There’s magic in the housing market. Especially at the upper end, and especially in California’s coastal areas, such as San Francisco and Silicon Valley, where prices have become ludicrous.
We already understand that the median price of single family homes has been pushed up by private equity firms, REITS, and other institutional investors in the US that have within the last couple of years scooped up 386,000 vacant homes across the country specifically in order to drive up prices, and secondarily to rent them out.
According to my source at one of the GSEs (Government Sponsored Enterprise), they did it by constantly laddering their purchases in certain markets. In Las Vegas, for example, they achieved price increases of 100%. These price increases on 386,000 homes impacted the prices of 23 million homes via the “multiplier effect” [for more on this, read… How Wall Street Manipulates The Buy-to-Rent Housing Racket].
And what about foreign buyers?
And I’ve been asked countless times to what extent soaring prices, especially at the upper end of the market, are attributable to foreign buyers. In California, anecdotal evidence has pointed at organized arrivals of well-heeled Chinese buyers desperate to get their money out of harms’ way in their own country, while they still can. We see it everywhere. But what are the numbers?
Turns out, anecdotal evidence was correct, according to the National Association of Realtors. During the 12-month period ending in March 2014, foreign buyers plowed 35% more into US homes than during the prior 12-month period. In total: $92.2 billion. Both volume and prices-paid rose. And 60% of them paid cash – versus a third of domestic home buyers, which includes investors.
The Chinese were the most prolific buyers, at $22 billion. That’s up 72% from a year earlier! They’re desperate! They accounted for 24% of all foreign purchases. Back in 2010, they accounted for just 8%. Of the top 10 countries as origin of international clients, only China saw any significant share increase over the last four years.
The Chinese weren’t buying the cheap stuff.
Buyers from China paid a median price of $523k. That’s 160% more than strung-out American buyers could afford (median price of $200k for all Existing Home Sales over the same period).
And 76% of the deals were all-cash. Anecdotal evidence was correct: 35% of their purchases were in California alone. Other favorite spots were Washington and New York. They were serious about leaving their country: 52% intended to use their newly acquired homes for more than 6 months out of the year, and 39% considered them their primary residence. Bailing out of China while they still can.
Canadians were buying the cheap stuff.
At least compared to the Chinese, though they still plunked down more than Americans, with a median price of $212k. In dollar terms, they came in at a distant second place with $13.8 billion in purchases. But they reigned supreme in terms of volume, going after homes in lower-priced markets, such as Florida where 34% of the foreign buyers were from Canada, and in Arizona where 74% were from Canada. Unlike the Chinese, these folks don’t really want to live in the US; they’re going south for vacation and to survive the winter: 86% of the homes they bought were for vacation and residential rental.
In third place were buyers from India, at $5.8 billion. Like the Chinese, they went for the expensive stuff, paying a median price of $342K. They were apparently less worried about finding a place for their cash: only 23% of the deals were all-cash. And even more so than the Chinese, they wanted to live here: 80% considered it their primary residence and 96% intended to spend over 6 months per year in their new abode.
Buyers from the UK were in fourth place, with $5.8 billion in purchases. Buyers from Mexico were in fifth place, with $4.5 billion in purchases. These five countries combined accounted for 54% of all purchases by international clients.
So to what extent can the soaring home prices be attributed to foreign buyers? They sank $92.2 billion into the US housing market, or about 7% of the $1.2 trillion in Existing Homes Sales during the period. On the surface, it seems they wouldn’t have a lot of influence on price. But as my source at the GSEs pointed out, each sale impacts the price of 60 homes nearby via the multiplier effect. And in this manner, the price pressures of the 232,000 homes that foreigners bought would impact 14 million homes.
Their impact on the market pales compared to the highly targeted impact of domestic investors whose goal was to jack up prices. But they impacted different ends of the market: domestic investors focused on homes below the median price, foreign buyers on homes above it.
The Fed’s devaluation of the dollar had a lot to do with it.
It made US homes cheaper for buyers with foreign currency that has been gaining against the dollar, like the Chinese yuan. The devalued dollar gave Chinese buyers an additional incentive to buy in the US, and a big advantage over American buyers. So 44% of the realtors reported that the value of the dollar had “a moderate effect” on home purchases by international clients, and 31% reported that it had a “very significant effect.” That’s a total of 75% who finger the persistent destruction of the dollar for the flood of foreign buyers.
While foreign buyers benefit from the Fed’s destruction of the dollar, domestic PE firms and other Wall Street creatures benefit from the Fed’s flood of nearly free money, to which they have nearly unlimited access. Foreign buyers goose prices above the median, Wall Street buyers push up prices below the median. And American buyers, caught in between, are simply getting squeezed out in many markets.
Observations that the Fed’s policies are once again inflating a housing bubble have finally transitioned from bloggers throwing around reeking party-pooper data to conservative mortgage bankers. And lenders see consumers returning to “reckless borrowing.” Read…..Mortgage Bankers: ‘Unsustainable Housing Bubble Is Inflating’
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A long term bet by overseas buyers on American real estate must just chap your arse? Buying dollars and using the proceeds to purchase a hard American asset busts your bust? So many new experts so little claptrap to stake a claim! How many busters can fit on a dogs arse anyway? DOLLAR USED TO HAVE A 15% OVERNIGHT RATE NOW DOWN TO. 25% and CHINA buying houses means a great deal for USA and GET USED TO MONEY FLOWING HOME TO BUST YOUR MEME!
Didn’t the Japanese do this same thing – buy up property during a bubble here – a few decades ago? I recall it didn’t work out too well for them. When the bubble burst, they lost money.
Sure did. The Rockefeller building was about the peak of their buying binge in the late 1980s. In ended famously in financial disaster for the Japanese investors. But Chinese investors haven’t started buying – and overpaying for – the biggest landmarks yet. The difference between their two bubbles is that Chinese individuals are trying to diversify their wealth and their legal residences outside China (a scary thought because these are the people in the know). Whereas during the Japanese bubble, it was Japan Inc. that did the foreign buying.