Dec042013

Are the Chinese buying California homes in large numbers?

Stories about foreign buyers circulate periodically in the mainstream media. The plot is always the same: foreign buyers loaded with cash are buying houses as an investment. The nationality changes from time to time, but the narrative is always the same, and the implied urgency to buy before a foreigner buys your dream home is always present as well.

In October of 2010, I published Foreign Buyers Rush to Catch Falling Knives. In August of 2013, the OC Register published Foreign investors buying homes in O.C. And today’s featured article is another in that genre. One statistic is consistent in these articles; foreign buyers represent between 5% and 7% of the housing market. These stories imply the number of foreign buyers is large and growing, but the reality is that these numbers are little changed over time. Foreign buyers are always part of the landscape, and their impact is negligible. The builders make the most of these foreign buyer articles. I suspect most of them are a plant by a compliant media hoping for advertising revenue.

In 2010 after nearly two years of fanfare and compiling lists of prospects, the Irvine Company launched its new communities and started building again. They quickly sold about 500 units to foreign buyers on their lists and created momentum they hoped would carry them through buildout. However, after the first phase, the foreign buying reverts to its normal negligible amount, and local owner-occupant buyers step up to continue sales. In 2011 those local buyers didn’t materialize, and sales slumped until interest rates dropped so low that buyers found bargains and started buying again.

In 2013, FivePoint Communities duplicated the Irvine Company process. They advertised heavily to generate great initial interest, and they sold many of their homes to foreign buyers on their waiting lists. The OC Register article above proves that contention. However, now the initial push is over, and they must sell homes to local owner-occupants. And with the Irvine Company building competing homes just a few miles away, continuing the sales momentum is proving challenging. (See: Vital Signs: SoCal house sales decline while prices stagnate)

Chinese buying up California housing

Published: Monday, 25 Nov 2013 | 11:50 AM ET

By: Diana Olick | CNBC Real Estate Reporter

At a brand new housing development in Irvine, Calif., some of America’s largest home builders are back at work after a crippling housing crash. Lennar, Pulte, K Hovnanian, Ryland to name a few. It’s a rebirth for U.S. construction, but the customers are largely Chinese.

They see the market here still has room for appreciation,” said Irvine-area real estate agent Kinney Yong, of RE/MAX Premier Realty.

realtor bullshit always sounds the same.

What’s driving them over here is that they have this cash, and they want to park it somewhere or invest somewhere.”

There is truth in that statement. The Chinese have inflated one of the most massive property bubbles in world history. Some are wisely selling their holdings and parking that money in other asset classes in other countries.

Yong’s phone has been ringing off the hook, with more than 5,000 new homes slated for the nearby Great Park Neighborhood. Most of the calls are from overseas, but prospective buyers are not looking solely for financial returns on the real estate.

“We are seeing a lot of Asians who are buying as an investment, but their kids are going to school here, so kids live in the home. They are looking at it more as an investment in education,” said Emile Haddad, CEO of Fivepoint Communities, developer of the Great Park Neighborhood.

That is Brian Yang’s plan. Speaking from his home in China, Yang said he purchased a home in Irvine this year, but he will wait five years, until his daughter turns 10, before moving his family to the U.S. He has several reasons for taking the leap.

“Education in America is very good and world class, so the first one is for education,

I know first hand that some Chinese are buying in Irvine for the potential to move their families for educational opportunities. I rent a house from Chinese owners. They bought it to send their son to UCI. When his plans changed, they decided to keep the house. Based on what I know about their income, expenses, and purchase price, I calculate their cash return at about 3.5%. They probably made an additional 10% on appreciation since closing, but how long will that continue?

and I think the second one is for the property appreciation,” explained Yang.

I agree. Many foreign investors are buying for price appreciation — which probably won’t materialize. (See: Housing bubble fully reflated in Irvine, California) The kool-aid intoxication is particularly strong for real estate among Chinese who so far haven’t experienced an equity-crushing crash. Once their bubble finally deflates, much of the kool aid intoxication in China should abate.

While American secondary schools and universities are a big draw for the majority of Chinese buyers in California, Yang, and many of his colleagues, are also concerned about China’s political instability, inflation, even pollution. They are paying all-cash for real estate in California, using it as a safe-haven for their wealth. Yang was reluctant to talk about the money, but he admitted, “I feel the same way to some extent.”

For now, Yang is renting out the four-bedroom home, and, he said, getting a 5 percent return on the investment.

In his dreams.[dfads params=’groups=165&limit=1′]

While Yang purchased an older home, the new model homes at Great Park are drawing thousands of potential buyers. In fact, more than 20,000 attended the opening weekend, according to developers. The vast majority of lookers were Asian, and that fact is not lost on the builders. Hoping to cash in on this new wave of investors, they are tailoring the homes to the demand. Some are incorporating multigenerational floor plans and even Feng Shui designs.

“The imbalance of supply and demand here is really driving a lot of competition for these homes,” said Haddad.

Yes, lenders managed to remove 20% to 40% of the normal market supply. (See: Loanowners drowning in debt: 21% underwater, 40% can’t move up) Builders are taking advantage of this imbalance while it lasts, which may be for many more years.

The homes range from the mid-$700,000s to well over $1 million. Cash is king, and there is a seemingly limitless amount.

“The price doesn’t matter, 800,000, 1 million, 1.5. If they like it they will purchase it,” said Helen Zhang of Tarbell Realtors.

Notice the implied false urgency? You better buy now, or you will get priced out by these foreign buyers with limitless resources.

And is Ms. Zhang telling us her clients are savvy or stupid? Investors don’t haphazardly buy anything they like, at least not those who want to grow their money.

Are Chinese buyers pricing you out?

The California Association of Realtors pegged foreign sales at 5.8% of the state’s transactions.

Let that number sink in, folks. This is not an invasion. Foreign buyers represent a small fraction of the buyer pool. In case you hadn’t noticed, the Irvine Company and FivePoint Communities are building thousands of new homes in Irvine. Shea Homes and Toll Brothers is building several hundred in Lake Forest’s Baker Ranch. Prices may be inflating, but that’s due to policies of lenders, federal reserve, and our government, not foreign buyers.