How Foreign Investors Are Pricing Out Local Homebuyers
Foreign real estate investing in the U.S. became popular after the nation’s financial crisis of 2008. Following the 2008 Great Recession, some of the best places to invest in real estate included states like Florida, California, Texas and Arizona. And within these states, target cities include San Francisco, Miami and Los Angeles.
For seven consecutive years, China has been the biggest investor of residential real estate in the United States, purchasing about $13.4 billion in real estate funds in 2019 alone. China is followed by Canada at about $8 billion. Real estate investment companies in India came in third at $6.9 billion.
While foreign investments in the American housing market can help to boost local economies in many cities and states throughout the U.S., this phenomenon has also made it increasingly difficult for residents to purchase homes, especially members of the middle class.
Instead of participating in commercial real estate investing or purchasing luxury homes with higher price tags, most foreign investors have been investing in cheaper homes at a median price of just $280,600. In turn, this has caused residential real estate costs to skyrocket in target areas, making it difficult for the local population to find homes that they can afford.
However, there’s some good news here for American homebuyers who live in target states such as Florida and California. According to the National Association of Realtors (NAR), foreign investment property activity in the U.S. has declined in the past year, mainly between April of 2018 and March of 2019. If this trend continues, it might make it easier for local homebuyers to afford real estate.
What International Real Estate Investing Means for Local Homebuyers
Foreign investors put $121 billion worth of real estate funds into the housing market in 2018. However, that number is at $77.9 billion in 2019 — a 36 percent decline. Approximately $33.2 billion worth of U.S. homes were purchased by non-resident foreign buyers in 2019, while about $44.7 billion worth of residential properties were purchased by recent foreign buyers (recent immigrants).
The recent decline of foreign investors buying rental property opportunities in the U.S. might point to slower global economic growth, limited home inventory, a stronger U.S. dollar and tighter capital controls by the Chinese government. However, this change can also signal several promising changes for local homebuyers who reside in target states such as Florida, California and Texas.
Since foreign countries began investing in rental properties even more rapidly following the nation’s 2008 recession, housing costs have increased in certain areas and local homebuyers have struggled to afford the cost of purchasing a home in these target states. Additionally, access to certain REIT advantages (or real estate investment trusts) have helped foreign buyers to purchase properties that they would not otherwise be able to qualify for.
As such, the goal of purchasing a home in target cities such as Miami, Los Angeles and San Francisco has become more of a luxury that many residents are finding difficult or even impossible to attain. If foreign investment slows down, however, it could also slow the skyrocketing increase in home prices.
When Foreign Buyers Find an Investment Property for Sale, They Pay Cash
When buying an investment property in the U.S., approximately 63 percent of non-resident foreign buyers and 25 percent of resident foreign buyers (recent immigrants) pay for homes in cash. However, fewer U.S. citizens purchase homes in cash, especially first-time homebuyers.
Cash purchases are more attractive to home sellers because they come with fewer restrictions and steps in the home-buying process. Sometimes, homebuyers are even willing to lower the price of their home if it means they will attract a cash buyer rather than someone who is financing the purchase. This makes local homebuyers who are using loans less attractive than foreign investors paying in cash.
According to the NAR, 23 percent of residential home sales in January of 2017 were handled in cash — in comparison to 21 percent in December of 2016 and 26 percent in January of 2016. In January of 2017, the percentage of all-cash sales included the following types of buyers:
- 59 percent were citizen buyers investing in rental properties, vacation homes, turnkey real estate or other types of properties.
- 57 percent were international buyers.
- 47 percent were buyers of distressed sales, including foreclosures or short sales.
- 45 percent were buyers purchasing their second home.
- 13 percent were relocating buyers.
- 6 percent were first-time homebuyers.
Again, while domestic buyers are more likely to finance the purchase of a home — resulting in a longer buying process — financial experts say that most sellers will accept an all-cash offer over one that requires financing. As such, this alone can make it more difficult for local homebuyers to compete with foreign investors.
Florida and California: Leaders in Residential and Vacation Rental Investment
Due to their warmer climates, Florida and California see more real estate investment than many other states, especially from Canadian investors purchasing vacation homes.
According to a recent NAR survey, 40 percent of Canadian buyers purchased U.S. investment properties for vacation purposes in 2018, compared to about 4 percent of Chinese investors. About 27 percent of real estate private equity investors in China purchased U.S. properties for residential rental purposes, compared to about 15 percent of Canadian buyers.
Moreover, about 17 percent of investors in the United Kingdom made purchases for vacation purposes, while another 17 percent purchased homes for residential rental purposes.
Can foreign investment property purchases ever be good?
California and Florida are home to some of the best real estate investments for international buyers. But even though foreign real estate investing often prices out local homebuyers, are there any positives that could explain why officials sometimes go out of their way to give incentives to foreign investors?
It turns out foreign real estate investment is helpful for reigniting an area’s real estate market. In Las Vegas, for example, foreign investment is helping the condominium market to rebound. By buying up condominiums, foreign investors are encouraging and financing building projects that increase the supply of homes in the city.
Foreign investment also creates jobs for home builders, architects and designers. This kind of development can help keep an area thriving or help a housing market bounce back after a recession. This means that the problem for homebuyers isn’t always foreign investment. It real issue comes when this investment gets out of hand in an already expensive market.