U.S. Real Estate on Sale?
The demand for U.S. real estate has exploded in the past year with foreign investors. Why? Two reasons: the potential for high yields in the U.S. real estate market coupled with the weakness of the U.S. dollar. Investors from overseas have successfully speculated in the U.S. market while making profits from the currency trade. Its no wonder that more investors want a share in these growing returns.
Rising real estate prices
Property values in the U.S. declined 70% in some areas after 2006. But recent moves by the Federal Reserve Bank, Ben Bernanke, and major U.S. banks have caused real estate costs to rise. Overseas investors have responded by taking their capital and placing it in U.S. investment properties.
Growing number of investors
International investors accounted for $82.5 billion, or 8.9%, of the $928 bill spent on residential property in 2011-2012. According to a National Association of Realtors survey, this figure was up 24% from $66.4 billion in the previous year’s period.
The same survey attributes 55% of all world buyers as coming from the following five countries: Canada, China, Mexico, India and the United Kingdom. And five states account for almost 55% of all sales to foreign buyers: Florida, California, Texas, Arizona, and New York.
Another finding was that 62% of foreign consumers paid cash. Up to 50% of all sales nationwide are from cash purchasers, and up to 70% of sales in some Florida markets are by cash buyers.
Buyers from China are a major force in the market. The State Association of Realtors noted that buyers from China accounted for $7.4 bill of sales in the 12 months ending in March 2012. This is up 24% from the previous 12 months. And according to another source, financiers from China and Hong Kong spent $1.71 billion on commercial real estate in the U.S. In 2011, this was more than 4x their investment in 2008.
Effects now and later
This has many effects for domestic buyers of U.S. real estate. Both domestics investors and inexperienced house buyers are having a tough time competing with cash investors. They often find themselves on the losing end when their contract contains a financing contingency.
The demand from foreign investors is unlikely to slow anytime soon. European investors, for example, may seek to protect their wealth by moving capital to the U.S.
I forecast costs will continue to rise over the next 24 to 36 months, maybe even longer. Market manipulation due to government programs and policies, fast cash printing by the Federal Reserve, and artificially low rates, will continue to drive it.
One note of caution here. Wall Street stockholders and hedge funds are buying billions of dollars in real estate, waiting for inflation to drive the costs up. They expect higher property prices to also result from the government’s no-money-down loan program. Once real estate costs go up, many are likely to sell their positions, leaving the market at the top of another bubble.
So what’s the lesson to take from this?
Know what drives a market. Look for changes in those driving factors and plan in an appropriate way. There is incredible opportunity in real estate at this time, but you need to know what to do.