Ask the Economist: Foreign Housing Investment Trends

Dr. Svenja Gudell is the Chief Economist for Zillow. She joined the company in 2011 and leads Zillow’s industry-leading economic research team, a recognized voice of impartial, data-driven economic analysis on the U.S. housing market. Under Gudell’s leadership, Zillow produces monthly reports on housing trends for more than 450 metros nationwide, with data often available down to the ZIP-code level. In addition, Gudell and her team publish original research on various real estate topics, ranging from rental and mortgage affordability, negative equity and forecasting, to policy, generational and mortgage research. Gudell has presented to various federal agencies and at numerous industry conferences, and has been widely quoted in national and local media.

Gudell spoke with DS News about the current trends seen for foreign investors in the U.S. housing market as well as her thoughts on trends for the housing market as 2016 rounds out the second half of the year.

What are the trends seen currently in the foreign buyer/investor sector of the U.S. housing market?

In general, there are a whole bunch of trends going on right now with international buyers so it's hard to say definitively what will happen but taking a look at some of the separate trends we are seeing can help to better tease out an answer.

Brexit and frankly a lot of other international uncertainties has created a "flight to safety" phenomenon were people are actually wanting to invest in the U.S. Treasury more which is why mortgage rates have been so incredibly low. With that, they also want to invest in the real estate market. Usually foreign investors tend to invest in high-end real estate or commercial.

In terms of residential investment, in theory, people will want to buy more high-end real estate, but currently we also have a couple things going on where high-end real estate has become quite expensive especially in very popular markets like Miami, New York, San Francisco, parts of Texas, and San Diego. Homes there are more expensive than they have ever been. Especially with a really strong dollar, the foreign buyer, upon converting their dollars, into U.S. currency are seeing steeply priced high end homes and that is for some going to be a deterrent and some will no longer want to buy.

In addition, the regulations and terms for what needs to be reported for someone buying a high-end property might make someone think twice about how they are buying properties and if they want to continue. Specifically, in Vancouver, they recently passed a law requiring 15 percent tax for non-residence to buy properties. There might be an impact there where we see people choosing to buy in the U.S. versus Canada. Though this will not be a huge impact, it is something to keep in mind as a small driver.

Additionally, in China there is a lot of uncertainty looking at their stock market as well as recent turmoil. This makes Chinese investors active in their own stock market as well as in the U.S. feel less rich. There are two possible factors that could go along with this, either the investor will want to take more money out of the Chinese market and invest it in the U.S., or the investor will have lost so much money in that collapse that they will not have the want or the funds to invest in the U.S. anymore. I personally feel it is more of the latter.

 

What is your outlook on the housing market as a whole currently as well as for the rest of the current year?

Currently home value appreciation nationally is right around a 5 percent increase annually from the year prior. However, some markets are growing faster than others so at this point in the recovery, we are seeing a very obvious split among the Northeast and the middle of the country, versus markets in the West as well as Texas and Florida. These markets are appreciating for different reasons. Strong job growth and strong local economic growth attracts buyers and increases the housing demand and that's why we are still seeing at times double-digit home value growth.

For example, Denver is growing at 11 percent along with Seattle and Dallas is at 12 percent home value appreciation. The strongest of them all is Portland at 15 percent. It's important to keep in mind that one of the biggest drives for these markets is demand, but supply is also playing into that in terms of for-sale inventory. Inventory is still down 5 percent annually so we are seeing 5 percent less homes on the market for July, year-over-year. The good news is that we are starting to see declines for inventory slow down and for the second half of the year we hope to see more inventory come online. With that we should see home value appreciation relax a bit and not grow quite as much as we have seen. Our forecasts are two to three percent over the next year.

Increase supply should certainly help on that front as well and we have seen some good numbers with recent new home sales in July and some more robust activity to actually foreshadow what kind of inventory will hit the market. Additionally, the really hot markets like San Francisco have already started to see a slow-down of a 1.3 percent growth versus the double digit growth seen 8-9 months ago simply because they are getting to be too excessive and people can no longer afford to live in these markets at these prices.

This is what I think the theme will be going on; more of a slow-down and return to normalcy in home values and inventory levels.