Is Now the Right Time to Buy Overseas?
For generations, Americans have poured their wealth into their homes. Not only does it provide a roof over our heads; rising property values make a house a perfect way to save for retirement.
That may be about to end. And the way to avoid the consequences may lie outside the United States.
Most homes in the US, particularly those with mortgages, carry property insurance. For decades, insurance payments have comprised between 5% and 10% of a homeowner’s monthly payment towards their mortgage and escrow.
But that’s changing rapidly. A recent study by investment house First Street found that insurance as a percentage of mortgage payments more than doubled from 7-8% to over 20% in the decade from 2013 to 2022. They also found that given current risks, insurance pricing would rise to nearly 50% of the average monthly mortgage payment by 2055.
As always, averages disguise the extremes. In coastal cities and fire-prone areas, insurance price increases could range from 140% (Sacramento) to 325% (Miami). In such circumstances, insurance payments could equal or even exceed the cost of a mortgage payment.
As insurance costs rise, house prices fall. That’s because a house’s selling price depends on what buyers can afford to pay monthly. The higher insurance costs go, the less houses will be worth in the market.
Rising insurance costs will thus drive down the equity value of US homes, stripping their owners of wealth.
Compounding this will be migration away from areas vulnerable to risk, primarily from climate-related factors. First Street estimates that over 55 million Americans will leave their homes to avoid climate-driven risk and the consequent rise of insurance and falling property values.
But rising insurance costs and folding home values could be the tip of the iceberg. Insurers in Florida and California are already saying that under current circumstances, they cannot issue insurance policies at all in many areas. Without insurance, mortgage lenders won’t extend credit. Housing markets in such areas will be cash only, leading to a dramatic drop in property values.
The states most vulnerable to these trends are in the sunbelt: Texas, Florida, and California, as well as many parts of the Southwest and the Gulf Coast. Retirees typically favor these regions. If these projections pan out, those retirees could be faced with rapidly declining wealth as they age. First Street estimates the total economic cost of rising insurance and migration on housing values in the US could reach $1.5 trillion over the next 25 years.
Fortunately, there is a way to avoid this catastrophic impact on one’s wealth: Invest in property abroad. Housing prices in Mediterranean Europe have been increasing at around 7% to 10% annually since the end of the COVID pandemic. Combined with the cash yield from renting out property, many investors are seeing total yields of 15% or even 20% annually. Similar yields are possible in many places in the Western Hemisphere as well.
For generations, Americans have sought to build their wealth by climbing the so-called “property ladder.” That ladder may now have an extra rung… one that takes you overseas.
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