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

A home for sale in the Pacific Heights neighborhood is seen in San Francisco, California February 3, 2009. REUTERS/Robert Galbraith
A home for sale in the Pacific Heights neighborhood is seen in San Francisco, California February 3, 2009. REUTERS/Robert Galbraith

By Julie Haviv

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.

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.

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.

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.

"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."

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.

(Editing by Eric Walsh and Gunna Dickson)

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