Will Foreign/Mainland Chinese Homebuyer Demand Continue?

July 13, 2015

Strong Dollar Discourages Many Foreign Homebuyers in the US

Frank Nothaft    |    Housing Trends

Home sales in the U.S. during the first four months of 2015 have been the best in eight years. Relative to the same period one year ago, sales jumped 9 percent, helped by a drop in fixed mortgage rates of almost one-half a percentage point. However, one group of homebuyers has backed off over the past year: foreign buyers.

The National Association of Realtors reports that the number of U.S. homebuyers who identified as international dropped to 2.0 percent during the first four months of 2015 from 2.5 percent a year earlier, a 19 percent decline. About three-fourths of real estate agents who work with international clients report that changes in foreign exchange rates have a moderate to very significant effect on foreign buying.1

The U.S. dollar has strengthened against currencies used by many foreigners who buy homes in the U.S. Exhibit 1 shows that from the beginning of 2014 through April 2015, the U.S. dollar had appreciated 10 percent relative to the United Kingdom pound, 13 percent relative to the Canadian dollar and 26 percent relative to the euro. Notable exceptions to these large swings in foreign exchange values were the Chinese yuan and Hong Kong dollar, which have closely tracked the value of the U.S dollar.

A stronger U.S. dollar makes property more expensive for foreign buyers whose currencies have weakened. Consequently, purchases by foreign buyers have dropped, especially for those whose currency was most affected by the foreign exchange swing. Between the first four months of 2014 and the same four months of 2015, the number of homes sold to foreign buyers drastically declined. Exhibit 2 shows the change in currency relative to the U.S. dollar and the change in home purchases in the U.S. for foreign buyers in selected locations. Foreign purchases were down between one-quarter to one-third during this period for buyers whose currencies depreciated significantly relative to the U.S. dollar, even though domestic purchases rose.

In addition to the sticker shock caused by the stronger U.S. dollar, the markets where foreigners tend to buy have had strong home price appreciation in the last few years. For example, many Canadians, Europeans and South Americans prefer to buy along the Southeast coast of the U.S. for the beaches, cultural amenities, warm winter temperatures and accessibility. Canadians made roughly two-thirds of their U.S. home purchases during the first four months of both 2014 and 2015 in Florida. Of these purchases in 2015, nearly one-half were located in the Miami-Fort Lauderdale-Palm Beach area where home prices rose about 7 to 8 percent from April 2014 to April 2015. Couple that with the effect of a stronger U.S. currency, and the average Canadian considering a home purchase in south Florida saw a jump in purchase cost of 20 to 25 percent in the past year.

Foreign buying could continue to decline, level off or increase in 2016 depending on the value of the U.S. dollar relative to most foreign currencies, but the uncertainties surrounding how the Eurozone will resolve the debt crisis in Greece has made it more difficult to project foreign currency movements.

Note: Contributions to this blog were made by Andrew LePage.

Source: CoreLogic Home Price Index, Federal Reserve Board (exchange rates) and CoreLogic analysis of public records data. The public records do not record the nationality of the homebuyer; rather, it records the primary address of the owner if different from the property address. The analysis in this blog used these data as a proxy for the nationality of the purchaser. Some foreign buyers may provide a U.S. address of their local representative; CoreLogic is unable to identify these cases and could lead to an undercount of foreign buying activity.

[1] Realtors Confidence Index, National Association of Realtors, Report on the May 2015 Survey, p. 17, accessed at http://www.realtor.org/reports/realtors-confidence-index; and 2015 Profile of Home Buying Activity of International Clients, June 2015, p. 8, accessed at http://www.realtor.org/reports/profile-of-international-home-buying-activity