Good News/Bad New for U.S. Real Estate Investors

Investing in U.S. real estate has never been more complicated or more confusing.

Sales of existing homes in the U.S. unexpectedly rose 5.1% in February, but prices of existing homes fell another 15%. Most of the homes were sold to first time buyers, and nearly half of the properties sold (45%) were distressed in some way.

Distressed properties sold especially well in the West, a part of the country that has seen a steady 30% increase in sales over the past year. But the median existing home price, which was at $195,800 at the end of 2008, has fallen dramatically (as of February 2009) to $165,400.

According to economist Lawrence Yun, “Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price.” Yun said that prices are down because of the sheer number of foreclosed homes still on the market. However, the number of foreclosed homes for sale has been slowly dwindling (though it’s still enormous) since it hit an all-time high in July of 2008.

One way to interpret this data is to very cautiously conclude that the U.S. housing market may well have bottomed out, making this a good time to jump in, especially in western states like California, Arizona, Oregon, Washington and Nevada. Markets are very dependent on local conditions, so it is important to work with a knowledgeable realtor, but it appears that at least in some parts of the U.S. the worst may be over.

Foreign investors may still have to hold a property for a long time before it can be resold for a profit. A sustained economic recovery in the U.S. looks to be a long way off by any measure. Mortgage lenders have tightened standards dramatically. While mortgage rates have dropped to historic lows, getting a conventional loan has become tougher than ever.

In some parts of the U.S. buyers who signed contracts for new condos or new home construction are forfeiting huge deposits because banks have tightened up loan requirements before the construction could be completed. A recent New York Times article describes the plight of a young couple whose $93,199 apartment deposit was seized by Toll Brothers when the bank quit making 90% loans. The couple could not come up with the additional 10% the bank is now requiring so the luxury builder declared the couple in default, seized the deposit, and voided the contract.

The credit crunch is still hurting American buyers looking for primary residences. Even though February brought an increase in overall sales, the properties sold were not expensive ones. For example, East coast banks are now requiring 20% to 50% down for jumbo loans of over $729,000. In major east coast cities (like New York) it’s hard to find a decent property for less than that.  So while the market doesseem to be thawing a bit, family homes in popular areas are still difficult for Americans to buy without a large deposit and impeccable credit.

Foreign investors with cash and good instincts about where to buy should  have lots of negotiating power right now: But don’t plan on flipping that house too terribly fast until the mortgage market loosens up.

Caution is still in order: Sales in the Northeastern portion of the U.S. fell 20% in February from a year earlier, with Pittsburgh leading the list of dismal sales figures. Sales of Pittsburgh homes fell 44% in February from the previous year. Part of the reason for that is that prices in the Midwest and Northeast never ballooned as much as they did in the West during the boom times.

By all accounts, the sweetest spot right now is the distressed properties market. Look for them west of the Mississippi, bring cash, bargain hard, and plan to stay awhile.