By Elaine Mills Of Dow Jones Newswires
 
With house prices in free fall in the US and the pound still strong against the dollar, canny UK investors are seeing attractive opportunities.

A raft of recent surveys has painted a bleak picture of the US property market.
 
The S&P/Case-Shiller Home Price Indices for October show negative returns from sales of existing single family homes across the US for the 10th consecutive month.

House prices in the ten largest metropolitan areas suffered a 6.7% annual drop – the biggest on record. The previous largest decline was in April 1991 when the index tracked down by 6.3%.

Last month Morgan Stanley predicted a 10% real decline in home prices in 2008. The bank says that mortgage defaults jumped to a 19-year high of 5.59% in the third quarter of 2007, and the foreclosure rate rose to a record 1.69%.

But one man’s murder is a another man’s meat, and many prospective British buyers are eyeing properties, ranging from beachfront villas to up-market city lofts, that are selling at bargain basement prices.

In Kissimmee, Florida, there is a three-bedroom 1,234 sq ft house with a heated pool and Jacuzzi up for sale on a pre-foreclosure basis at about £80,000.

With a 25% deposit, the mortgage would come to about £400 a month, says Lee Weaver from British Homes Group, a property sales and mortgage brokerage aimed at foreign buyers.

Florida with its blue-ribbon beaches and world famous attractions such as Walt Disney and Universal Studios has always been a popular destination for British holidaymakers and expatriates.

A 2007 survey by the National Association of Realtors found that Britons were the second largest group of foreigners buying US property.

UK nationals paid a median price of $335,000, which was amongst the highest, and nearly half of these purchased their homes in Florida.

Over the past four months Stirling Sotheby’s International Realty has seen a steady increase in enquires from Britons interested in acquiring property in the sunshine state.

However, this interest has not yet translated into an increase in sales. The Florida-based estate agent closed around 40 sales to UK buyers last year, which is half the number a year earlier. But it believes that 2008 will be its strongest year yet for sales to foreigners and expects some of the best deals to take place over the next six months.

BHG also says there is renewed interest from the UK. "However, problems surrounding sub-prime lending had muddied the waters, and in the fall-out not only less credit worthy individuals are being flushed out but also good borrowers," says Weaver, BHG’s director of operations.

Craig Priestley of UK-based Mortgages4You, which is licensed by the State of Florida, says it has become harder to obtain home financing since "stated income" or "self-certified" mortgages are no longer readily available and lenders now require full documentation to prove earning capability.

"The average loan-to-value has also reduced significantly from 90% to 75%, with an interest rate that ranges from 6.9% to 8%," says Priestley, the company’s US mortgage manager.  "There are 85% loan-to-value mortgages available, but these charge a diabolical interest rate of up to 12%." 

Weaver believes the slump in the property market is largely due to excess inventory as a result of a building craze prompted by demand from speculators. In 2001 there were only 2,500 homes on the Central Florida market – now there are 28,000, he says.

This concurs with Morgan Stanley’s findings, which indicate that the nationwide supply-demand mismatch is so large that builders must slash single-family housing starts by 40% from current levels to eliminate the inventory of unsold homes.

As a result the bank predicts that overall housing starts will run below one million units in each of the next two years – a level not seen since recording began in 1959.

Weaver also sees the current downturn as a necessary market correction after unsustainable property price increases over the past five years.

According to forecaster Global Insight some of the steepest price declines have occurred in the metro areas of Florida, one of the states where there has been the greatest incidence of overvaluation.

Developers are auctioning off their excess inventory to the highest bidder. Sterling Sotheby’s founder-owner, Roger Soderstrom, says sellers are willing to sell at or below current real market value in order to facilitate an immediate sale.

On January 19, the estate agent will auction 27 seaside resort homes, in up-market Naples on Florida’s west coast. An equivalent 1600 sq ft, three-bedroom apartment is valued at $393,000. A week later 30 units at Oceanwalk Condominiums on the south side of New Smyrna Beach on Florida’s east coast will be auctioned. The units, which range in size from 1350 to 2050 sq ft, are currently on sale for $250,000 to $440,000.

However, real estate is a highly localised business and there are large variations in home prices across the US. South Florida, and the Miami metropolitan area specifically, are still experiencing challenging conditions, Soderstrom says. "But areas in central Florida, such as New Smyrna Beach near Orlando, are approaching the bottom of the market.

The Naples market, which contains many multi-million dollar properties, remains soft. Both areas offer great opportunities," Soderstrom says.

Weaver expects the market to stabilise this year, and he’s not the only one. Sean Snaith, director of the University of Central Florida’s Institute for Economic Competitiveness, says Florida’s housing sector should start recovering from mid-2008 onwards.

The National Association of Realtors is optimistic that a broad-based recovery is imminent, based on a 3.6% reduction in November’s national housing inventory and a modest firming of the Pending Home Sales Index for three consecutive months.

NAR sees an increase of 0.9% in existing home sales nationwide this year after a projected fall of 12.7% in 2007.

The association forecasts that the median price for existing homes will remain flat at $217,600 in 2008 before rising to $224,400 in 2009.

However, numerous other economists have a much more pessimistic view.

"The housing downturn will likely subtract 0.9% from growth in the next four quarters, and the housing recovery in 2009 will hardly merit the name," says Morgan Stanley’s report ‘Recession Coming’, co-authored by the bank’s chief US economist Richard Berner.

Global Insight sees home prices falling an average of 7% in 2008 and says the peak-to-trough drop in home prices will probably end up being more than 10%.

In the meantime, the pound has declined from its highs of above $2 last year. With many analysts predicting a negative longer term outlook for the currency, the window of opportunity for UK property investors to exploit a still favourable exchange rate may be shrinking.
 
Elaine Mills, Dow Jones Newswires; 020-7842-9448; elaine.mills@dowjones.com