Home sales perked up in July, a report this week showed, but they’re still down significantly so far this year compared with 2018, even with lower mortgage rates.
While analysts typically blame high prices and growing worries about a possible recession, another factor is also playing a prominent role: Foreign buyers, particularly the Chinese, have pulled back sharply from the U.S. real estate market.
Foreign investors purchased $77.9 billion in residential property in the 12 months ending in March, down 36% from the previous 12-month period, the National Association of Realtors said in a recent report.
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China, meanwhile, topped all other countries for the seventh consecutive year, with $13.4 billion in home purchases, but that was down a whopping 56% from the prior year, NAR said. About half those sales were all-cash, down from 58% a year earlier. The next largest international buyers – Canada, India and the United Kingdom – also had big drops, but they represent smaller shares of the market.
“The magnitude of (China’s) decline is quite striking, implying less confidence in owning a property in the U.S.,” says Lawrence Yun, chief economist of NAR.
All told, existing U.S. home sales are down about 3% so far this year from the same period in 2018 despite a 2.5% increase in July from the prior month, NAR figures show.
A big reason Chinese investors are retreating from the American housing market is that Beijing has placed tight limits on how much capital can leave the country in the wake of a devaluation in the yuan a few years ago.
“In China, each family member has been restricted to $50,000 or less,” says Steven Ho, senior loan officer at Quontic, a New York City-based bank. That makes it tougher for Chinese investors to elbow out American buyers with all-cash offers.“A few years before, these restrictions were not so stringent.”
The government toughened capital controls last year as the Chinese economy weakened, Ho says.
Also, China’s slowing economy itself has dampened the confidence and purchasing appetite of Chinese buyers, Yun says. The Trump administration’s trade war with China, he says, has further chilled investment in U.S. housing.
Meanwhile, more Chinese homeowners have been selling their American houses and condos because they can’t pay the maintenance costs with their money trapped in China, says Jeff Lu, vice president of Fidelity National Title Insurance Company.
California feeling the effects
California is the epicenter of Chinese residential investment in the U.S., with 34% of purchases in the state. Other significant hubs are New York, New Jersey, Florida and Texas.
In Irvine, population 280,000, “There are 65,000 houses… and 21,000 of them are owned by Chinese.” Lu of Fidelity National says.
“It’s normal for Chinese buyers to raise the price aggressively,” says Phil Lee, a broker at Keller Williams in Irvine. “For example, a $1.2 million house, they pay $1.22 million, all in cash.”
In recent years, Chinese investors made about half of all home purchases in the city but that share has fallen to about 36% in 2019, Lu says.
The pullback is depressing prices. In the first half of the year, the median home sale price in Irvine fell to $820,000 from $834,000, according to Zillow.
“It’s good news for local Americans who are looking to buy a home – larger supply and less competitors,” Lu added.
Many of the wealthy leave market
The drop-off in Chinese investors has especially affected the upper end of the market. After decades of economic growth, China has created a class of nouveau riche, many of whom want to buy U.S. homes as a solid investment or as a home for their children who attend American colleges.
“The wealthy Chinese see the U.S. as a safe harbor to park their money, and also an ideal place for their children’s education,” says Lin Pan, the founder of Lin Pan Realty Group, a Chinese real estate brokerage in Long Island, New York.
“The first batch of Chinese who came into the American housing market were entertainment stars, and then high-level Chinese officials and their families, businessmen and middle-class families,” says Chole Ren, an independent real estate broker in New York City.
“They specifically fly over here to view the houses,” says Xiang Jill Ji, a broker with Douglas Elliman Real Estate in New York.
“The condos in midtown Manhattan used to be one of their favorite choices because they’re brand new, with the best view and positive valued-added space,” Ji said. But at a recent open house, few Chinese shoppers showed up, she says.
More turn to mortgages
With China’s limits on cash that can leave the country, Chinese buyers are now searching for lower-priced homes and using mortgages more often. The share of their home purchases that rely on mortgages has risen to 46% in the 12 months ending in March, from 37% the prior year, according to NAR. And more of the buyers are middle-class.
The Chinese buyers are also downsizing. Ji has a Chinese client who wanted to buy a two-bedroom condo in Manhattan earlier this year but is now looking for a one-bedroom or studio.
At the same time, brokers are seeing a growing number of home buyers from Hong Kong due to the political crisis in the city, New York brokers Pan and Ji say.
“Hong Kong buyers could be the next source of growth,” Pan says.