BLOG VIEW: Foreign money is increasingly moving to the U.S., as rich people overseas seek shelter from financial uncertainty, economic slowdowns and political upheaval. Whether you have euros or yuans, reals or pesos, the growing sense is that your capital will do better in the U.S. – specifically, in U.S. real estate.
From April 2014 through March of this year, foreigners purchased $104 billion in residential U.S. real estate, or 8% of all existing-home sales, according to the National Association of Realtors (NAR). That's up from $92.2 billion in the prior period – a 13% gain.
To a great extent, foreign buyers are interested in high-end real estate, rather than entry-level homes. You can see this in the numbers because although the dollar volume of foreign purchases rose, the actual number of home purchases declined by 10% – meaning overseas buyers are targeting more expensive U.S. properties.
The logic behind such purchases is not necessarily related to scenic views or modern floor plans. Yes, such things are important, but what really counts is having viable assets within U.S. borders.
Shelter From The Storm
Whether one gets his news online or from the daily newspaper, the story is the same: Much of the world is facing a financial slowdown. The most visible recent dislocation was in China, where the Shanghai stock market's Shanghai Stock Exchange Composite Index went from 5,174.42 in June to 3,027.68 in September – a wallet-busting 41% drop that wiped out equity worth several trillion dollars in just a few weeks.
The slowdown in China has affected commodity prices worldwide. Crude oil prices went from $100.05 per barrel in August 2014 to $46.05 in early September. Gasoline prices in the U.S. are plummeting and will likely dip below $2.00 per gallon in the next few weeks, depending on where you live.
The catch is that falling prices creates winners and losers. If you're trying to balance the budget in Russia, Iran or Venezuela, good luck. Producing more oil at low prices only forces down values, while producing less may raise oil prices but reduce sales. The shrinking shale oil business has led to a recession in Canada, while reduced demand for iron ore is pushing Australia in the same direction.
Meanwhile, the slowed Chinese economy is not the only indication of tough economic times. In Europe and Japan, for example, investments worth trillions of dollars now earn negative interest. It makes earning zero interest on savings and certificates of deposit in the U.S. actually attractive by comparison.
‘With U.S. home values on the rise, foreign buyers are looking at the U.S. market as a much better investment opportunity than many other higher-risk or low-return options,’ says Rick Sharga, executive vice president of Auction.com, an online real estate marketplace. ‘Real estate is truly becoming a global market, and the Internet has made it possible for investors from around the world to find and buy properties virtually anywhere on the globe.’
Why Foreign Buyers Want U.S. Real Estate
For foreign investors, U.S. real estate is a commodity that – for the moment, at least – has two very interesting characteristics.
First, U.S. real estate values are rising. According to NAR, metro home prices in the second quarter rose in 163 out of 176 metropolitan statistical areas. The Federal Reserve reports that between 2009 and the start of 2015, owner equity rose from $6.57 trillion to $11.73 trillion – an increase of more than $5 trillion.
Second, U.S. real estate is perceived as a relatively safe investment. For foreign buyers in the upper brackets, the key issue is capital preservation. If you buy a $20 million condo in mid-town Manhattan and the price falls to $19 million, it's likely that you're still better off than if the stock market back home crashes or rebel troops are closing in on your city. Of course, if prices rise, that's a very nice bonus.
Most foreign buyers – 51% – come from five countries, according to NAR: China ($28.6 billion), Canada ($11.2 billion), India ($7.9 billion), Mexico ($4.9 billion) and the U.K. ($3.8 billion). In terms of property searches, the five most popular locations for potential foreign buyers are New York, Los Angeles, Miami, Orlando and Las Vegas.
Although foreign investment is undoubtedly on the rise, it's hard to determine exactly how accurate the numbers are, seeing as foreigners can hide their U.S. real estate investments from prying eyes behind a maze of offshore shell companies, partnerships and corporations.
‘In some cases, it's nearly impossible to establish with certainty the source of money behind shell companies,’ wrote Louise Story and Stephanie Saul in a lengthy exposé that appeared in The New York Times earlier this year. ‘Purchasers can register shell companies in the names of accountants, lawyers or relatives. Purchases are often made not just by individuals, but on behalf of groups of investors or numerous family members, further obscuring the origin of the funds. What is more, ownership of shell companies can be shifted at any time, with no indication in property records.’
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Auction.com. Miller has also spoken before such groups as NAR and the Association of Real Estate License Law Officials.
(Do you have an opinion to share with MortgageOrb? Get in touch! Send an email to pbarnard@zackin.com.)
