Foreign Buyers Flood US Real Estate, But Buy Cheaper Homes Diana Olick | @DianaOlick The appetite for U.S. real estate continues to flourish, but international buyers are shifting their sights from luxury to less-pricey properties. This may be due to overall higher home prices, along with a stronger U.S. dollar, which both cost foreign buyers more at the negotiating table. There are also fewer nonresident foreigners investing in the market. "Weaker economic growth throughout the world, devalued foreign currencies and financial market turbulence combined to present significant challenges for foreign buyers over the past year," said Lawrence Yun, chief economist of the National Association of Realtors (NAR). "While these obstacles led to a cool down in sales from nonresident foreign buyers, the purchases by recent immigrant foreigners rose, resulting in the overall sales dollar volume still being the second highest since 2009." Chinese investors negotiate at the US-China Real Estate summit & trade fair in Beijing. (File photo). Zhang Peng | LightRocket | Getty Images Chinese investors negotiate at the US-China Real Estate summit & trade fair in Beijing. (File photo). Foreign buyers purchased $102.6 billion of residential property in the U.S. between April 2015 and March 2016, according to NAR's annual report on international activity in U.S. real estate. That is a 1.3 percent decline in dollar volume from the previous survey. The number of properties purchased, however, rose 2.8 percent to 214,885. The value of homes bought by foreigners was typically higher than the median price of all U.S. homes. "The slight drop in dollar volume can probably be accounted for based on the types of properties purchased, and the locations of many of those properties. We've seen at least some evidence that foreign buyers — both investors and people just looking for a home — have begun looking beyond expensive markets like San Francisco, New York City and Washington D.C., and buying properties in smaller, less-expensive cities in the Southeast and Midwest," said Rick Sharga, executive vice president at Ten-X (formerly Auction.com), an online real estate marketplace . Another major shift was in the makeup of international buyers. Chinese purchasers continued to outpace all others, with their dollar volume exceeding the total of the next four ranked countries combined. Their dollar volume of sales, at $27.3 billion, was a slight decrease from last year's survey but was still three times as much as Canadian buyers, who were ranked second. Chinese buyers also bought the most expensive homes at a median price of $542,084. "Although China's currency modestly weakened versus the U.S. dollar in the past year, it's much stronger than it was five to 10 years ago, thereby making U.S. properties still appear reasonably affordable over a longer time span," wrote Yun in the report. Given today's volatility in global financial markets, real estate is one of the safest investments available. U.S. real estate in particular is relatively inexpensive compared to properties in Asia. "The explosive growth of the Chinese economy created a very large number of very wealthy people. As that country's economy has slowed down, those individuals are looking for better investment alternatives, and many have concluded that U.S. real estate is a smart bet," added Sharga. With economic instability and political turmoil outside of the U.S. likely to persist, the world view of American real estate as a safe investment should keep demand firm even as pressures from a stronger dollar continue to weigh down on affordability." As for U.S. destinations, five states accounted for half of foreign buyer purchases: Florida, (22 percent), California (15 percent), Texas (10 percent), Arizona and New York (each at 4 percent). Latin Americans, Europeans and Canadians, who historically favor warmer climates, were most prevalent in Florida and Arizona.

CITIES CANNOT HAVE IT ALL

The Housing Trilemma   Josh Lehner    6.8.16

Like most things in life, Cities cannot have it all  - when it comes to strong economy, high quality of life and affordability. 

Every city wants to have a strong local economy, high quality of life and housing affordability for its residents. Unfortunately these three dimensions represent the Housing Trilemma. A city can achieve success on two but not all three at the same time. Underlying all of these tradeoffs are local policies as well.

The reason these tradeoffs exist is mostly, but not entirely, due to market forces. People want to live in cities with a strong economy and high quality of life. Increased demand for housing leads to higher prices and lower affordability. Nice places to live get their housing costs bid up due to strong demand.  The opposite is true as well. Regions with under-performing economies and lower quality of life do have better affordability.

Clearly a few patterns emerge. In particular the popular metropolitan areas stand out, not least because their eroding housing affordability is constantly discussed. What you could call the cool city profile is seen in the Denver’s, Portland’s and San Francisco’s of the world. In a way, they are victims of their own success. Their strong regional economy and high quality of life do come as the cost of lower housing affordability.

HOME SALE PRICES AND INCOME GROWTH

Residential sales levels are constrained by a lack of new inventory.

MAY 2016 | BY LAWRENCE YUN

Notwithstanding the ups and downs of the transaction pace, there appears to be a steady stream of buyers in the market, so we can expect sales to hold steady this year and settle at a pace close to where they were at the end of 2015.

The chief constraint continues to be inventory levels, which remain historically low. There were only 2 million homes available for sale nationwide at the end of March. That’s just a 4.5-month supply at today’s sales pace. Additional inventory will spur more transactions and moderate home-price growth.

The latest annual home-price growth of 5.7 percent is unsustainable because incomes are rising by only 2 percent per year. Either demand will have to fall or supply will have to increase to align price and income. Many potential first-time buyers are telling us they are less likely to buy now, since prices are moving beyond the affordable range. That is why first-time buyers currently account for just 30 percent of the market, compared with the more typical 40 percent.

Eric Rosa comments - So what else is new. In the end, home sale price increases are dependent on income growth.

EARTHQUAKE INSURANCE - WEIGH THE RISK AND COST

The San Andreas – Locked, Loaded and Ready to Go

Seismologist warns the “Big One” is Imminent

Susan Williams   

In his recent keynote at the National Earthquake Conference, Thomas Jordan, director of the Southern California Earthquake Center declared that, “The springs on the San Andreas system have been wound very, very tight. In particular, the southern San Andreas fault looks like it’s locked, loaded and ready to go.” The Pacific plate is slipping northwards along the North America plate, taking cities such as Los Angeles, San Diego, Santa Barbara, San Francisco and Monterey along for the ride, while other California cities sit directly in the fault zone.

A 2008 USGS report based on a simulation of a magnitude 7.8 earthquake on the southern San Andreas Fault warned that such an earthquake could cause more than 1,800 deaths, 50,000 injuries and $200 billion in damage along with severe, long-lasting disruptions.

So what can homeowners do to protect themselves and their property against the next “big one”? First, they should investigate their level of risk. Since typical homeowner’s policies don’t cover earthquake damage, an additional earthquake policy is a smart first move if the property is within a high-risk area. In the past, some homeowners assumed that earthquake coverage was too expensive. However, what many may not know is that rates for earthquake policies from the California Earthquake Authority (CEA) have come down and now include more deductible flexibility.

Retrofitting older homes to mitigate earthquake risk can potentially lower insurance premiums. Simple things like making sure the strapping on water heaters are secure, anchoring large bookcases, TVs, and pictures to the wall and knowing where and how to shut off gas and water valves can help homeowners protect their home and belongings.

Finally, everyone should know what to do during an earthquake – DROP! COVER! HOLD ON! Every at-risk family should have an earthquake plan that includes who to contact and where to meet if an earthquake hits. 

ANEMIC ECONOMIC GROWTH -WHAT EFFECT ON HOME PRICES

Q1 GDP Revised Up to 0.8% Annual Rate

by Bill McBride on 5/27/2016 08:33:00 AM

From the BEA: Gross Domestic Product: First Quarter 2016 (Second Estimate)

Real gross domestic product -- the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 0.8 percent in the first quarter of 2016, according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 1.4 percent.

Eric Rosa comments - What effect does anemic  GDP growth have on national home prices? On first glance, one would think that slow growth means family income  growth would also be very slow. That makes sense. And... slow family income growth translates into  slow home price increases. That makes sense. But, maybe that slow income growth  results in more families staying in their homes, not "moving up" and not selling their homes. And just maybe, that lack of homes for sale, low inventory levels, results in prices going up at a pace much faster than GDP growth. I THINK THAT IS WHAT WE HAVE GOING ON RIGHT NOW.

WIRE FRAUD AND REAL ESTATE

WIRE FRAUD IN REAL ESTATE TRANSACTIONS HAS BECOME A HUGE PROBLEM. Most real estate transaction funds ($$ dollars) deposits, transfers and disbursements involve Bank wires. Bad guys literally all over the world are trying and  all to often succeeding in fraudulently directing wired funds into their accounts and then "vanishing" with the money.

ALL PARTIES INVOLVED IN REAL ESTATE TRANSACTIONS (BUYERS, SELLERS, AGENTS, LAWYERS, ESCROW PERSONNEL, TITLE COMPANIES) SHOULD USE THE PRECAUTIONS LISTED BELOW.

Precautions related to bank wire transfers include:

ALWAYS PERSONALLY VERIFY wire instructions.

DO NOT AGREE to requests to forward wire instructions to other parties (or their brokers).  

BE VERY SUSPICIOUS of emails with purportedly updated, revised, or corrected wiring instruction It is extremely rare that a lawyer or title agent will change wire instructions during the course of a transaction.

PERSONALLY CALL the party who sent the instructions to confirm the ABA routing number or 

SWIFT code and the credit account number, but do not use the number provided in the sender’s 

email.  A hacker may have inserted a fraudulent telephone number in the email.  Use only phone numbers that you have called before or can otherwise verify. 

MAKE SURE you are not sending or requesting sensitive financial information in emails (e.g., SocialSecurity numbers, bank accounts, credit card numbers, wiring instructions). Also, use strong passwords (e.g., 8 characters including both letters and numbers, nothing obvious) and periodically change your passwords.

DON’T open attachments or click on links from unfamiliar sources because they could contain malware or be a phishing scheme which once opened allows a hacker the same access that you have to 

your computer and accounts.

MORE CHINESE MONEY COMING TO BUY US REAL ESTATE ?

Chinese U.S. Real Estate Demand Tip of the Iceberg

New study says Chinese buyers will spend $218 billion despite Beijing’s attempts to control capital outflows.

By        ABBY SCHULTZ       May 20, 2016

China’s efforts to stem capital flowing out of the country so its economy, and currency, stabilize, may dampen the fast-and-furious pace of investment in U.S. real estate. But as a new report from the Asia Society and Rosen Consulting Group predicts, China’s controls on this capital outflow only stand to temporarily slow -- and will hardly stop -- the tide of cash streaming to U.S. real estate.

By 2015, Chinese investors were the source of $350 billion into U.S. commercial and residential properties and investments, Rosen Consulting says. Even with tighter capital controls, direct investment into existing U.S. commercial and residential real estate alone in the next five years will reach $218 billion, accelerating through 2025 as China’s economy returns to equilibrium. More startling is Rosen Consulting’s figures don’t capture all the dollars coming from China to the U.S. through such means as partnerships, private equity funds and 

limited liability corporations.

Another crucial insight from the report: Chinese investment in U.S. property to date is the tip of the iceberg of what’s to come. This is true for institutional players, ranging from developers to insurance companies, but it’s also true for China’s wealthy.

The rich are buying homes and luxury apartments, but they’re also investing in funds and partnerships that are buying into commercial projects. An example is Ping An, the Chinese insurer, which is tapping China’s high-net-worth investors for an RMB private equity fund to finance U.S. residential projects in a joint venture with Pacific Eagle Real Estate Fund, the report says.

There are also uncounted smaller real estate investment projects funded by individuals who pool investors together to buy, say, a handful of budget hotels or several apartment units in a high-rise. “That’s going on way below the radar of what can be specifically tracked down and quantified and also from what most people see going on,” says Arthur Margon, partner at Rosen Consulting Group and an author of the report.

One reason U.S. real estate investment by China’s wealthy has only “scratched the surface” is common U.S.-style investing vehicles like real estate investment trusts and private equity funds focused on real estate are relatively new in China, Rosen Consulting says. Both avenues have potential to grow. Investing may also spike if the Chinese government opens its individual investor program allowing for foreign investment into U.S. REITs and other investment vehicles, the report says.

Certainly plenty of Chinese are buying U.S. property for themselves or family members, enough so that China blew by Canada last year as the biggest foreign buyer of U.S. residential properties, purchasing 33,000 homes, according to the National Association of Realtors. The actual number is probably far more as the identity of many investors using trusts and special vehicles to buy U.S. real estate isn’t known.

Home purchases by China’s rich could accelerate as buyers get more access to financing. Between 2013 and 2015, an average of 71% of Chinese home buyers paid for homes with cash, NAR reports. That’s in part because U.S. banks tightened lending criteria for foreign investors post financial crisis. Today some wholesale mortgage lenders are lending to Chinese buyers and Chinese banks with U.S. operations will lend to Chinese investors based on assets they hold in China, the report says.

A global push to expose tax evasion and money laundering by forcing owners of offshore companies to reveal who they are could mute buying enthusiasm, though. Many foreign investors use special purpose vehicles legally for tax and wealth planning, but they still may not want to be named. The U.S. government is piloting a program in Manhattan and Miami that requires foreign property buyers to reveal who they are if they pay all in cash or use a special corporation. If this catches on, some Chinese investors may say ‘forget it’, or they’ll wait until they have a better idea of how the rules will be implemented. “But the motivation to buy among lots and lots of people in China is strong,” Margon says.

Back in China, the government’s attempts to keep capital at home could also mute U.S. real estate buying. Chinese banks, for instance, are being asked to look for over-invoicing of exports, a common tactic for getting money out of China, while state-owned banks are on watching for “unusual transactions” that indicate friends and family are pooling together funds to buy real estate, the Asia Society report says. China limits foreign investment for most individuals to the equivalent of $50,000 a year.

Some big deals, like China’s Gemdale Properties’ high-profile partnership with Hines, a top-shelf global real estate firm, to redevelop Boston’s South Station are moving forward but “we are hearing other deals are happening much more slowly than they did two years ago,” Margon says.

But Rosen Consulting doesn’t expect brakes on capital outflows to last more than two years. That’s because China remains driven to be integral to the world’s global economy. “Our view is these global forces acting on Chinese financial services sector are long-term forces,” Margon says.