International Investments – When Bird’s Fly Higher Property View

by | Oct 4, 2006 | Archives

International investments in international real estate and US real estate are good inflation fighter now…just in different ways then before.

We reviewed why the international investments in US modular homes market may rise.

See International Investments – Bird’s Eye Property View

Now let’s fly higher to get a international investments bird’s eye view and see the potential of foreign buyers on the US real estate market.

The last message showed the problems in house sales may enhance potential for modular homes. This came from a friend (in Portland, Oregon) who builds homes and has a modular home park (that is doing well). Yet he also has new, just built, condos that have everything, good price, tax benefits, great location, right size that are not even attracting lookers, much less buyers. They are not doing well.

His solution to sell these condos is to look for overseas buyers. He notes that most of the new homes he builds are purchased by Chinese or Ukraine immigrants. I can believe this. Rockwood, Oregon, the model suburb where I grew up is now heavily populated with people form the Ukraine. They are even reaching Ashe County. Last week Merri and I had the privilege of hosting four Ukraine musicians, members of the Kiev Symphony and Orchestra, after they performed at Ashe County High School (more on this in an upcoming message). Here they are in our front patio.

Left to right: Merri, Yuri, Andrei, Francesca, Gary, Constantine, Danyl

This global participation is why I have not been overly concerned about a US real estate crash. Though US property seems really high…by international Western country standards US real estate is still quite low…a pittance of the price compared to London, much of Europe or Asian centers like Hong Kong and Tokyo.

We live in a global market place. Inflation is a problem everywhere and investors scoot their dinero around the world to preserve purchasing power. Real estate always has been (and always will be as long as global populations grow) the ultimate inflation hedge. The government cannot make more! Plus the US still has some mystique. Some investors abroad still believe there is safety, security and order of law in the US.

My thinking on this point was recently confirmed when a reader shared:

Dear Gary,

I thought you both would find the email below interesting. This Southern CA development/investment group tried to buy and/or develop budget hotels in China, but failed. So now they are redirecting their efforts to buy troubled projects in the USA w/ the help of foreign investors. Something Karl to think about. Warm regards, Here is what the email says:

“So now where do I see investment opportunity? With the residential markets in the United States quickly changing, creating a huge renewed interest in bringing money here from investors in Japan, Australia, the Middle-East and parts of Europe, we will be more focused on helping our network of global investors capitalize on the changing market here at home. We are looking to acquire troubled condo developments, as well as Apartments, Retail, and Boutique Hotels.”

There are many reasons to believe that American real estate prices will not drop…a lot. Property sales will slow and the US dollar will crash instead. In purchasing power terms real estate values will fall a lot compared to real estate in other countries. Here is what this means.

Let’s say that your home is worth a million dollars. Let’s say that this million will buy 100 fur coats from China that each cost $10,000. So you could sell your home for a million and buy the coats. If the dollar falls 25% versus the yuan your home may still be worth a million but if you sell it, now you can only buy 750 coats because Chinese coats will have risen to $12,500.

However statistics will say that the real estate market has not crashed…that prices have leveled out.

Join Merri, Currency Experts from Jyske Bank and me at our next International Business and Investing Made EZ course in Ecuador. Review which current markets offer good value. Meet Steve, our man in Ecuador, and learn about products to export. Meet Dr. Andres Cordova and learn about owning real estate in the Galapagos.

There is a new support to the idea that that the dollar will fall by the way.

In the second quarter of 2006 the US income deficit was the highest ever and for the first time in history the national income balance has been in deficit for three consecutive quarters.

The national income balance is the amount of money that America as a nation earns from abroad and spends abroad. For example if an American buys a Chinese share and earns a dividend, or if an American manufacturer builds plant in Germany, theoretically those Americans earn that money abroad. On the other hand if a non American invests in America his or her earnings from the investment flow out of the US.

Historically Americans have always earned more abroad than non Americans have earned in the US.

Not now.

Merrill Lynch just completed a review on the American income deficit and says:

Until recently, the striking feature in the US balance of payments has been the consistent ability of the US to run a surplus on the income balance despite the size of net foreign liabilities. This beneficial situation is due to the return that US investors receive on their overseas assets exceeds what the US pays on foreign owed US assets. One explanation for the gap in returns is that US owned foreign assets are more concentrated in equities and direct investment, while foreign ownership of US assets is skewed toward fixed income investments. However, Higgins, Klitgard & Tille (2005) show that the return discrepancy is due to returns on direct investment, not portfolio returns. Nonetheless, the US has been fortunate.

The Q2 2006 US income deficit in the current account was the highest on record and the only time in history that it has registered three consecutive quarterly deficits. Given these developments we review the dynamics influencing the income balance and provide simulations under various assumptions.

Implications for the USD

The recent turn in the income balance from surplus to deficit could be heralding a structural turn in this portion of the US current account. The path of the income balance depends on a number of moving parts, but a higher structural income deficit, all else equal, would entail a weaker USD than otherwise to clear global imbalances over the long run.

You can read Merrill’s entire view on this at Cause and FX – As the Income Balance Returns.

In short this means that Americans have invested a lot in high earning overseas stocks and business. Foreign investors have invested back in low earning US bonds. Thus America (until now) as a nation has earned more abroad than nations abroad have earned in the US.

If this trend continues America will have to sell its assets (like its real estate) to maintain this balance. This will buck up the dollar somewhat and support the real estate market in the short term. However a bird’s eye view shows that in the long term, even more income (from the real estate) will be earned by non Americas which will increase the weight on an already heavily burdened US dollar.

My recommendations remain. Fight inflation by investing in currencies and shares out of the US and in leveraged real estate (anywhere in the worlds). New segments of US real estate are becoming attractive now and I suspect they will hold their purchasing value by rising in US dollar terms.

Double your profit potential with the MultiCurrency Sandwich. Leverage investments in top value markets. See Borrow Low – Deposit High

Ecuador Real Estate and Other Areas of Distortion

Investing in real estate abroad makes sense as well. Merri and I have almost 400 acres in Ecuador. Our front yard offers a nice view!

Join Merri and me. Attend our next Ecuador course.

Then view Ecuador real estate for sale in the Mystical Andes extension.

Real estate everywhere offers value. There are plenty of beautiful places to choose…such as China. The picture below taken by one of our readers is a real bird’s eye view that proves this.

That reader writes:

Gary As some of you know, I have been to China a number of times. The first time, I was the representative from the Emory medical school to the Emory student government, and our trip was a medical study tour underwritten by Coca-Cola. At that time, I had hair hanging down below my shoulder blades. We went to the honeymoon capital, Hangjou, as part of the trip. No westerners had been there in more than a generation. The Chinese say, “Heaven is above, and Hangjou is below”, referring to the beauty of the area. Probably because of the hair, whenever I walked in town, fifty or more people would follow me. I would stop at the shops and give out Susan B. Anthony silver dollars.

China is on the upswing, our country is on the downswing. Jimmy Rogers, one of the most astute investors I know, is moving to China. Some of you might enjoy his “Investment Biker”, written after he drove a motorcycle around the world. In any case, the photos below speak for themselves. Cordially,

Merri and I are pretty busy so can’t get to China right now but our long time friend Barbara Periello of Agora Travel is taking a group there. If you want to investigate this opportunity take a look at Agora Travel

Until next message may all your investing wherever in the worlds help support global equilibrium.


P.S. A Super Thinking + Spanish course has now been scheduled for December 2006. See Super Thinking + Super Memory + Spanish