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Foreign investment in US housing market falls to a record low

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·5 min read
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The U.S. housing market was a bright spot during most of the COVID-19 pandemic, but it didn’t get any help from international buyers, many of whom couldn't even travel to the U.S.

The dollar volume of existing-home purchases by foreign buyers for the 12-month period ending March 2021 fell 27% to $54.4 billion, while the number of homes bought by foreigners fell 31% to 107,000 units, according to a new report by the National Association of Realtors (NAR) released Monday. The dollar volume and number of homes sold were the lowest since the NAR started tracking foreign buyer activity in 2011. The dollar volume of foreign buyer purchases amounts to 2.8% of the $5.8 trillion of existing-home sales during this period, a decrease from the 4.4% share in the prior period a year ago.

"When COVID came, international flights stopped," said Edward Mermelstein, a luxury real estate attorney and founder of One & Only Holdings, a brokerage and consulting firm that caters to high-net-worth individuals. "The only clientele we have been seeing are ones who have extra means, private flights into U.S."

But “irrespective of the international buyer, the housing market, surprisingly, took off in the U.S. even with the absence of foreign participation,” said Lawrence Yun, NAR chief economist.

Historically low interest rates and a lack of inventory fueled the housing market through the pandemic, driving home prices to record highs. Home sales in the U.S. as of May 2021 are 24% higher than a year ago, according to the NAR. There was only a brief pause in the housing market in the second quarter of 2020, when most of the U.S. was in lockdown. Existing-home sales plunged to a seasonally adjusted annual rate of 4.01 million in May 2020 but by July 2020, sales had recovered and then peaked in October at 6.73 million.

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In fact, sky-high home prices and lack of homes for sale were two key reasons that kept foreign buyers away, according to the new report, which surveyed U.S. realtors with international clients. Forty-six percent of respondents said their clients “could not find property to purchase” and 38% said the “cost of property” was the main reason why they did not purchase a home. Thirty-five percent of respondents reported that international clients viewed U.S. home prices as “more expensive than prices in the home country,” up from 26% in the prior period, according to NAR. And 22% of respondents said their clients cited travel restrictions affecting international transactions.

The drop in foreign buyer activity in the U.S. is not a shock. The downward trend has been happening for quite some time. The dollar volume and number of transactions peaked in 2017, when 284,500 homes sold for a total of $153 billion to international buyers. Since then, foreign investment has declined annually.

Source: National Association of Realtors
The NAR survey included two types of foreign buyers: Non-U.S. citizens with permanent residences outside of the U.S. (Type A) and Non-U.S. citizens who are recent immigrants (less than two years at the time of the transaction) or non-immigrant visa holders who reside for more than six months in the U.S. for professional, education, or other reasons (Type B). Source: National Association of Realtors

According to Yun, politics played a role in slowing down investment activity. “The rhetoric coming from the White House” has been “less welcoming to foreigners” in recent years, he said. Other experts note that immigration policies in the U.S. may have also stifled activity. The NAR report includes foreign buyers who are recent immigrants and non-U.S. residents (non-immigrant visa holders).

For the first time since 2015, foreign buyers from Canada topped China (which includes Hong Kong and Taiwan) accounting for 8% of total purchases in the 12-month period ending in March 2021. China represented 6%, falling behind Mexico with 7%. Buyers from India and the UK rounded out the top five representing 4% of total number of deals each. 

“China has been much more successful in slowing down outflow of capital,” said Jonathan Miller, CEO of appraisal firm Miller Samuel, adding that the Chinese government has limited investment in the U.S.

That may be the case but Yun is not too concerned, noting that people will figure out ways to invest in U.S. real estate.

'Huge pent-up demand'

“The Chinese economy is fastest growing, creating millionaires left and right,” Yun said. “They want to protect their wealth and there is a desire to have some of their wealth in countries like the U.S.”

Some experts also partially attribute the decline in foreign investment to the value of the U.S. dollar. In recent years, the value of the dollar has been stronger so there’s not much of a discount for buyers from most countries outside of the U.S., Miller explained.

“That currency play has evaporated,” Miller added.

However, that may also be shifting. As of May 2021, the value of the dollar was down 9% against the currencies of its trading partners, with larger declines against the Canadian dollar (-10%) and the British pound (-10.9%), the NAR report said.  

According to Mermelstein, ultra-high-net-worth foreign buyers aren't as sensitive to the value of the dollar and for others who aren't as wealthy they will just find a home that is more affordable.

"Once the borders open up to international travel we are going to see an inflow of investors from overseas," Mermelstein said. "We are speaking to many international clients planning on entering the U.S. in September or earlier, if able. We are seeing huge pent-up demand."

With the increase in COVID-19 vaccination rates and global travel opening up, Yun is also upbeat. He thinks foreign buyers will begin to make inroads in the U.S. again.

“2021 should be the low point,” said Yun, who also isn't too concerned about the value of currencies when it comes to foreign home-buying activity. “I see some growth in next year and beyond. We are a globally connected economy.”

Amanda Fung is an editor at Yahoo Finance.

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