Aug252013

First Hedge Funds, now Foreign Investment is slowing down

First Blackrock and other hedge funds companies started to scale back or completely drop their large purchases of Single Family Residences. Actually, the very first investors of SFR’s before the Blackrocks were people like IR that study the cash flow of these homes in the early days of the housing correction. Then after Blackrock this activity was picked up by small LLC type companies and cash buyers. In addition to these domestic investors, foreign investment has been a big factor for the previous 18 months. Now, this trend from foreign investors also seems to be reversing.

Analysis: Higher prices sap foreign interest in U.S. real estate

NEW YORK (Reuters) – Foreign investors, who rapaciously scooped up U.S. real estate during the 2007-2009 recession, are backing away from the same markets they so eagerly jumped into a few years ago.

Real estate brokers say demand from international investors has flagged in locations that have been most attractive to overseas buyers – markets such as San Francisco, Phoenix, Las Vegas and Miami.

Many of those markets are back on solid footing after stumbling during the housing crisis. Property prices have risen, while the dollar – against the Indian rupee in particular, and to a lesser extent the Canadian dollar – has appreciated over the past year, despite hitting a speed bump in recent weeks.

As a result, real estate is no longer the bargain it once was for foreigners. That is discouraging new sales, while many foreigners who already own property – especially those who bought strictly as investment – are turning into sellers.

Many of these recent properties that have been purchased are above rental parity. So, if the owner were to rent it out they wouldn’t cash flow for the owner if it was financed with a 20% down payment. It seems that current cash buyers are for appreciation and for not cash flow and that is extremely risky. I’m discussing cash investors, because many foreign investors have been cash investors.

Kevin Kieffer, a broker who sells property in San Francisco for Keller Williams Realty, said in that area buying from foreigners has dropped by at least 30 percent in the last few months.

“That is partly due to the fact that prices escalated so quickly in the San Francisco area,” he said. “But some of my foreign clients have also mentioned the value of the dollar as another reason they decided not to buy.” At the same time, domestic demand for real estate held steady, he said.

Calamitous declines in many of the nation’s housing markets during the economic crisis had attracted droves of international investors seeking to cash in on a weak U.S. dollar and rock-bottom property prices. Many were attracted to Sun Belt markets that had been battered by the crisis.

The opposite trend is now gathering steam, and that will likely spell the end of the double-digit price gains seen recently in markets such as San Francisco and Miami, say people in the real estate business community.

International sales of U.S. residential real estate dropped by $14 billion to $68.2 billion for the 12 months ending in March, the latest data available from the National Association of Realtors. Foreign purchases comprise 6.5 percent of the $1.050 trillion in total U.S. existing home sales.

I was a little surprised that international sales of US real estate dropped before March. Much of the recent increases in prices occurred during this time period, so they were being priced out during the increase in prices.

Sluggish foreign economies and unfavorable exchange rates are reasons behind the decline, the NAR said. That hurts cities dominated by foreign buying but has little impact on large stretches of the country.

The NAR recorded buying from 68 countries, with Canada, China, Mexico, India and the United Kingdom accounting for about 53 percent of the transactions in the year ending in March.

At 23 percent, Canada took in the largest share. But real estate website Trulia.com said Canada’s share of foreign-based searches of its site fell 9 percent year-over-year in the second quarter.

One interesting note when a foreign buyers purchases, they are not subject to background checks. But even with that loop hole which was lobby by NAr, foreign investment has slowed.

The dollar is up more than 2 percent versus the Canadian dollar in the last six months. That’s a reversal from 2012, when the dollar fell 2.7 percent against the Canadian dollar, commonly called the loonie because of the image of a waterfowl engraved on the coin.

“Due to higher prices and a falling loonie, I decided to hold off on buying in Miami,” said Norm Glick, a Canadian investor who owns property in Lake Worth, on Florida’s east coast. “Miami is no longer the bargain it was a mere year ago.”

About 45 percent of Miami’s real estate is owned by foreigners, said Brigitte Lina Lombardi, an associate at Keller Williams Elite Properties, and home prices there gained over 14 percent year-over-year in May.

45%! That’s an amazing figure, however it also sounds like a dangerous bubble.

“About 25 percent of foreign investors who bought in Miami between 2009 and 2012 are not purchasing anymore because of the increase in price,” she said. “Now they are thinking to sell.”

DOLLAR GIVES UP STRENGTH

After hitting a three-year high in July, the dollar index (.DXY), which tracks the greenback against a basket of six major currencies, has fallen nearly 3.7 percent. But the dollar has kept rising against the Indian rupee, which is down 13 percent against the greenback in the last six months and recently sunk to an all-time low against it.

A stronger dollar has “absolutely curbed my appetite to buy U.S. real estate,” said Anant Bokar of Mumbai, India, who has invested in property in the San Francisco area. “I would much rather hold my money at home and look at buying here (in India) since house prices are low due to higher inventory.”

Despite problems the US economy in 2008 and 2009 the US dollar is still the world’s reserve currency. In addition, all the other major currencies are having their economic problems and also resorting to money printing. This sudden increase of the US dollar slowed has slowed foreign investment and even affected enrollment into colleges.

San Francisco notched an annual price gain of 24.5 percent in May, according to Standard & Poor’s/Case Schiller home price gauge, the largest rise in its 20-city index.

International investors have been backing away from San Diego as well. Karen Van Ness, owner of Ranch and Village Homes, a Coldwell Banker brokerage, said demand there has fallen over the last three months.

San Diego prices jumped over 17 percent annually in May.

“They are watching, but they are not circling as they were,” she said, referring to prospective foreign buyers. “The international buyers are a financially astute group of individuals and not necessarily fixated on any one location.”

More experts expect the dollar to strengthen in the months and years to come as the economy improves and as the Federal Reserve tapers off a bond buying program designed to fuel the economy recovery. Interest rates are also expected to rise, although that is less important to buyers paying in cash.

Michelle Meyer, senior U.S. economist at Bank of America/Merrill Lynch in New York, said declining demand from foreigners will help moderate home-price appreciation in coming years.

She sees prices up 6.5 percent in 2014, after annual price increases of more than 10 percent though May, according to S&P/Case-Shiller.

This increase in foreign investment for US Real Estate was just on of the items that was used reflate the real estate bubble. There has been many tools used to control the supply and demand for real estate since bubble burst. For example, the supply of real estate has been contained with slow judicial states, HAMP & HARP loan modifications, bank settlements, stricter foreclosure laws with longer timelines, lack of construction, bank accounting changes, Fannie & Freddie delays, and slow processing time within the banks. All of these factors have worked brilliantly to contain supply. By containing supply Banks/Federal Reserve has kept the home prices from falling and it worked so well that prices have actually increased.

But now, real estate is having head winds on the demand side due to recent price and mortgage rate increases, look at the new home sales figures for July as an indication. Higher mortgage rates tend affect new home sales before existing home sales. The expectation that Quantitative Easing is tapering will brings the possibility of further mortgage increases. Foreign buyers, along with ultra low mortgage rates, hedge funds, tax credits, and cash buyers help pushed up this demand. However, now that these buyers are leaving the market and it much more difficult to keep home prices with less demand. Somehow the supply will need to be further reduced as demands wanes? How is it even possible to reduce supply even further? What will be the additional techniques to reduce supply except completely take housing units off the market?

In addition, the housing market will also have several other factors that are curbing demand like stricter mortgage laws under Qualified Mortgage guidelines, possible lower mortgage interest deductions, and higher costs of living (fuel, food, and medical care). In reflection the only factor I can see that will spark demand is more affordable homes. Since affordability products are banned under the new Qualified Mortgage guidelines, it seems only price decreases increase demand.

Mike