Falling Dollar To Boost Foreign Investment?
A: With the US economy still strong but showing signs of cooling, and a mysterious fed, the US dollar continues to lose ground against many foreign currencies. Specifically, the US dollar has trended towards 2YR lows against the Euro & only $0.01 from the all time low, presenting a good buying opportunity for European investors looking to invest into NYC real estate. When it comes to foreign real estate investing, here is why currency trends are so important and Europeans have an upper hand!
When the US dollar goes to the crap house like its doing now, new opportunities arise for foreign investment to take advantage of the currency trends and buy while their money is hot, and ours is not!
First off, lets see the damage! Here is a chart showing how the US dollar has performed in the past year against the Euro; showing the recent fall to a new 2 year low!
So how does this all translate into a foreign investment buying opportunity for NYC real estate?
First Step: Put into perspective! To put this into perspective, all you need to do is show how much more house the Euro can now buy over here compared to only a year ago by doing some reverse math. How many US dollars could 1 Euro buy today compared to a year ago? Here it is.
April 14th, 2006 - 1 EURO buys $1.2087 US dollars
April 13th, 2007 - 1 EURO buys $1.3538 US dollars
Next Step: Take an example and convert the currency! Here is how the math works out for a buyer with say E650,000 (Euros) to convert to US dollars and buy real estate in Manhattan.
April 14th, 2006 (1 year ago) - E650,000 BUYS $785,655 worth of US real estate
April 13th, 2007 (today) - E650,000 BUYS $880,000 worth of US real estate
Based on currency trends over the past year, look at how much more house an investor with Euros can buy right now! In this case, the foreign investor can now buy $95,000 MORE HOUSE! All this because of the sinking value of the US dollar!
According to Larry Kudlow's blog Money Politic$:
It’s hard to deny that inflation expectations are creeping higher.What he is talking about is whether the fed will step in and help support a stronger US dollar by raising the fed funds rate that affects how much interest we pay on our debts! With the US dollar softening, inflation pressures are rising and that presents a pretty convincing argument for higher fed funds rates! But as Kudlow asks, will we get it?And finally, many in the market have come to expect a softer dollar to ameliorate the U.S. trade deficit. Nothing definitive has come from Treasury Man Paulson or Fed Chief Bernanke. At this stage of the cycle, more dollar softness will translate into higher inflation.
The solution to all this? A stronger U.S. greenback. But will we get it?
According to Marketwatch.com:
"A combination of adverse factors keeps gnawing at the US currency and may leave the Fed in the unwelcome predicament of having to boost rates to throw out a life-preserver to the greenback," Nadler said.In any event, contrarian investors (that is, those who seek value by buying when an investment is down and unpopular and selling when it is very hot) are those that can profit off the weak dollar and put that money to work! What better way to do that than to sell a foreign currency while its hot and buy US real estate as prices fall with the extra dollars! It's just hard to argue against this strategy for those that can take advantage of it.
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Comments (7)
The flip side of this is that your home's appreciation looks significantly lower. Sure, your 900k house is now worth a cool mil a year later, but its a mil worth of cheaper dollars.
Months ago I saw a chart (apologies for the lack of link) where they did the same thing with the S&P- yoy it was up 13 something percent, but when put into Euros, it was flat to slightly neg.
Posted by drtomaso | April 16, 2007 12:57 PM
Lets run this as a thought experiment- please shoot holes in my argument.
You are a prospective real estate investor from Europe. You are looking at purchasing a one bed in a nice building of NYC. Lets make the math simple by saying the 2006 price of a 1 bed was 1M USD.
2006 Price: 1M USD
2006 USD/EUR: 1.2087
2006 Price is therefore 827,335.15 EUR
Now, lets use the high end of the appreciation spectrum from the article linked in your prior post (http://www.urbandigs.com/2007/04/nyc_rocks_on_sa.html)
2006-2007 Appreciation: 13% (nice!)
2007 Comparable price: $1,130,000
2007 USD/EUR: 1.3538
2007 Price in EUR: 834,687.55 EUR
So whats our PNL:
Buy: 827,335.15
Sell: 834,687.55
Gross: 7352.40 EUR
So, before broker's commissions, taxes, debt service, etc, our European investor sees a rate of return of....
Rate of Return: 0.89%
Posted by drtomaso | April 16, 2007 2:50 PM
dr--no time to review the comments yet..Ill have to look at this more closely in a day or two!
Posted by Noah | April 17, 2007 8:28 AM
drtomaso's example assumes the buyer would flip the apt after a year, an unlikely scenario for many.
Noah, this is an interesting idea for someone who's savvy about currency markets. There are timing issues and you'd have to assume that the value of your home would not decrease any lower than your gain on currency by the time you sell if you want to make a certain profit.
On the reverse side, is there any good data avaialble about Europeans buying NYC RE in recent years?
Posted by newbie | April 17, 2007 9:13 AM
dr tomaso, i agree, you need to take into account appreciation of the property over a given period when investigating the investment opportunity, and not just purely the comparable exchange rate on a given set of dates when making a decision about how much "bang for buck" you get, but i think Noah (and please correct me if i'm wrong here Noah) was writing the article more from the perspective of how much more attractive outward investment from Euroland becomes, as a result of the weak(-ening) dollar, rather than the rate of return on investment over a specific year long period.
This is probably more prevalent on those frothy markets (mainly out of NYC) that have seen stagnation (or decline) as a result of over developing/speculation etc, where appreciation is no way near 13% (and that's if the market has appreciated rather than depreciated, or stagnated), but likewise, it can still make even markets appreciating strongly attractive - it all depends on what the appreciation level is, and what rate of exchange one can procure for a large transfer.
I have to admit, looking at the current exchange rate, and what you can get in some markets outside of NYC, there are some fabulously tempting offers. The 52 week low for the $/£ is something like $1.72 compated to the high of $1.93 or so now so a $500,000 property that has stagnated is approximately £30,000 which is a big chunk of change for not doing anything more than watching the dollar weaken.
Posted by Dave | April 17, 2007 10:55 AM
The point isnt a 1 year flip- its that the currency fluctuations make RE investing from abroad extremely dangerous becuase a small currecny fluctuation eats away all of the appreciation. 13% appreciation is rather high historically, and in the example I gave, its completely wiped out by a falling dollar.
If you argue longer term, it really comes down to whether you are bullish or bearish on the dollar. The dollar has been the most stable currency historically, but the times they are a-changin, and with the US's current debt, various nations reducing their reserves of UDS, its never been more dangerous to be long the dollar.
In general, a weaking dollar leads to increased demand for consumable goods (hence the narrowing of the trade gap mentioned above), but falling demand for investment equities. I need widgets. I can buy them from Europe, or the US, and right now my EUR buys more USD. For an investment, sure your investment appreciates- but the currecy its valued in is depreciating at the same time.
Now, theres lots of reasons to buy RE from abroad- but "for investment" is the one case where weakening currency doesnt help. An investor from abroad will run these numbers, decide he can do better in stocks (hell he can do better in an online savings account!), and will stay away.
Posted by drtomaso | April 18, 2007 11:22 AM
A falling dollar might make NYC real estate more attractive for foreign investors but Wall Street being the leading terrorist target in the US today may well make some investors think twice about investing there. See Nightmare on Wall Street at
http://www.swissconfederationinstitute.org/swisspreserve18.htm from The Swiss Preserve Solution
Posted by Ron Holland | June 20, 2007 11:48 AM