As the real estate market collapsed in the fall of 2008, when the financial crisis pushed us over the edge into the Great Recession, a quiet but interesting phenomenon started occurring within a couple of years in the largest markets around the country.
In big coastal markets such as New York, Miami and major cities in California, foreign buyers started snapping up residential real estate that they considered to be “on sale” as a result of the artificial downdraft on value the financial collapse wrought on housing prices.
In the investment world, foreign buyers are considered “flight capital.” They are moving portions of their wealth into the extremely safe and free markets of the United States, where they can own real estate valued in U.S. dollars in a safe haven, far from the reach of the dictators and oligarchs in their home countries.
This audience of buyers was mostly made up of people from South America, Russia, China and other Asian countries.
But the turmoil of the tariff and trade skirmishes taking place between Washington and China, and even our allies in Western Europe and Canada, have roiled these markets, and the popular business press has reported widely on the negative impact these uncertainties is having on housing values in previously robust markets.
Purchases Declined. We are now learning that foreign purchases of U.S. homes have dropped by half over the last two years, a fresh blow to the top end of the market in New York City, Miami and the big cities in California.
Foreigners bought less than $78 billion worth of U.S. residential real estate in the year that ended in March, a 36% decline from $121 billion the previous year, according to a report by the National Association of Realtors. But worse, it marks a 51% decrease from 2017, when $153 billion was spent by foreign buyers.
To be sure, an uncertain global economy, a simmering trade dispute with China, the politics of immigration policy and a stronger U.S. dollar have made America a less hospitable place for foreigners to invest over the last year.
In many cases, the currency exchange rates are so unfavorable, foreign currencies don’t have the buying power they used to have.
As a result, purchases by foreigners are now at the lowest level since 2013, when buyers from China and South America first began entering the U.S. market in large numbers in search of bargains and a safe place to stow their capital.
Real-estate agents said the pain from the foreign pullback is evident when they try to sell high-end condos in Miami and New York, or mansions in southern California and Seattle. Real estate agents in New York report that market is in the largest market correction since the Great Recession, as foreign buyers have much all but disappeared.
Largest Drop. But the largest drop was in buyers from China, who purchased just more than $13 billion worth of U.S. homes during that time period, a 56% decline from the prior 12 months.
And the Chinese buyers had been especially active in California, where the pullback may be beneficial if it helps alleviate a housing shortage. But in places like New York and Miami, where there is a glut of luxury condos, it is less welcome.
Anecdotal evidence is far and wide; ultra-luxury residences like Manhattan’s One 57, a 75-story skyscraper known as “the billionaire building” is seeing major corrections in prices, but it has also rippled to lower-end purchases, such as one-bedroom apartments parents were buying for children attending New York University. That has dried up as they now question whether New York is a safe investment given the slowing market.
When we consider that 5.34 million new and existing homes were sold in 2018, it may seem like these impacts are miniscule by comparison to the overall market size. But for the handful of major markets affected, it has had quite an impact, and only time will allow for these corrections to stabilize.
About the Author
Pierre G. Villere has been a contributing editor for The Concrete Producer for over a decade, and serves as the President and Senior Managing Partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry. He has a career spanning more than four decades, and volunteers his time to educating the industry through his regular articles and presentations. Contact Pierre via email.