Subprime Mortgage Meltdown

Mortgage company executives in August 2007 had to share the sentiment of
" The Poseidon Adventure" of 1972 . The struggles of the survivors of the luxury ocean liner is compared here with the mortgage lenders who went deep underwater as the tidal waves of the subprime meltdown swept them overboard and human agony knew no bounds.


What is subprime mortgage?
Subprime lending is a new feature of the mortgage market that offers legitimate credit to people with poor credit scores, low income level and cannot meet the minimum down payment requirements. So a subprime mortgage expands credit to that section of the population who were turned down from mortgage in the past.

What are the features?
The interest charged for subprime lending is higher than that charged for prime lending because of the risk of lending to someone with a poor credit record.


















History of Home Prices

http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi_table1.pdf

















Why buy a house?
Homeownership is the most important source of household equity and a great deal of attention has been paid to the mortgage market and residential property is worth more than commercial property .

Was housing bubble anticipated?
Karl Case and Robert Shiller define a bubble as "a situation in which excessive public expectations for future price increases cause prices to be temporarily elevated."

Where was the subprime mortgage crisis highest?














When did it begin?
Parts of Texas, Oklahoma and Louisiana experienced large decline in house prices in the 1980's, New England and California experienced smaller price declines between 1989 and 1995. These regions faced the after effects of recession.For couple of years the rise in house prices toppled the growth in disposable income. By the year 2003 the total mortgage debt was $1.4 trillion. Low interest rates for mortgage repayment increased home prices far more than the increase in disposable income.Around 2005-2006 there was a high default rate on subprime and adjustable rate mortgages (ARM) and the long trend of rising housing prices could not be maintained. People lost their main source of equity for refinancing. This led to default and foreclosures.

Most mortgages in defaults were issued in 2006 and 2007 when the house prices were at its peak. Many people made either very little or no down payment so they had little equity in their houses from the beginning. In 2007 nearly 1.3 million U.S. houses were subject to foreclosure leading to a rise of 79% from 2006 and in March 2008 about 8.8 million homeowners had zero or negative equity for their homes. The relentless slide of housing prices caused the default on mortgage payments as one in every six of U.S. homeowners mortgage debt rose far above their home value. According to Mortgage Bankers Association the delinquency rate for subprime borrowers was 14% and the data from Equifax shows a more severe figure of 26% in the second quarter of 2007. By the end of May 2008 131,000 foreclosures were completed on subprime loans. The inventory of new homes reached a peak in January 2008 which was the highest since 1981.This excess supply of houses lowered down their prices. This decline followed the speculative borrowing concept of the Keynesian economist Hyman Minsk who pointed out speculative borrowing lead to accumulation of debt and decline in asset values. This decline will continue until the house price reaches an equilibrium level. If this process is not fast it will push more home-owners to the risks of defaults and foreclosures. This high foreclosure rates are trickling down the housing market, mortgage market and financial markets.

What caused a subprime meltdown?
Markets which showed a considerable rise in home prices over a couple of decades had two common features:-

Large change in population and employment growth through economic changes;

Limited space for new development which restricted the supply of new housing.

Supply side and demand side factors a couple of reasons can also be responsible for a subprime meltdown.

High Risk Loans— The Ninja loans or the "No Income, No Job and No Assets "loans fall in this category. In 2005, 43% of buyers acquiring Ninja loans made no down payment. Besides this, mortgage underwriting issues including providing loans without any credentials.The hybrid ARM's can have a sharp jump in interest in a short time which will render the borrowers unable to pay them back.

Government Action— " America 's Home Ownership Challenge" made the Fannie Mae and Freddie Mac to make to make more than 5.5 million new minorities and low income mortgage loans.

The ACORN (Association for Community Organizations for Reform Now) empowered some people to demand more loans.

Securitization— According to Alan Greenspan, the securitization of home loans for people with poor credit record and not the loan itself is responsible for the current crisis. As the house prices started to stabilize in 2006, the investors demand for collateralized mortgage securities waned and mortgages were issued continuously.

The situation can be compared to the Napoleonic complex— Napoleonic indomitable cant was solely responsible for his decline.

Speculation— Financial leverage means borrowing at a lower interest rate and investing at a higher interest rate. A Diamond Dybvig model is followed in making mortgage loans —current expenditures will fructify into higher returns in the future. Too much speculation and extrapolation of the rising trend of home prices into the future is a culprit for this crisis.

Comparison with 1929--
There was also a steep fall in house prices during 1929. The structure of mortgage credit was the form of short term, callable, non-amortizing loans. With the decline in home prices, the home-owners were unable to pay back their dues. To prevent this situation in the future, the federal mortgage programmed the long-term,, non callable, amortizing loans.

Effects
Trouble in the Financial Sector—
"Analyst reported the world losing $5.2 trillions as a result of global slowdown triggered by the US housing market"---------------------- BBC News

The subprime crisis spread to other credit markets. Major banks and financial institutions reported losses of US $ 435 billion as of July 2008. Most notable is the downfall of Bear Stearns, the bank which survived the Great Depression. On June 2007 the firm found its collateralized debt obligations (CDO 's) to be worth less than their market value prompting investors to liquidate the CDO 's followed by liquidation of similar assets in other portfolios.

Following Lehman Brothers downfall investors found out the sub-prime mortgage backed securities of AIG were priced higher than Lehman Brothers. This caused a 60% drop in AIG 's stock prices in September followed by a downgrade of its credit rating by Moody.

The international financial scene also shared the woes.— German bank IKB Deutsche Industriebank AG was bailed out by state-owned KfW Group.

The Market In Trouble— Dow Jones index declined by 22% in its 118 year history. S&P 500 Index got its negative point in 2007.

Not only U.S. the subprime mortgage crisis contaminated the world stock markets— In London, the main FTSE 100 index lost more than 150 points, the first time since the 9/11 terrorist attacks.

In Paris, the stock market fell 12.3% in January and was down 15.3% in the three months from November.

India's BSE Index fell 16% , China's stock market fell by 21.4% and Turkey suffered a loss of 22.7%.


















Source:- Bloomberg

Government Actions

"If we know the price of cream and the price of skim milk, we can figure out the price of milk with 1 per cent cream, 2 per cent cream, or 4 per cent cream. There might be some money in repackaging, but not the billions that banks made by slicing and dicing sub-prime mortgages into packages whose value was much greater than their contents."

--Joseph Stiglitz
Noble Laureate '2001 for Economics of Information

Refinancing Options— The Federal Housing Authority's FHASecure program is offering refinancing options to move delinquent hybrid ARM borrowers into fixed-rate loans. It should help about 250,000 home owners through 2008, according to Department of Housing and Urban Development.

Freezing Lower Interest Rates – The U.S. Treasury Secretary Henry Paulson has organized a voluntary organization " HOPE NOW" which will allow borrowers of subprime mortgages to pay a lower interest rate for a fixed period, say 5 to 7 years till they find other sources of re-financing.

A $700 billion proposal was presented to the Congress in September'2008. On 3rd October, President George W. Bush signed the bill to help financial markets.

The ECB injected a €95bn (£63bn) emergency funding to prevent the US subprime mortgage slump to proliferate in the European banking systems.

Prevention is Better than Cure On Feb'27, 2007 Freddie Mac announced tougher subprime mortgage lending standards to prevent the risk of default. Freddie Mac is developing fixed rate, hybrid ARM's that will have reduced adjustable margins with longer fixed rate terms to prevent credit default. The company will also minimize the use of low documentation underwriting to ensure that borrowers will have necessary funds to afford their homes.

In 2007 The State Foreclosure Prevention Working Group met with the 20 largest servicers of subprime mortgage loans to discuss opportunities to prevent unnecessary foreclosures.

The Foreclosure Prevention Act is passed in 2008 – It provides a $100million additional funding is provided for housing counseling . To help veterans and returning soldiers to avoid foreclosures this bill has increased the time –span a lender must wait before starting foreclosures.

References:-

http://www.speculativebubble.com/videos/real-estate-roller-coaster.php http://www.fdic.gov/bank/analytical/regional/ro20041q/na/infocus.html; http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf http://www.freddiemac.com/news/archives/corporate/2007/20070227_subprimelending.html http://www.fdic.gov/bank/analytical/regional/ro20041q/na/infocus.html http://en.wikipedia.org/wiki/American_International_Grouphttp://news.bbc.co.uk/1/hi/business/7239506.stm http://www.financialsense.com/editorials/lee/2008/0208.html http://money.cnn.com/2007/12/05/real_estate/FHASecure_status/index.htm?postversion=2007120512 http://www.heritage.org/research/regulation/wm1742.cfm http://banking.senate.gov/_files/040208_ForeclosurePreventionActSummary.pdf

Barnett Shale: Has Texas Hit the Mother Lode?

By Lisa Briggs
REAE 5311


Until recently, most people in the Dallas/Fort Worth area paid little, if any, attention to mineral rights. Few even thought to discuss them when buying or selling a home. But in 2005, that suddenly changed. Today, no real estate transaction in the area would be complete without discussing the disposition of these rights. The reason for this sudden change: Barnett Shale.

Background

The Barnett Shale is a geological formation of sedimentary rock located in North Central Texas. It can be traced back approximately 300 million years[i]. These rocks contain ‘sponge-like’ pockets filled with natural gas. Although scientists have long known about the Barnett Shale, it wasn’t until 1980 that technological advances allowed them to reach the gas. Even then, the process was expensive; the hard shale must be fractured (or ‘fraced’) in order to access individual gas pockets.

Hydraulic fracturing, a new innovation developed in the late 90’s, made gas drilling in the shale formations more feasible, but there were still problems. The richest part of the Barnett Shale, its core, lies directly beneath the densely populated city of Fort Worth. Drilling in such an urbanized setting had not been tried before. In 2002 a new method of horizontal drilling made it possible to reach gas pockets up to 6,000 ft. away without disturbing the surface area. This new technology coupled with rising gas prices provided the impetus for the Barnett Shale play.

Because natural gas is the cleanest burning fossil fuel, it has become an increasingly important source of domestic energy. While domestic oil production has declined in recent years, gas production in the U.S. began increasing in 2005; production was up nearly 9% in just the first five months of 2008[ii]. This is due in large part to shale exploration, particularly Barnett Shale, now thought to be one of the largest on-shore natural gas fields in North America. While it was originally thought that gas might be drilled in three North Texas counties, the gas-rich shale extends much further than expected. Drilling has been so successful that estimates now are that it will span as many as 21 counties in North Central Texas and cover more than 5,000 square miles. By mid-year 2007, the Barnett Shale had already produced more than 2.5 trillion cubic feet of natural gas. That’s enough to heat every home in Texas for several years[iii]. In a 2007 study commissioned by the Ft. Worth Chamber of Commerce, the Perryman Group estimated that total production would reach 26 trillion cubic feet of gas. Barely a year later, expectations have now more than doubled - to 55 trillion cubic feet - and as exploration continues, these numbers will likely continue to be revised upwards.

Economic Impact

The Perryman Group reported that by year-end 2007, the Barnett Shale had created 83,823 permanent jobs in the Ft. Worth area and produced $8.2 billion in annual output. This represents an increase of over 50% compared with 55,385 permanent jobs and $5.2 billion in annual output during the previous year. Benefits to the state are equally impressive.[iv] Although estimates may continue to grow, the Perryman Group expects that through 2015, The Barnett Shale will generate 108,000 new jobs and $10.4 billion in output each year. The revenues will come from activities related to gas drilling and exploration as well as from royalty payments, personal income and increased tax receipts from local businesses.[v]
There’s no doubt the Barnett Shale has helped insulate North Central Texas from the economic woes seen in other parts of the country. In fact, according to the US Census bureau, between 2006 and 2007 Dallas/Ft. Worth was the fastest growing metropolitan area in the country. And while much of the country saw rising unemployment, Dallas/Ft. Worth posted the largest number of new jobs in any metropolitan area, nationwide. Much of the job growth can be attributed to gas exploration.[vi]

Not surprisingly, gas exploration has also had an impact on the real estate market. In March, 2008 The Perryman Group reported that retail vacancy rates were down and office space was full in the downtown Ft. Worth area. In addition, rental rates had increased by over 23% in the Central Business District. The housing market has also been bolstered by the inflow of labor. Over 38,000 home sales have thus far been attributed to activity in the Barnett Shale.[vii] An even larger impact on the housing market can be attributed to the leasing of mineral rights. Because mineral rights are owned by individuals and governments, gas companies can’t simply drill where they choose; they must first obtain permission. Gas companies began soliciting mineral leases by sending out an army of ‘landmen’ to knock on doors in targeted areas. Their goal was to lease the sub-surface minerals from as many individuals, businesses and public entities as possible. In exchange for the right to drill, they offered a one-time signing bonus and a royalty, a portion of the profits generated from any gas retrieved under the property. The initial bonuses were reported to be “as high as $300” with royalties between 12.5% and 18%. But as the Barnett Shale received increasingly more attention, property owners became more ‘gas-savvy’. They soon began banding together in groups and demanding more. Signing bonuses increased slowly at first, but as groups got larger and more powerful, lease incentives began to skyrocket. Soon there were reports of neighborhoods receiving bonuses of as much as $30,000/acre and royalties of 27.5%. Many wondered where it would end.

Signing bonuses and royalties have undoubtedly been a boon to the area. Cities have signed leases for the sub-surface minerals in parks and schools and have also leased out much of the land used for drill sites. Ft. Worth estimates it will earn nearly a billion dollars from bonus and royalty payments over the next 20 years[viii]. The money will benefit everyone in the area, allowing for improvements to infrastructure and providing funding for additional city services and programs. Thousands of individual mineral owners and businesses have also leased their mineral rights with the anticipation of big paydays. But amid this rush to cash in, many have had concerns about both the short and long-term effects of drilling on property values. Once drilling begins, the site operates 24/7. There are issues with noise, bright lighting, truck traffic, road damage and more. The gas rig reportedly remains in place for about 45 days before being dismantled and moved. After that, the area is restored and most of the disruption abates, but the well continues to operate and can do so for 30 years or longer and additional wells can be drilled from the same site. Depending on city ordinance, some homes can be as close as 200 feet from a drill site (Ft. Worth city ordinance requires a 600 foot setback). For some, that’s too close for comfort. Pockets of residents in various neighborhoods have organized ‘no lease’ groups, encouraging residents to refuse to lease their minerals rights. Two recent drilling-related accidents in the area – one involving a fatality – have brought increased attention to these concerns.

Don Young who founded Fort Worth Citizens Against Neighborhood Drilling Ordinance (FWcanDo), cites the following as his group’s most important concerns regarding urban residential drilling:[ix]

Ø Safety, which includes the possibility of accidents and blowouts
Ø Property marketability, including the possibility of diminished real estate values near rigs
Ø Environmental concerns, including air pollution, soil contamination, water pollution, loss of green space and diminished water supply
Ø Compromised neighborhood integrity, including noise, trash and overall disturbance from drilling activity
Ø Lack of oversight regarding unscrupulous mineral leasing, drilling and maintenance

Some residents believe the risks of having a nearby well are offset by the monetary rewards, but not every homeowner within a well’s drilling radius is entitled to collect bonus or royalty money. Mineral rights are not part of the surface estate and can be bought and sold independent of that estate. Because of the potential for income, most mineral owners in the area are now keeping the sub-surface rights when selling property. Others are using them as a bargaining tool in real estate transactions. Builders and developers are also retaining minerals rights and leasing them out for entire sub-divisions before even beginning to build. In addition, speculators are buying up large tracts of land just to obtain the rights and flip the property. This isn’t just happening in Texas, but also in places like Pennsylvania and Louisiana where gas exploration is now underway. As a result, most area homebuyers today must endure the noise and inconvenience without any direct compensation.

To date, there’s been no evidence that gas exploration has affected overall property values in either direction, and drilling hasn’t caused assessments to change. But it’s still early - The Perryman Group believes activity in The Barnett Shale could last as long as 80 or 90 years. As taxing authorities gain a better understanding of how gas exploration will affect home values, many residents are likely to see changes in their property tax bills. There will no doubt be some who challenge assessments, either because they feel their home values have truly suffered or because gas exploration has caused increased valuation and higher property taxes.

Looking Forward



The recent economic crisis has sent markets reeling. The oil and gas market is no exception. Gas prices have plunged from over $13/Thousand Cubic Feet in July to only $6.54 in October. That’s a drop of over 50% in only three months. Many gas company’s stock prices have been cut by as much as 70%. In response, the major gas companies began cutting back on both production and lease offers in the Barnett Shale area. Many rescinded lease offers they had already approved. Gone are the $30,000/acre paydays. Instead, mineral owners are now being offered $4000-$5,000/acre. Royalty offers have also decreased from a minimum of 25% of profits to only 20%. Some believe this is only a temporary glitch in the road and that when the economy recovers, the offers will again increase. Others think this may be the end of the gravy train. No one knows for sure. Oil and gas attorney, Mark Nastri, has counseled his clients to be patient. Nastri contends that the minerals aren’t going anywhere and neighborhood groups that hold their ground will be rewarded in the end.[x]
Stages of Exploration Barnett Shale Wells



Today, anyone driving on the highways of Ft. Worth or through the many side streets of the city can’t help but notice the gas rigs towering above school yards or competing with high rises for attention in the downtown area. At the end of 2006, there were already 500 wells within the city limits. Another 660 are expected to be drilled by 2010. The Texas Railroad Commission, the regulating body for oil and gas exploration, currently has nearly 10,000 gas wells registered and over 5,000 permitted drill sites.[xi] Although the current economic crisis has caused a pull back in production, no one yet knows how long it will last or how severe its impact will be. Experts do however agree that exploration in The Barnett Shale and other shale formations throughout the country is a necessary step toward energy independence. With regard to North Central Texas, the overall consensus is that the long-term benefits of drilling far outweigh the costs to the area. And while the true effects of this type of wide-scale urban drilling may not be known for decades, most are optimistic that with regulatory vigilance and careful planning residents will grow comfortable with the changing landscape.

Helpful Links:

Texas Railroad Commission
University of Texas Bureau Of Economic Geology
Interstate Oil and Gas Compact Commission (IOGCC)
U.S. Department of Energy Public Utility Commission of Texas
Barnett Shale Energy Education Council

Cited References:
[i] DFW TexStar Land Services, L.L.C.
www.dfwtexstar.net/BarnettShale.htm

[ii] Drilling Boom Revives Hopes for Natural Gas
Clifford Krauss
Sep 7, 2008
http://www.nytimes.com/2008/08/25/business/25gas.html?_r=2&em&oref=slogin&oref=slogin

[iii] DFW TexStar Land Services, L.L.C.
www.dfwtexstar.net/BarnettShale.htm

[iv] Drilling for Dollars:
An Assessment of the Ongoing and Expanding
Economic Impact of Activity in the
Barnett Shale on Fort Worth and the Surrounding Area
The Perryman Group
March, 2008
www.barnettshaleexpo.com/docs/2008_Report.pdf

vBarnett Shale gas field paying off
55,000 jobs, homeowner royalties part of $5B impact
Laurie Fox / The Dallas Morning News
May 17, 2007

[vi]North Texas economy lifted by Barnett Shale gas
Anna Driver, Reuters News
Apr 4, 2008
http://www.telerate.com/article/rbssEnergyNews/idUSN0331328420080404?pageNumber=2&virtualBrandChannel=0

[vii] Drilling for Dollars:
The Perryman Group

[viii] OpCit.

[ix] They're getting to know the drill
Homeowners wooed by oil companies hoping to tap into mineral rights
Laurie Fox and Marice Richter / The Dallas Morning News
March 27, 2007

[x] Northeast Tarrant Gas Leasing Organization website
at: http://www.freewebs.com/netglo/

[xi]The Texas Railroad Commission Field Data Report
at: www.rrc.state.tx.us/data/fielddata/barnettshale.pdf Economic Development &

Pictures:

Gas Exploration in the City of Dallas
Economic Development & Housing Committee
September 5, 2006
http://www.dallascityhall.com/committee_briefings/briefings0906/20060905_EDH_gasexploration.pdf

Drilling for Dollars:
The Perryman Group

"Right-of-Way 101" by Steven Kunkel, MAI

REAE@UTA special thanks to Mr. Steven Kunkel, MAI for presenting "Right-of-Way 101" to the appraisal class yesterday. Steve brought up many good points regarding property rights and valuation practices for commendation purposes.

From guests

Steve, an UTA graduate, is the owner of Kunkel and Associates, located right on the edge of UTA's campus, and has hired UTA students.

Developer's Roundtable @ UTA

The second annual Developer's Roundtable sponsored by the College of Architecture was very well done. Although the main topic was the changing demographics in Texas, the current state of the economy and its impact on development certainly was a common theme. Also, some very good advice regarding managing relationships between developers and designers was offered.

GIS Day, Today!

Josh Been has organized the second annual GIS Day@UTA. This event starts at 11 AM (today!) and will go to 5 PM (or longer). GIS Day is held on the top floor of the UTA Library.



11 am – Noon: Showcase Campus Use of GIS

Noon – 1 pm: Featured Talk: Dr. Taner Ozdil

1 pm – 2:30 pm: Showcase Campus Use of GIS

3 pm – 5 pm: Hands-On GIS Workshop

We have several exhibits from the REAE@UTA program so come on over and check-out the latest faculty research and student projects using GIS.

Foreign Direct Investment

By Hsiangyu Yang

REAE 5311 Blog Project

Real estate markets fluctuate all over the world, with high and low times. Running a real estate business in the United States requires the real estate professional to have a general grasp of the markets overseas in order to better conduct business here at home. As the United States is open to foreign investment, other countries may decide to invest in a piece of US soil, especially when exchange rates would favorably enhance the terms of the deal.

The United States is open to foreign investment. In Texas, “aliens have the same rights to real property as U.S citizens; also, alienage is also no bar to inheritance” (Richards 49). That is only one of several reasons that it is attractive to investors. Other reasons include the bundle of rights associated with real estate, low levels of corruption, transparent transactions, and a stable economic and political environment (Miles 33). There are also strictly monetary reasons for foreign investment. To find why a person from Taipei, Taiwan may be interested in purchasing real estate in the Dallas/Fort Worth, Texas area it is necessary to compare and contrast the monetary qualities of the transaction. Closing costs, cost of the real estate, property taxes, and the rate of appreciation are the main quantitative categories. By comparing and contrasting these categories the real estate professional will be able to more readily identify monetary reasons the Citizens of Taiwan will want to purchase real estate in Dallas/Fort Worth, Texas.

The need for the real estate professional to consider the reasons foreign investors act is an ongoing and increasing concern. “The National Association of Realtors indicates that foreign investment in U.S properties increased to $40.6 billion in 2002, up from 38.3 billion in 2001 ”(Miles 34). The access to foreign resources and wealth is also increasing as 27.8% of the U.S population increase was due to legal immigration from 1991 – 2000 (Miles 21). Anyone who ignores these statistics is missing out on a valuable segment of the market.

(http://static.flickr.com/174/418662140_f90864eee2.jpg).

Closing Costs

Closing costs include items such as title insurance, fees for recording documents, mortgage insurance, recording taxes, appraisal fees, and survey fees (Ling 403). This is an important consideration because it explicitly relates to the effective borrowing costs and the overall investor’s yield. These closing costs must be disclosed when in conjunction with a loan under Federal Reserve Regulation Z (Ling 404). This contributes to the U.S standard of transparency and would be seen as a positive attribute by an investor from Taiwan.

The main closing costs in Taiwan include the deed tax, land value increment tax, and real estate commission. The deed tax on a purchase of real estate is six percent of the purchase price (http://investintaiwan.nat.gov.tw/en/env/guide/tax/deed.html), the value increment tax is the increased value of the property which is computed by deducting the acquisition costs and improvement costs from the property’s market value at the time of the transfer. The taxable gain is adjusted to take account the changes in the consumer price index. The rates of the land value increment tax range from 20% to 40%, depending on the taxable gain. For owner-occupied residential land, this tax is levied at a flat rate of ten percent under certain conditions (http://www.globalpropertyguide.com/Asia/Taiwan/Taxes-and-Costs). Finally the last major closing cost is the real estate commission which is normally four percent for the seller and one percent for the buyer. All of these major closing costs add up to a significant percentage of the overall purchase price.

In the Dallas area the closing costs are quite different, but they are still high. According to Pedro Rodriguez of Metroplex City Mortgage, LCC, there is a transaction specific cost of approximately $350 for closing services. When looking at his website other costs such as: loan origination fee, points (optional), appraisal fee, credit report, interest payment, and escrow account may apply. However, it is very interesting that there are no transfer taxes on real estate sales in Texas. This amounts to a relatively low transfer cost when compared to Taiwan.

Cost of Real Estate

The cost of real estate (acquisition cost), when a foreign investor is considering, it is more of a comparison of investment value. Certainly the previously mentioned closing costs and property taxes that will be discussed later must be considered as part of the overall cost of real estate, however, the base purchase price, along with any property rights, is the main concern. When considering a property in a purely quantitative way many investors will be led to the simple equation: NOI/Cap Rate = Value.

In Taiwan, the cost of real estate is very high when considering the length of time it takes to own a property. Consider the chart below that includes various countries in the continent of Asia. Taiwan’s timeframe for property purchase is 35% higher than the next country in line, Hong Kong. This may entice Citizens of Taiwan to seek out opportunities to live where the timeframe to own a home is lower.

(http://www.globalpropertyguide.com/Asia/Taiwan/Price-History)

In the United States, an investor or buyer may enjoy a lower payback period than Taiwan. In the chart below it can be seen that the house values of Dallas, Texas have been steadily rising. However, they are relatively low compared to the local economic environment which allows many people in the DFW area to payback their mortgage sooner than the 20-30 stated timeframe on the mortgage amortization schedule.

(http://recenter.tamu.edu/data/datahs.html)

Property Taxes

“The public sector is always a partner” in any real estate investment or purchase (Miles 63). Property taxes pay tribute to infrastructure, water/sewer service, education (for children or future employees), and many other services that add value to a property. The portion of the taxes paid that directly affect the subject property may be subtracted from the whole to isolate the true economic leakage. This is complicated and not absolute. Therefore, the tax rate as a whole will be considered.

In Taiwan the property tax is delineated between the building and the land. “The building tax is levied based on the government assessed value of the building at applicable tax rates. The government assessed value is not the market value of the building. The value assessment factors are location, construction type and the total number of units in the building”(www.investintaiwan.nat.gov). For businesses this building tax is approximately 3% to 5%; for residential structures it is approximately 1.2% to 2% (if owner occupied)( www.investintaiwan.nat.gov).

The land is taxed separately. All lots within a certain tax municipality are based on the value of a seven acre section within that municipality. This section serves as the one and only comparison for tax value purposes. “Land value tax is levied at either the regular progressive rates or the special rates. Regular progressive rates are from 1% to 5.5%. Special privileged tax is applicable to land used for the following purposes: purpose, special use, privileged, tax rate, remarks, and rate of appreciation” ( www.investintaiwan.nat.gov).

Property taxes in the Dallas/Fort Worth area are different by nature and in their degree. As can be seen on the chart labeled DFW Taxes 2007 the rate is applied to the property as a whole (land and building). Also, the rate in Texas may be high within the U.S., however, it is considered very low when compared to the tax rate of Taiwan.

DFW Taxes 2007

	Total	City	School	County
Dallas	2.52%	0.75%	1.20%	0.57%
Fort worth	2.68%	0.86%	1.19%	0.64%
Arlington	2.56%	0.65%	1.28%	0.64%

(http://www.davedowns.com/propertytaxes.htm).

Rate of Appreciation

The rate of appreciation is an extension of the cost of real estate, as the above value equation only considers the capitalization rate. It is an added benefit (and an overall unique benefit of tangible items) of real estate ownership to experience growth in the initial value. The yield is the capitalization rate plus growth. Following the axiom of buy low and sell high, it seems like the Taiwanese may have another reason to purchase property within the U.S. Although exchange rates must be considered, the percent of house price change between Taiwan and the United States is polar.

(http://www.globalpropertyguide.com/Asia/Taiwan)

In the chart above it can be seen that the house price percent change is on an upward slope. Since two years ago the price has went up nine percent annually. This is very steep appreciation and the market is said to be in a boom. This boom was followed by an erratic pattern of up and down patters that may hint to volatility (risk involving the current peak).

(http://www.globalpropertyguide.com/real-estate-house-prices/U)

In the chart above describing the United States market it can be seen that now may be the time to buy because the United States real estate market is in a depression, falling six percent annually after a long gradual increase of value.

Conclusion

The United States is open to foreign investment, and the State of Texas has no alien restrictions regarding real property. In addition, the real estate market of the United States has low levels of corruption, transparent transactions, and a stable economic and political environment. (Miles 33) Therefore, foreigners can enjoy the investing environment of the United States. Nevertheless, foreigners will consider closing costs, cost of the real estate, property taxes, and the rate of appreciation and then make a decision. The Taiwanese have specific advantages when considering the aforesaid in an investment decision.

The United States real estate market is depressed now, however, the housing price in Taiwan, especially in Taipei, is very high. Besides, it takes the Taiwanese more than 30 years to afford one condominium normally. Therefore, it can be seen by comparing and contrasting these categories the real estate professional will be able to more readily identify monetary reasons the Citizens of Taiwan will want to purchase real estate in Dallas/Fort Worth, Texas.

On the other hand, real estate professional need to be familiar with the potential international demand and the general international conditions in order to provide the best service possible in the United States.

Works Cited

Ling, David and Archer, Wayne. Real Estate Principles, A Value Approach. New York: McGraw, 2008.

Miles, Mike and Berens, Gayle and Eppli, Mark and Weiss, Mark. Real Estate Development: Principles and Processes. Fourth Ed. Washington, D.C.: ULI, 2007.

Richards, Timothy. The Guide to Foreign Investment in United States Real Estate. New York: Van Nostrand, 1984.

Rodriguez, Pedro. Telephone interview. 17 November 2008

Ed. Invest In Taiwan. (2008). Invest In Taiwan. Retrieved November 14, 2008, from http://investintaiwan.nat.gov.tw/en/env/guide/tax/building.html

Ed. Global Property Guide. (2007). Global Property Guide. Retrieved November 14, 2008, from http://www.globalpropertyguide.com/real-estate-house-prices/U

Ed. Dave downs. (2008). Northwest Dallas suburb. Retrieved November 14, 2008, from http://www.davedowns.com/propertytaxes.htm

Ed. Real estate center. (2008). Real Estate Center at Texas A&M University. Retrieved November 14, 2008, from http://recenter.tamu.edu/data/datahs.html