Hello everyone, today we're going to talk about the recent US real estate market, especially in the Sun Belt, places like Florida and Texas. Recently, many media outlets have been bearish on real estate in these areas, saying that house prices are going to plummet. A drop in house prices isn't scary in itself, after all, prices can't rise forever. Like the mainland Chinese real estate market that has been rising for the past few decades, isn't it starting to fall now? This is not surprising, because the speculative opportunities are gone, and the investment value has also decreased.
In the Sun Belt in the United States, such as Florida, Nevada, Arizona, and Georgia, house prices were also directly cut in half during the previous economic crisis. House prices in Las Vegas even fell to rock bottom. However, although these places fell sharply at that time, rents did not fall much, and the holding costs of investment properties were not high. Therefore, even if you bought at a high price, it didn't count as a loss as long as you didn't sell the house. Most of those who sold houses at that time were homeowners of owner-occupied houses because they could not afford the mortgage.
More Severe Challenges Than 2008
The situation now is more complex than before. Even if current homeowners can afford their mortgages, they may be forced to sell because other holding costs are getting higher and higher. Such as property taxes, insurance, HOA fees, etc. When buying a house a few years ago, they may have been able to afford it, but now it is becoming increasingly difficult to bear, so they have to sell the house.
This phenomenon of homeowners being unable to withstand the pressure due to rising holding costs did not exist during the last financial crisis. Because the pressure of inflation was not great last time, house prices fell, and other pressures did not change. The only reason for selling the house was that they could not afford the mortgage, or the investment had no cash flow.
Buyers are under greater pressure when buying houses at high prices this time, whether they are homeowners or investors. Due to the increase in holding costs in the past two years, the holding cost of a house costs thousands of US dollars more each year. What could barely be afforded two years ago may not be sustainable now. Moreover, now there is the pressure of falling house prices, so these homeowners have to sell their houses.
For investors, although they bought houses at high prices in the past two years, they still had some cash flow. However, in the past two years, inflation has risen sharply, and the cash flow has turned negative, requiring thousands of US dollars in reverse subsidies every year. Investment properties should have been passive income, but now they have become a hot potato that cannot be held or sold.
Case Study of Three Major Cities in the Sun Belt
In order to better illustrate this phenomenon, let's look at the conclusions through three cases in the Sun Belt. These three cases are located in Orlando, Tampa, and Las Vegas respectively. These cities have common characteristics:
- During the previous financial crisis, house prices all plummeted, with drops of more than 50%.
- During the pandemic, house prices in these places soared again, with increases of more than 50%.
- Now, buying a house here basically has no cash flow.
Case 1: New Project Bear's Heaven near Champions Gate, Orlando
- House price: approximately $420,000
- Rent: $2,500/month
- Property tax: 1% of house price (lower because there is no CDD)
- HOA fee: $151/month
- Insurance: $2,500/year
If the loan is 25%, the loan interest rate is 7%, and the loan is 30 years, the monthly loan fee is $2,096, or $25,152 per year. Plus property tax, HOA fees and insurance, the total annual expenditure is $33,664, but the annual rental income is only $30,000, with a negative cash flow of $3,660 per year, or a reverse subsidy of $300 per month.
Case 2: Tampa Eports Lagoon Internet-Famous City Area
- House price: approximately $420,000
- Rent: $2,590/month
- Property tax: 2% of house price (including CDD fees)
- HOA fee: $250/month (including Lagoon fees)
- Insurance: $2,500/year
Under the same loan conditions, the monthly loan fee is $2,096, or $25,152 per year. Plus property tax, HOA fees and insurance, the total expenditure is $39,052, but the annual rental income is only $31,080, with a negative cash flow of $7,972 per year, equivalent to a reverse subsidy of $660 per month. This does not include vacancy periods and maintenance costs.
Case 3: Las Vegas Enterprise Emerging Development Zone
- House price: approximately $420,000
- Rent: $2,350/month
- Property tax: $4,169/year (approximately 1% of house price)
- HOA fee: $57/month
- Insurance: $1,200/year
Under the same loan conditions, the monthly loan fee is $2,096, or $25,152 per year. The total expenditure is $32,205, the annual rental income is $28,200, and the negative cash flow is $3,105.
Data Comparison
| Project | Orlando | Tampa | Las Vegas |
|---|---|---|---|
| House Price (approx.) | $420,000 | $420,000 | $420,000 |
| Monthly Rent | $2,500 | $2,590 | $2,350 |
| Annual Negative Cash Flow | -$3,660 | -$7,972 | -$3,105 |
It can be seen from these data that even in the Sun Belt, the investment returns of different cities vary greatly. Tampa has the worst cash flow situation, while Las Vegas is relatively better.
Conclusion and Recommendations
The current state of real estate in some parts of the United States is worrying, especially in places with high holding costs. Because this time, there is not only the pressure of falling house prices, but also the pressure of falling rents, and the pressure of rising house holding costs. The latter two pressures did not exist during the last financial crisis.
Therefore, be very careful when investing in places with high holding costs in the Sun Belt! That's all for this share, I hope it helps everyone.