Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
“For developers and agents in most parts of the country who rely on foreign buyers, there is really no alternative to buyers from China”: CEO of Juwei.com
The puzzle in the US housing market was this: Mortgage rates have dropped since November, and as expected mortgage applications to buy homes have surged, and this was a total no-brainer. But home sales, which had been expected to surge this year, given the much lower mortgage rates and the much higher mortgage applications, have woefully disappointed.
We suspected, based on anecdotes we hear from the industry, that part of it had to do with foreign buyers – particularly Chinese buyers – that must have gotten cold feet for a slew of reasons. And now the National Association of Realtors in its annual report on foreign buyers shed some light on it: Yes, foreign buyers have gotten cold feet. In the two-year period between April 2017 and March 2019:
- Purchases by resident foreigners (red) plunged 43% to $44.7 billion;
- Purchases by non-resident foreigners (blue) collapsed by 56% to $33.2 billion, on par with 2011:
Purchases by all foreign buyers in the period between April 2018 and March 2019 plunged 36% from the same period a year ago and 49% from the period two years ago, from $153 billion to $78 billion, below the level in 2012 – with purchases by Chinese buyers, the largest group, collapsing by 58%.
Foreign buyers fall into two categories, according to the NAR report:
- Resident foreigners (red in the chart), about 60% of foreign buyers: Non-US citizens who are recent immigrants (less than two years at the time of purchase) or non-immigrant visa holders who reside for more than six months in the US for professional, educational, or other reasons.
- Non-resident foreigners (blue in the chart), about 40% of foreign buyers: Non-US citizens with permanent residences outside the US, who normally purchase for investment, vacation, or visits of less than six months on non-immigrant visas.
The interest by foreign buyers – though small compared to total US home sales – is concentrated in a handful of urban areas, particularly along the coasts of Florida and California. In these limited markets, the plunge in purchases by foreign buyers does leave skid marks, the NAR concedes.
“The luxury markets in the biggest cities are typically the most affected,” the NAR points out. “It has led, in some cases, to an oversupply of high-end units, longer times to close a deal, and potentially even price drops.”
Top 5 Countries of origin of foreign buyers & their plunging purchases from 2017:
- China, which in the report includes Hong Kong and Taiwan: -58% to $13.4 billion.
- Canada: -58% to $8.0 billion.
- India: -12% to $6.9 billion.
- UK: -60% to $3.8 billion
- Mexico: -75% to $2.3 billion.
Note that despite the 58% plunge in purchases by Chinese buyers, they remained Number 1.
All major US brokerage firms advertise US properties in China in deals with Chinese real estate portals that specialize in this, such as Juwei.com, “the biggest Chinese international property portal,” as it says. This includes Warren Buffett’s Berkshire Hathaway HomeServices, the second largest residential brokerage in the US, which belatedly in 2017 inked a marketing agreement Juwai.com.
“The Chinese reaction” by the CEO of Juwei.com
Interestingly, there was an email in my inbox this morning from Juwei.com, concerning the NAR report, titled, “Chinese Reaction from Juwei.com.” In it, Juwei.com CEO Carrie Law addresses the NAR’s report and specifically the plunge in purchases by Chinese buyers:
“Chinese buyers remain the biggest spending foreign buyer group of all, although they invested significantly less last year than in the year before. For developers and agents in most parts of the country who rely on foreign buyers, there is really no alternative [to] buyers from China.
“Actually, I’m surprised Chinese buying is still so high. It turns out that Chinese demand for US real estate cannot be killed — not by the trade war, not by the Trump effect, not by visa restrictions, and not by capital controls.
“Yes, the trade war has had an impact. The data from Juwai.com’s platform closely tracks that of the Realtors [NAR]. In the first quarter, Chinese buyer enquiries on U.S. property were down 27.5% from a year earlier. By contrast, Chinese spent more on real estate in competing markets like Canada, the UK, Australia, and Japan. Chinese buyer enquiries for US property were down in four out of the five last quarters.”
She then lists some of the primary factors that drive the Chinese to buy properties in other countries, citing a survey by Hurun:
- Education “is a factor for 83% of Chinese who move overseas.”
- Environmental quality “is a driver” for 69% of Chinese buyers.
- Food safety is “a factor in their decision to come to the US” for 57% of the Chinese buyers.
And she added in the emailed statement:
“Without Chinese capital controls and the Trump effect, I think we would see an avalanche of Chinese investment in US real estate, just like we saw in 2015 and 2016. Capital controls are not a tap that completely turns off the flow of cash escaping from China, but more like a constriction in the pipeline that reduces the amount that gets through. That is why Chinese residential real estate investment remains so high in the US and is actually growing in several other countries around the world.
“The industry still relies on Chinese buyers. Just in the last few months, Juwai.com has signed new or renewed contracts with agent networks representing more than 100,000 agents and their properties across the USA.”
Yup, there’s always another side to everything.
For folks who don’t make their money by selling to Chinese buyers, and who have to pay the higher prices that this foreign buying pressure causes, Carrie Law’s message has a chilling effect.
And there are a couple of factors she didn’t mention: In the US, property owners actually own the land, and they have property rights that are fairly well established and protected; in China, they can only lease the land from the government, which owns all land. In addition, Chinese buyers seek to have one foot in another country as an escape hatch, in case things go sour at home, such as a corruption purge going the wrong way.
So yes, for US brokers, selling homes to Chinese buyers is big business, in particular since Chinese buyers are at the high end where commissions are huge, and the money must continue to flow for these brokers.
For years, Chinese buyers had been the biggest spenders per home purchased, but in the latest period, the median price of homes purchased by Chinese dropped 16% from the peak in 2016 to $454,000. Back in 2016, Chinese buyers paid double the US median price. In the latest period, they paid 75% more than the US median price during the period.
And thereby, in terms of the median price, Chinese buyers have fallen into second place, behind buyers from the UK, which moved into first place with a median price that surged 19% over the same period to $510,700.
The next three in line of the top five are India with a median price of $358,600 (-13% from 2018); Canada at $268,200 (-8% from 2018), and Mexico at $170,100 (-10% from 2018).
The median price paid by all foreign buyers was $280,600, compared to the median price across the US of $259,600 during the same period. According to the NAR report, which was based on a survey of its Realtors, 8% of foreign buyers purchased homes with prices of $1 million or more – compared to 3% of all existing-home buyers.
The Top 5 Destinations:
- Florida, 20% of all purchases by foreign buyers. This is where Canadian snowbirds like to go, with 42% of Canadians buying in Florida.
- California, 12% of all foreign buyers, but that’s down from 14% in the prior period as the number of Chinese buyers dropped. Of all Chinese buyers in the US, 34% bought homes in California.
- Texas, 10% of all foreign buyers, a favorite with Indian and Mexican buyers.
- Arizona, 5% of all foreign buyers.
- New Jersey, 4% of all foreign buyers.
Of all foreign buyers:
- 47% said they would use the home as primary residence.
- 41% paid all-cash from the US point of view and 51% obtained a US mortgage.
- 44% purchased in a suburban area.
- 76% purchased detached single-family homes and townhomes. The remainder purchased condos.
By Country:
- Canadians: 48% purchased as vacation homes (the snowbirds) and 15% as rental
- Chinese: 37% purchased as primary residence and 28% as rental
- Indians: 75% purchased as primary residence and 12% as rental
- Mexicans: 63% as primary residence, 13% as rental
- British: 38% as primary residence and 29% as vacation home.
Just as the flood of foreign buyers in a handful of expensive US markets has roiled those markets and helped drive up prices in recent years, so is the decline of those foreign buyers going to take some pressure off. And this explains in part why, despite the plunging mortgage rates and the surging mortgage applications, the housing market in those areas, especially at the high end remains challenged.