In order to understand the effect that international speculation could have on the U.S. real estate market, we have to understand what speculation does. Another thing to focus on is the impact foreign investors have on the U.S. real estate market and whether the impact is good or not.
Real estate, in general, is a market that allows speculation. In real estate, speculation can be a very risky endeavor, but, if done with great knowledge of how the market works, it can provide quite a profit. Real estate speculation is different from both investments and house flipping.
The difference between investment and speculation is the knowledge behind each practice. Seeing as the two terms are often used as synonyms because of their similar meaning, we are going to break them down, explain their general meaning and point out the differences.
In order to invest in something, one has to spend personal funds. The way in which money is spent is very important here because through investing you put money into something and expect a profitable return. The return, however, is not expected to come in the next few weeks or months. Investors use personal funds for long periods of time to take moderate risks by purchasing an asset for securing stable returns.
Common investment practices:
- learning a foreign language and profiting from the knowledge later on;
- buying bonds and stocks from a company that you have every reason to believe would increase in value over long periods of time;
- buying antiques or gold when the dollar value drops;
- buying real estate that you expect to sell at a higher price in a matter of years, not months, or rent it.
And in real estate is the area where the two terms get confused. The time frame in which they work is the biggest difference but there are others as well.
A speculator may take advantage of a situation for personal profit. Speculating involves buying something at a small price when you have reason to believe that the price will rise in the next few weeks or months, but not years. Speculators often use borrowed funds for short periods of time to take high-risks by executing the risky financial transaction while hoping for a profit.
Common speculation practices:
- Buying medical supplies cheap when the demand is high and sell them at a higher price;
- Buying real estate in an area that has a bad reputation and TO sell it once the area is gentrified;
To bring some light on the differences between investment and speculation one must understand that buying a home is an investment but if someone else buys said home from the new owner in the next months at a higher price, it turns into speculation.
The real estate bubble burst
In times of crisis, real estate speculation can have harmful effects on the real estate market. The housing market itself is volatile and changing, it can be influenced in a good or bad way by real estate speculation. The economy itself has cycles as the real estate market does, but these cycles can be sent into overdrive by irresponsible speculation. The housing market goes through the bubble period that is followed by the burst.
Looking back in the mid-2000s, it is when housing speculation managed to grab everyone’s attention. Back then, with low-interest rates many people, speculators or everyday people, made housing purchases. Those houses remained vacant for long periods of time and the demand increased. The purchases were made because prices were low, interest rates were low and mortgages or loans were easy to access. When the housing demand increased so did the real estate prices.
Just like in any market, the real estate market pricing is changing based on supply and demand. It doesn’t change as easily because of the higher value real estate works with. When supply decreased because people would buy a second home that they did not need and left them vacant, the demand increased. That triggered prices to skyrocket. To put it simply: there are ten apples and you buy them all, but somebody else wants an apple and they can only get it from you, you increase the price and make quite the profit. That’s what happened with real estate at the end of the 2000s. This is the real estate bubble. Prices go high, profits for everyone.
This bubble is currently happening across the U.S. as during the last few years prices have increased. The increase has happened however with a lower increase for incomes, but as mortgage rates are low, it didn’t affect the housing market yet.
In the late 2000s or during the great depression the element that made the real estate bubble burst were the economy crashing, rising interest rates, as well as the drop in demand as people could no longer afford purchasing a new house.
Foreigners investing in real estate
Chinese, Canadians, Mexicans are pulling back from investing in the U.S. real estate. With lower economic growth in these countries, foreigners are not as capable to invest in real estate in the U.S. as prices continue to grow. The fact that the dollar is stronger also influences foreigners to purchase homes in the U.S. Specifically for China, however, the overall control on capital is what makes it harder for investments to take place in the foreign U.S. real estate market. There is also the unfavorable rhetoric against foreigners that influences the current non-American investments on the U.S. soil. When a foreigner sees the way their ethnicity is treated both economically and socially in any country, they are less likely to want to purchase property or start a business in that country. If in 2018 Chinese buyers spent over $30 mil on real estate, that number dropped to $14 mil last year. From April of 2018 to March of 2019 the purchase of foreign buyers dropped by 36%. The median house price for homes purchased by foreigners also dropped from $290,000 to $280,000 during that same period.
Foreign investors can be a great asset to the country’s economy. The more we work with them and not against them the better things will be for both entities in the long run. Building a network of foreign investors will help you get access to an interesting culture and show them all the perks of American life. Learning that working with foreign investors will improve the quality of U.S. property might come as a surprise, but foreigners usually go for new homes and that increases the demand for new construction.
Because of the fact that the Chinese Government tightened the grip on the outflow of cash for foreign property purchasing, the level of cash investment in U.S. property from the Chinese population has dropped by 56% during that 12 months period. Chinese buyers are moving their scope for real estate towards Canada, UK and Australia and that is due to the so-called “Trump effect”. The trade war also affects Chinese students who used to look towards California for real estate due to their closeness to the American lifestyle and the great school district.
Foreigner ownership of U.S. real estate
Foreigners often purchase real estate in America for their children studying in U.S. universities as many are drawn to California, Texas as well as Florida. The real estate is often bought with all-cash down payments and moderate-income families find it hard to out-bid those buyers. In 2006 about 10% of the single-family homes in California were purchased either by investors or foreigners. Ten years later the percentage increased to 25 and these foreign investors purchased in all-cash whereas an American family would have to get a mortgage in order to be able to afford the property. Furthermore, during the bid for one particular property, the foreigners often bid amounts that are much higher than the market price and that increases the median house value in some areas. We can look here at California, Texas and Florida, as mentioned before.
Why Foreign Investors?
Not all foreigners purchase property for their personal use, some just prefer the housing market to the stock market. Once they make the purchase, they often rent them which is why over the last 10 years there has been an increase in single-family homes rentals.
Some experts even go as far as to say that foreign buyers have a bigger impact on the real estate market than an institutional investor, those companies with large cash reserves that are there to be invested. These foreign investors are one of the reasons why the real estate market in California bounced back as fast since the end of 2000.
A survey gathered data showing that out of all foreigners, those of Chinese nationality accounted for 71% of the real estate purchase in California and nearly 40% of all Chinese bought properties in the U.S. had been in California. So why do they do it? Well … it is the safest investment. If something happens in the market due to an economic crisis or the current situation that the coronavirus has developed, the housing market is the most difficult market to hit but there are regions that might take a harder economical hit than others. Areas like California, Texas or Florida where there is certain economic stability due to diverse job markets and tourism, this stability will help and has helped during past economic crises, but some regions will feel the effect of a pandemic from an economical standpoint.
The most interesting part and why they have such a big impact on the real estate market wherever they settle in America is the fact that only 40% of foreigners use their U.S. real estate purchase as their actual residence. Some use them as vacation homes, simply an investment to hold onto for when the market skyrockets again or, for those who want a continuous profit, they rent it, generally to students.
Real estate in China is very expensive apparently, and for them, the housing market in the U.S. is affordable. This is probably also the reason why they pay way over the real estate market price.
When foreigners are coming here and can afford to purchase real estate in all-cash, most sellers can’t say no to the offer. They also offer more than the asking price and this makes it difficult for medium-income families to be able to afford a single-family house even with a mortgage. Interest rates are the lowest they have been in a long time but domestic buyers are really struggling to win against some foreigners. With no fear, foreigners investing in U.S. real estate know to spend their money in those recession-proof cities that feel the least impact during an economic crisis.
Real estate speculating isn’t risk-free but studying the market, past real estate bubble bursts and how fast some areas recovered is something to be looked into. While foreigners find it easier to invest in the real estate market and also influence the pricing, domestic buyers can get in touch with real estate agents on The Official Real Estate Agent Directory®.
Keep an eye out for further developments that may influence the real estate market and let us know in the comments if there is anything in particular that makes the current climate weary in your eyes. Like & Share to keep those close to you in the loop with speculation in the U.S. real estate market.