Sydney
Shanghai Melbourne
Beijing Hong Kong
Singapore

2. Top U.S. residential real estate investment destinations:

New York, NY Miami, FL Orlando, FL Ft Lauderdale, FL Ft Worth, TX
San Antonio, TX Austin, TX Dallas, TX Houston, TX Seattle, WA
Chicago, IL Los Angeles, CA San Fran, CA San Jose, CA Atlanta, GA
Portland, OR Las Vegas, NV
New York, NY Miami, FL
Orlando, FL Ft Lauderdale, FL
San Antonio, TX Ft Worth, TX
Austin, TX Dallas, TX
Houston, TX Seattle, WA
Chicago, IL Los Angeles, CA
San Fran, CA San Jose, CA
Atlanta, GA Portland, OR
Las Vegas, NV

On average, the net rental yield of popular U.S. real estate investment destinations is 3.49%, much higher than that of other global cities – 1.39%. This means that on average, for a property that costs USD 500 000, you can earn approximately USD 17,450 if this property is in the U.S. and only USD 6,950 if this property is in other global cities. This is after accounting for property taxes. We see that investing in the U.S. can earn you 2.5 times the income you will earn in other cities!

In the following chart, you will see the disparity in the profit flow more clearly.

Now, if we look at the net rental yield that takes into account both local property and rental income tax as part of the costs, we can see that the results are similar. U.S. destinations, on average, have a much higher yield than other global cities (3.40% vs. 1.36%).

Note: Even after considering income tax, investing in the U.S. can still earn you 2.5 times the income you will earn in other cities.

Myth Buster – The common misconception that the U.S. tax regime makes investing difficult and not feasible is unfounded. Even adjusting for taxes, U.S. residential real estate is superior investment.

To further strengthen our point that the income potential of U.S. cities is much higher than other global cities, including your home cities, take a look at the table below. If you live in the cities stated in the row, you should definitely not buy-to-let in the cities highlighted in red as the income potential in those cities is worse than your home. Instead, it would be best to invest in the cities highlighted in yellow, where yield is much higher.

Net Rental Yield differences between Major Global Cities and U.S. Residential Real Estate Investment Destinations

Let someone else pay for your mortgage.

To make things better, in some U.S. cities, you can even pay off a sizeable portion of your mortgage loan with your post-tax rental income. Using the AM debt coverage ratio, we see that in cities such as Orlando and Fort Worth, without considering other maintenance costs of your home, your annual post-tax rental income can cover all of your annual mortgage payment (with some to spare). This is rare in other global cities. In Hong Kong, annual post-tax rental income can only cover 17% of the yearly mortgage payment.

The following diagram shows the debt coverage ratio comparison (the higher, the better).

Solely based on net rental yield, you should always consider Orlando, Fort Worth, San Antonio, and almost never San Francisco. It is interesting to see some overlap with last week’s affordability rankings, where Fort Worth and San Antonio were at the top and San Francisco at the bottom.

Just like affordability, rental yield is also just another aspect of property investment. It is important to consider other factors too – growth potential of the city, capital gains, future price appreciations – which we will discuss in our next report.

To summarize, we see that U.S. real estate properties are outperforming other major global cities in terms of affordability and income potential.

Next week, we will get an even bigger picture by understanding the factors that drive property value growth and why these factors will affect U.S. real estate investments more than other major global cities. You won’t want to miss out!

Stay tuned for next week’s continuation of our Deep Dive series.www.americamortgages.com

Making a case for U.S. Residential Property Investment – “Cheap as Chips”

America Mortgages introduces….

In our never-ending crusade to acquaint and educate the world of the investment opportunities in U.S. residential real estate and the ease of securing financing, we launch “The Deep Dive Series.” We investigate major themes, dispel major misconceptions in the U.S. real estate market, and use data to confirm our thesis.

Over the next 5 weeks, we will publish a series of reports on the following theme:

Making a case for U.S. Residential Property Investment.

  • Week 1 – “Cheap as Chips”
  • We compare at the relative affordability of the major U.S. real estate investment cities vs. major global cities.

  • Week 2 – “It’s not Apples to Apples.”
  • We look at the relative income potential of U.S. real estate investment cities vs. major global cities.

  • Week 3 – “Let’s Look Under the Hood”
  • We investigate what drives property prices and why these factors are more constructive in the major U.S. real estate investment cities vs. major global cities.

  • Week 4 – “Its Bark is Worse Than Its Bite”
  • We dispel the misconception that owning U.S. property is burdened with taxes and complications when it’s probably the easiest and most flexible in the world.

  • Week 5 – “Bringing Everyone to the Table”
  • In the final report, we expand on the above topics and combine them into a comprehensive mosaic to be published and distributed. 

“Cheap as Chips”

This week is Part 1 of our Deep Dive Series where we look at the Relative Affordability of the major U.S. investment destinations compared to major cities in the world.

When investors look at where they should buy real estate, most will typically choose where they live. This is rational because you know the market, the financing landscape and can physically see the property at any time.

However, if the assumption is to earn the highest risk-adjusted return for an investment property, then it would be irrational to not explore all real estate investment opportunities that could offer you the highest return.

Of course, as a primary home, there are other considerations to motivate a homeowner, such as not worrying about a “roof over your head.”

This is particularly true in Asia and ingrained in the culture, but in many countries like Germany and France, homeownership hovers around 50-60% vs. say Singapore, where homeownership is over 90% (admittedly the highest in the world).

When buying anything, you look at the absolute price of the asset and the associated costs (which include mortgage rates, stamp duties, taxes, etc.), what you can afford, adjusted for the risk (to include research time), its income potential and lastly what you think the asset will be priced in the future.

Let’s start with the price and cost of U.S. real estate vs. major global cities. 

We compare datasets from 2 sample groups.

1. Major global cities:

Toronto Vancouver London Sydney Melbourne
Shanghai Beijing Hong Kong Singapore
Toronto Vancouver
London Sydney
Shanghai Melbourne
Beijing Hong Kong
Singapore

2. Top U.S. residential real estate investment destinations:

New York NY Miami FL Orlando FL Ft Lauderdale FL Ft Worth TX
San Antonio TX Austin TX Dallas TX Houston TX Seattle WA
Chicago IL Los Angeles CA San Fran CA San Jose CA Atlanta GA
Portland OR Las Vegas NV
New York NY Miami FL
Orlando FL Ft Lauderdale FL
Ft Worth TX San Antonio TX
Austin TX Dallas TX
Houston TX Seattle WA
Chicago IL Los Angeles CA
San Fran CA San Jose CA
Atlanta GA Portland OR
Las Vegas NV

If we look at the major global cities where majority of our clients live, we will find that the affordability of a 1500 sq. ft house is really low.

AM Affordability Index*

*Our proprietary index includes factors such as, taxes, pension contributions, debt repayment, inflation, currency and others.

Using our proprietary AM Index, 0 represents a house that is very unaffordable and 100 represents a house that is very affordable.  Affordability only ranges from 0 – 24 in our client’s home cities.

Now, looking at the data for popular investment destinations in the U.S. for real estate investors. We see that the average affordability is drastically higher. This is particularly so for San Antonio, Chicago, and Fort Worth.

For example, if you live and work in Vancouver and earn the median income, the affordability index of 1500 sq. ft house in your city is at a meagre 12. However, the affordability index of a same-sized house in Fort Worth is at a whopping 94!

Read – if you live in Vancouver, buying a Fort Worth Texas investment property is 8x “more affordable” than back home!

You will see this graphically in the following charts, and the results are very clear and obvious.

Solely based on affordability, when purchasing property for investment income, you should always consider Chicago, San Antonio, Fort Worth, and almost never San Francisco.

Now, we know there are many other considerations when buying property besides just being cheap and affordable – like historical price appreciation vs. future price expectations, net rental yield, ease of securing financing, friction costs of doing the research – all of which we will discuss in our upcoming reports.

In summary, when deciding where to invest next, it’s best to get out of your comfort zone and be open-minded to the opportunities.

There are other cities in the world that you can consider aside from your home country, but we argue the best cities for real estate investments are in the U.S.

Hopefully, Part 1 of our Deep Dive Series has showed you that U.S. properties are more affordable that you think. In fact, they could be up to twelve times more affordable than your own city, e.g. Hong Kong residents buying in Chicago!

Next week, we will illustrate the net income potential of U.S. real estate investment cities vs. major global cities, i.e. how much you can earn from renting after financing costs… the results will shock you!

Still not convinced?

Supporting Charts

Price Differences between Major Global Cites and U.S. Residential Real Estate Investment Destinations:










Stay tuned for next week! www.americamortgages.com


The Roaring 2020s?

mortgage specialist

The “Roaring 20’s” is often considered as one of the most prosperous times in the West. WWI had just ended, and the housing market’s growth, the development of infrastructure, telephone networks, automobiles, etc., was the centerpiece of growth. America’s wealth more than doubled in the years between 1920 and ’29 with most of the wealth invested into finance and industry but there was enough trickle-down to lower-income earners to help buoy a new consumer culture.

Doesn’t this sound familiar?

In 2020, FAANG stocks (our version of industrial stocks in 1920s) doubled as well!

Meanwhile, as the world heads towards being incrementally more vaccinated, we are seeing inflation expectations rise, the first wage growth in over a decade, and a potential $3T infrastructure plan in the U.S. which draws some comparisons to FDR’s The New Deal.

Personally, I find it remarkable how the global macro narrative has shifted 180-degree only one year out from the start of a global pandemic, and also not far from when the discussions among leading economists were ‘when’ deflation would happen, not if. Now consensus, in under 12 months, has gone from deflation to inflation.

If you are looking for evidence that inflation is back, look no further than housing prices. Knight Frank reports that worldwide home prices rose 5.6% in 2020, and CoreLogic says U.S. home prices increased 10.4% year-on-year in February 2021, the highest in 15 years!

Taking some data points from Knight Frank’s survey, look at the annual % change in home prices in the major cities that Global Mortgage Group offers mortgages in.

Can you guess which city had the highest growth in the U.S., U.K., France, Canada, Australia, and Singapore? Read here to find the answer!

U.S.
Phoenix, California+14%
Seattle, Washington+13%
Los Angeles, California +10%
New York City, New York+10%
Atlanta, Georgia+8.9%
Dallas, Texas+8.4%
Miami, Florida+9.2%
Switzerland
Geneva, Switzerland+7%
France
Lyon, France+8.9%
Paris, France+7.7%
Australia
Sydney, Australia+4.5%
Brisbane, Australia+4.2%
Melbourne, Australia +3.6%
U.K.
Manchester, UK+8.7%
London, UK+4.3%
Canada
Montreal, Canada+15%
Toronto, Canada+10%
Vancouver, Canada+7%
Singapore
Singapore+2.2%

For more information, please contact hello@americamortgages.com.

Sources: World Property Journal, High Finance, History.com