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Foreign investment in U.S. homes has dropped to its lowest in 15 years, as per a fresh report by the National Association of Realtors.
Low supply and high prices have scared many foreign investors away from U.S. real estate, marking the seventh consecutive yearly drop in sales for this cohort.
The U.S. Home Market Slump: Unusually high inflation has pushed mortgage rates up, forcing many homeowners to stay in their current homes, bringing the supply of houses down significantly.
In this context, people who might have been looking for a new home are incentivized to stick to their low mortgage rates instead of selling their home in exchange for a more expensive mortgage.
The fall home sales hit its worst point in 28 years during 2023; and 2024 is lining up to be even worse. Looking at completed sales up to April, at this rate, 2024 would come with a drop of almost 2% since the previous year.
The panorama could change if the Fed decides to drop interest rates in an upcoming meeting. During a Wednesday call, a Bank of America economist argued that the most likely rate cut will come in December, against consensus from other colleagues who expect a drop by September.
Anticipation for an upcoming rate cut already caused a positive effect on the real estate market. On Wednesday, one report showed mortgages have come down to a four-month low last week, with new applications up by almost 4%.
The realtors report looked at two types of investor: foreign buyers who don't reside in the U.S. as well as visa holders who are not permanent immigrants, or new immigrants with less than two years in the country.
Foreign-born individuals with permanent U.S. residencies are not accounted for. For the groups examined, 45% of homes were purchased for use as a rental unit, vacation house, or both.
Yet the intended use of the homes varied greatly between the country of origin of the buyer. Forty-nine percent of Canadian buyers intend to use their homes for vacation, and only 16% as a permanent residency. For buyers from India, it was 6% for vacation and 66% for permanent residency.
Foreign investors might be lured by the U.S. real estate market as a way to diversify their foreign real estate investments in a market that has typically gone up with time.
Yet, the landscape for international buyers has been even worse than for U.S. buyers.
The U.S. dollar has strengthened against foreign currency in previous years, making it even more expensive for investors holding their capital in euros, Chinese yuan or Canadian dollars to purchase a U.S. home.
While at a slower rate, foreign buyers continued to purchase homes in the U.S., with California, Florida, Texas and Arizona as main destinations. Against some prime locations around the world, the price per square meter for residential properties in the U.S. remains very competitive.
The price per square meter for a home in the San Jose-Sunnyvale-Santa Clara area in California is almost half that of Hong Kong. In Boulder, Colorado, a square meter costs half of that of Oslo, Norway, and a third of the average Canadian price.
In the period running from April 2023 to March 2024, there were only 54,300 U.S. homes sold to international buyers, the lowest it's been since the association began measuring the data point in 2009. This marks a whopping 36% decline since the previous year.
In dollars, this meant a 21% decrease, with purchases worth only $42 billion against $153 billion in 2017
But this year's drop is no exception. There have been year-over-year drops for the last seven periods, from a recent peak of 284,500 U.S. homes bought by foreigners in 2017.
Those who did buy a house in America did it for a higher price. The average sale reached $780,300, a 22% spike from the previous year.
Foreign buyers accounted for only 1.3% of all U.S. home sales during the April 2023-March 2024 period, yet they represent a much more significant portion of the market in specific locations like Florida, Texas and California.
While the report analyzed a drop in foreign sales, most of its reasons are domestic, serving to better understand the state of the real estate market for homes in the U.S.
The drop in supply stemming from the rise in interest rates has affected U.S. buyers as much as foreigners.
Upcoming cuts in interest rates across the globe, and specially in Europe could soon reignite foreign interest in the U.S. market. This might be even more true if it falls in line with an increased supply of homes that could come if mortgage rates continue to drop.
There are several real estate companies focused on the residential sector that are part of the S&P 500 index. These include Equity Residential (NYSE:EQR), Essex Property Trust Inc (NYSE:ESS), Mid-America Apartment Communities Inc (NYSE:MAA), AvalonBay Communities Inc (NYSE:AVB) and Invitation Homes Inc (NYSE:INVH).
Most real estate ETFs are not pure-play residential, with the exception of iShares Residential and Multisector Real Estate (NYSE:REZ). Others follow the U.S. real estate market more broadly but are still liable to be affected by swings in the residential home market. These include Vanguard Real Estate Index Fund ETF (NYSE:VNQ) and Schwab US REIT ETF (NYSE:SCHH) among the largest.
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