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Untitled Document

For the United States, the housing sector is a very important component of the country's productive economy.

The complete value of residential structures amounts to over 12,000 billion dollars while the entire housing sector, directly or otherwise contributes from 15 to 20 percent of the GDP, of which industry only made up 1/3 in 2007 and the other 2/3, in which housing is accounted for, came from the tertiary sector.

Around 70% of state income comes from "property taxes". Homeowners contribute 43% of property taxes whereas commercial real estate owners pay 57%.

Because of its strategic relevance to the growth and development of the economy, the real estate market is constantly monitored by numerous statistics producing organization. The effort to survey in minute detail all of the most important steps of a market that is so vast and takes so many shapes are surely imposing. The mass of information that is available allows one to read about everything regarding the market, in both a timely and detailed way. The result impacts a European for its detail as well as its vastness.

There's reading from the branch of construction, where relative data is updated monthly to new licenses granted with further permission to build.

Until the collection of, thanks to the help of national realtor associations (real estate agents), information related to other sales of the seller, to the history of prices on certain pieces of real estate, to stock of unsold properties.

The approach is the same as that of stock or currency markets. Equal space is given by the financial press and by analytical institutions to the evolution of the situation.

Such mass of detailed information, periodically diffused, and eagerly awaited for by the market, creates continued monitoring of the entire real estate sector. The Fed dedicates generous space in its analyses, to the real estate market. The fears of a "real estate bubble" forming come primarily from these considerations. Already in 2005 in the middle of booming market, this a historic record of building concession permitted, the Federal Reserve, ha highlighted that there were many factors present for the formation of great speculation on the real estate market. Speculations favoured also by the low cost of the US dollar (in those years, approximately at 2%) and the easy access to credit with the high possibility to leverage finances (5% by the speculator and 95% by the bank), in addition to the appeal of the most common so called "only interest mortgaged" (special mortgages where only interest is paid in the first 3-5 years).

Such positions were considered dangerous and the Fed intervened (not only but also for this reason) with a quick increase to the cost of money. This action taken in order to limit the excess of speculation in the market cools the market increasing the cost of mortgages and arriving at a normalization of the situation. After a year of substantial price stabilization (2006), 2007 was reported as the year of the estate market bubble "burst" that resulted in many speculators and investors bowing out of the game, often "painfully". These people found themselves having to sell to buyers at much lower rates, after years of rising prices. It was not an excessive trauma for those who had bought the housing unit two or three years ago and in the meantime had acquired vast surplus, sure enough, these people did not cash in the way they had expected to but nevertheless with wide margins (in certain zone in Miami for example the market is trading at 100% with respect to the end of 2004). This is a different situation for those who wanted to leverage their money to the maximum and found themselves without enough coverage. Those who found themselves having to sell, after having just purchased 6-12 months before, probably, in some cases, had to accept a loss. In order to give an idea of the psychology climate in which these hazardous and imprudent buying decision were made, we need to highlight how in 2003 in Miami, he who put an apartment or a house in a good location up for sale, thanks to real estate agent's on-line services,would have received a dozen buying requests,of which one was surely higher than his asking price. This is just to describe the climate that in that period was very favourable to the seller. The easy gains in those first years led to the metaphoric "flaming lilt match" n the hands of the last people able to sell. Those who speculated, beyond his capacity to do so, betting on the fact that the market would always continue to grow at such alarming rates - which many had become used to the years before - surely paid the price. But, how common is this problem say in Miami?

In our experience, that can be exclusively limited to the micro-market of Miami Beach, and the coastal areas just north and south of Miami, the number of owners in a state of difficulty in not higher than 5% of the total of those who have their personal homes up for sale. It's usually those that bought in the last two years and are now trying to sell without any gains or with some loss (at the moment) of a few thousands of dollars. But, is it worth focusing on these owners going through difficult times to "make the deal"? Up until today, we'd say no. In as much as it is better to focus on those owners who bought 4-5 years ago who, able to count on surpluses of 50% to 80%, have a larger margin gain to allow themselves to take a hit and reduce their prices? It's obvious that, always referring to the micro markets, being very desirable to tourists, when real estate located right on the beach is talked about, with ocean views, with little or no limits to rents, the prices continue to remain stable. The situation is different for those properties far from the beach, for which there is less space for negotiation.

Now, let's come to the data available on the real estate market in the United States.

We'll take off from the market for "new buildings". After years of frenetic growth, relative levelling in off in 2006, in 2007, the new constructions market has seen a marked halt. Let's look at all the data related to the market on new constructions. In the order running from: new construction permits, housing starts, the annual sale of houses, the mean price of monthly sales and the months in waiting to make a sale. All these information is indispensable in order to get a snapshot of real estate market trends, as far as it related to new constructions.

Download the table related to sales of new houses

As can be seen in the first column, in the first year there was a perceptible reduction in the number of construction permits requested (36.1%). This reduction highlights the pessimism of builders that not only came across difficulty in pre-construction sales but also saw their operating margins go down substantially as a result of difficulty of sales and sales periods that stretch out over longer periods. Less affected by the reduction with respects to previous years (-28.4%), registered from housing starts. This information is usually seen as the thermometer of sales in pre-construction. Usually, builders, once they've obtained relevant permits, state pre-construction sales. Only when they've sold all or al least a large part of the apartments, do they proceed to the construction phase. Housing starts are seen as the thermometer of this delicate phase. Acceleration, a deceleration or just some shifts in one direction or the other, are interpreted as symptoms of the difficulty with which building companies are proceeding with sales. In 2007, the housing starts had a progressive decreasing dynamic until July, the liquidity crisis in banks became public made a getting loans more difficult, and from then on the decrease was accelerated. In February of 2008, the reduction of housing starts was at -28.4% of the previous year.

This paralleled house sales that obviously were at the base of these housing start trends. The sales show some date that is rather negative with respects to housing starts, between February 2007 and February 2008.The recovery of the average sale price is worth noting as it broke with a negative series of figures that lasted many months. We maintain that the vigorous policy of reducing taxes and the Fed's emission of liquidity should take the situation back to normality in 2008.

It's worth mentioning to this end the changes in builders' sales techniques that accompany and characterized this new market phase. The pre-construction market has always been characterized by a reward or at least a discount to the first buyers. Acquisition during the pre-construction phase entails a deposit of approximately 20% of the cost of the unit on the part of the buyer, who, at the moment of closing and once in possession of the unit, deposits the remaining sale price, around two years later. The builder usually waits to have all apartments sold before initiating building. In a bull market, speculators reserve dozen of apartments, making the deposit on them with the hopes that upon closing, they can sell quickly. This for many years guaranteed consistent gains. But, in a bear market, things change. Speculators lick their wounds and stop buying at the pre-construction phase. Even investors, or those who need to change houses, are more timid and as a consequence, they are more reserved to make any moves. Builders, in order to unblock this situation, especially when they find themselves with projects only 50% sold, and those who have paid the deposits start to put pressure on the project to get going, they have started making concessions to buyers. The closing fees, the cost of furnishings in the acquisition price (usually new apartments come furnished exclusively with bathrooms and the kitchen). All this to stimulate buyers by playing with the final acquisition price without of course getting into too much trouble with the first pre-construction buyers. Actually some building companies have allowed for actual bids to determine the best buyers for unsold apartments and therefore stat construction.

The latter "market of the new" in the United States actually represents less than 15% of the entire real estate market. It's thought that a reduction of new constructions, which have negative effects on building companies budgets, could instead, positively affect the equilibrium in the relationship between sellers and buyers, reducing the number of housing units available and therefore contributing to a progressive stabilization of the real estate market that evidently is what interests the investor to which they cater.

Let's analyze now the date related to the "existing real estate" market which represents about 85% of the entire market and which provides investors with the most interesting information. The data from 2007 shows, even in this sector, a perceptible slow down in sales. Let's look at the figures in detail.

Download the table related to sales of existing housing units

Trends show a constant decrease until July then there was a noticeable peak of the phenomenon in January 2008. In February we saw the inverse of these tendencies (a rise of 2.9% on the figures from the previous month), which caught the real estate market analysts by surprise.

It’s definitely too soon to say whether this is in fact a tendency towards an inversion of the trend but it can be a first sign of the efficacious measures taken by the federal Reserve.

As far as the real estate market of South Florida is concerned, we can show the data related to the two counties: Miami-Dade and Broward (Ft. Lauderdale) in 2006. Last year saw a marked reduction in the sales of housing units in both Dade and Broward compared to the previous year: -24% in Miami and -32% in Broward for apartments, -21% and 26% respectively for single family homes, the worst figures in the last 12 years. The average intermediary price remains positive: +1% in Miami and 10% in Broward for apartments and 7% and 2% respectively for single-family homes. The stock of unsold properties on the market was also very high, growing progressively from December 2005 to November 2006 from 31,351 to 66,477 (+112%). From the peak in November there was a small decrease in unsold properties to 65,827. The reduction is not significantly important but it did stop a trend that was on the rise uninterruptedly from the year before. And the hope is that this is the first sign of an inversion of this tendency. Miami and Dade counties have respectively 2,376,014 and 1,623,018 inhabitants for a total of 3,999,032. This figure amounts to one house for sale for every 60 inhabitants; just a suggestive but impacting figure given that in both counties a very high number of second homes with homeowners that reside outside the county or state are registered.

As far as Miami is concerned, legislative action approved a few months ago, takes the taxation rate for property back two years, to 2005. Previously, everyone was hoping for a better situation but these new regulations are an encouraging sign. It is hoped that this cut can generate not just increased investments but also consumption on the par of taxpayers in Florida, with positive results.

Parallel repercussions on the growth trend and especially on the capital coming from other states and abroad into the housing sector, with resulting positive real estate values and the incomes they generate.

Before drawing conclusions on that which has been presented until this point, let’s take into consideration the information listed above.

The first important thing to take into consideration is the complete number of sales in the USA, which remain however, notwithstanding the registered reductions, very high both overall and with respects to the number of residents compare to Italy. In Italy, in 2006 (the last registered data available), a total of 845,000 residential sales were made, according to L’Agenzia sul Territorio. The related residential sales data registered in the USA instead amount to (February 2008) for new housing units: 590,000 per annum and for existing properties: 5,030,000 per annum, for a total of 5,620,000 units sold per annum for 300 million inhabitants in comparison to the 845,051 units sold in Italy for 58,751,000 residents declared with ISTAT. That makes about one sale in the USA for every 60 inhabitants whereas in Italy there is one sale for every 70 inhabitants. This higher frequency of sales in the American real estate market with respect to the Italian one is surely due to Americans propensity to change houses more frequently than that of Italians. This doesn’t necessarily translate into greater “liquidity” in the market, understood as waiting time before the sale. This in fact depends on the crossover point between demand and supply (a total of the houses put up for sale, a known figure and the buying offers, a figure which is unknown) a consideration that can be made

With regards to this end is that only by putting a property up for sale can the real market value of a one’s housing unit be determined. A greater number of sales go hand in hand with more stability in the market; this is because stability is further anchored to the real price in the market. A market, the American one, that can have cyclical oscillations, as is normal for all markets, as market value at the moment of purchase prevails over the value at the moment of sale. But that runs less structural risk of forming “bubbles” and excesses. The markets that are at greatest risk, this counts for all types of markets, are those in which sellers or buyers are always advantaged, in the first case we would have an overvalued market, with the risk of forming a “bubble” in the second one, an undervalued one. The risk that is run when the tendency that has been maintained over a period of time, is reversed with the risk of great oscillations in the price consequentially.

The second consideration. No one can know where the market will go. Especially that of the real estate market in Miami. A market in which the prices don’t seem, according to figures available, to have gone down yet (even if right now one can surely make some great deals) with respect to a year ago. No one can know if in the future the prices will go down. Or if the tendency is at the brink of being reversed and the prices are about to start going up. But surely and Italian investor should acknowledge that a window has been open, with the actual euro/dollar exchange, a window that may remained open for a long time, even for a very long time. Maybe forever. But no one can be sure of this or if instead this exchange rate will only last for a few years or just a few months. The actual exchange rate makes the cost of one square meter in euros at the moment, very appealing. This can be verified with extreme simplicity. It’s enough to parallel the price per square meter of the opportunities highlighted on this website with those currently registered for Italian send European destinations. This accounts for both the exchange rate and the risk of the “real estate bubble” caused by overpriced properties. Considering also that we are talking about a real good (real estate is probably the real good par excellence), the fact that in the short run, and without the use of financial leverage, the acquisition of a real good annuls the risk involved in currency exchange. In as much as the rule of supply and demand, always more global, tend to return toward equilibrium. Today, the free flow of capital makes each Western country’s real estate market one single market. The remaining obstacles are not financial or administrative but only those related to the psychological effort it takes to face the difficulty of the language and learn the norms. These difficulties (which are increasingly fewer) slow down but do not stop the inevitable re-equilibration of price values beyond their fluctuations.

The Conclusion: the American real estate market and that of the state of Florida in particular is absolutely transparent with a series of norms that favours the investor, the principle engine behind economic growth. The decision of the time of market entry is one that is to be made by the investor but surely price comparisons (this is the United States of America, not just any exotic country somewhere) and the in situ verification of conservation levels or the quality of services offered can help one make a decision. This is about an evolved market that at the same time offers maximum protection of the investor. On the international scene, this is an excellent market in which to invest. The last consideration, considering the actual phase the market is in, the opportunities are more present in the existing real estate market, which is more flexible than the new market with is inevitably more rigid.

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