Chinese investors buy fewer homes in the US.
Oh no, we thought when we read the report from the National Association of Realtors. Not now! Not when there’s a huge unstoppable condo glut building up in the teetering housing markets of San Francisco, Manhattan, and Miami, when sales and prices are already dropping. Foreign investors are now needed more than ever to absorb this new high-end inventory and bail out these markets.
That’s what everyone has been praying for. The last thing we need is for Chinese investors to stay away from San Francisco and Manhattan; and Canadian, European, and Latin American investors to stay away from Miami.
But that’s what they’re starting to do – for the first time since the Financial Crisis.
The data for the just released NAR report is based on a survey of 5,960 realtors that covered “transactions with international clients during the 12-month period between April 2015 and March 2016.
In total, foreign buyers purchased $102.6 billion of residential properties, down 1.3% from the same period last year. They bought 214,885 housing units, and that was up 2.8%. But there are two categories of foreign buyers in the report: resident foreign buyers and non-resident foreign buyers:
- Sales to resident foreign buyers – the “recent immigrant foreigners” who live and work in the US – rose to 126,300 housing units, the highest on record, after having fallen in the prior year. And the amount they spent jumped to a record $59 billion.
- But sales to non-resident foreign buyers – investors who don’t bother to move in – dropped 11% to 88,500 housing units, the lowest since the Financial Crisis. That’s down 25% from the record year 2014. And the amount they spent plunged 19% to $44 billion, the lowest since 2013.
In the press release, NAR chief economist Lawrence Yun explained it this way:
“Weaker economic growth throughout the world, devalued foreign currencies and financial market turbulence combined to present significant challenges for foreign buyers over the past year.”
These foreign investors are confronted with a dual problem:
- Home prices in the US overall, according to the NAR, rose 6% year-over-year in March just before the survey was taken.
- And the currencies of the countries where these foreign buyers obtained their wealth have declined or plunged, which made buying properties in US dollars much more expensive for them.
This led to a peculiar situation for these buyers, according to Yun:
“Led by Venezuela (45%) and Brazil (24%), at least eight countries, including China and Canada, saw double-digit percent increases in the median sales price of a U.S. existing-home when measured in their country’s currency.”
Who are the biggest buyers? The Chinese. For this report, “China” includes Mainland China, Hong Kong, and Taiwan. They bought expensive homes with a median price of $542,084. In total, they spent $27.3 billion, down 4.5% from a year ago. And the number of homes they bought plunged 15% to 29,195.
So who is going to bail out the San Francisco and Manhattan housing markets, steeped in an epic condo glut? No one knows.
Here are the next four in line, and all are down from a year ago, except the UK:
- Buyers from Canada, $8.9 billion.
- Buyers from India, $6.1 billion.
- Buyers from the UK, $5.5 billion
- Buyers from Mexico, $4.8 billion.
Note that all four combined spent $25.3 billion, or 13% less than the Chinese! That’s how dominant among foreign buyers the Chinese have become.
Buyers from the UK probably knew a thing or two about Brexit and what it would do to the pound. So they took their pounds and changed them into dollars and bought US properties before their beloved currency got crushed. Among those five, the Brits were the only ones to spend more on US residential properties in this period than a year earlier.
But now the Brits are going to have a hard time buying anything in the US: the pound has lost 25% of its value against the dollar over the past 12 months.
Averaged over the entire US housing market, these foreign purchases don’t seem to amount to all that much. But they don’t occur averaged out over the entire US. They occur in just a few states – in fact, in just a few cities in those states. Nearly half (47%) of all sales to foreign buyers occurred in just three states:
- 22% in Florida, mostly Canadians, Latin Americans, and Europeans.
- 15% in California, mostly Asians, concentrated in just two urban areas.
- 10% in Texas, mostly from Latin America, the Caribbean, and Asia.
The next states in line were New York (4%), mostly just New York City, which attracted mostly Asian buyers, and Arizona (4%).
But San Francisco, Miami, and Manhattan are steeped in an epic condo glut. New high-rise developments are hitting the market, and those still in the pipeline will hit the market this year and over the next few years. Developments where construction has already begun can no longer be stopped without huge losses. They were planned in good times. And now the tide has turned.
It’s already happening. Condo prices in Manhattan, as new high-end developments flood the market, have tumbled 14% in three months.
Someone needs to buy these condos, or else the market will cave, and lenders will be stuck with the bill. Foreign investors are now crucial in the markets, but with the usual impeccable timing of market forces, foreign investors are now pulling back.
In San Francisco, where we call the housing bubble “the Housing Crisis,” entire high-rise developments have been dedicated to Chinese investors. To be sustained forever, the housing bubble needs an endless influx of money from around the world and endless rapid growth of highly-paid jobs. That’s how the booms in the past have worked. And the subsequent busts have become legendary. Now, jobs and the labor force itself are in decline. Already happening. Read… These 2 Forces Will Crush the San Francisco Housing Bubble