Monday, July 14, 2014

Cheap U.S. Real Estate Scooped Up by Canadians and Chinese

Record number of real estate purchases go to foreign buyers: Canadians target Las Vegas, Detroit Los Angeles, and Florida in General. Chinese targeting Los Angeles, San Francisco, Irvine, Las Vegas, Detroit, and Florida as well.

Investor buying continues to be a major player in the current housing market. Over the last two weeks I’ve had the chance to drive down neighborhoods were international money is flooding in. It does give off reminders of when Japanese buyers were purchasing tons of California and Hawaiian real estate. When it comes to California, there are certain cities where international money is pouring in. This matters when sales margins are razor thin. What struck me about these areas is the marketing is heavily geared towards international buying. After all, when escrow closes there is no loyalty where the cash is coming from. California continues to draw heavy investor money from China alongside their massive boom over the last decade. Apparently buying tons of consumer goods eventually will have a bigger impact and we are simply seeing money repatriating back to other places. While the US is seeing some signs of housing mania, we are nothing compared to the nutty Canadian housing market and what is occurring in some major Chinese cities. Yet a big part of this is speculation and we actually see this via rents. Rentals are more reflective of what local families can pay. It is interesting to see in some highly desirable areas that rents go for $2,500 to $2,700 while homes are selling for $700,000 to $750,000. Foreign money is a big player in the current market and this is also very dependent on foreign economies sustaining their booms.

Chinese investors heavily favor coastal regions

The National Association of Realtors (NAR) recently released data on foreign real estate buyers. What was interesting is that the latest figures show that international buying is at an all-time record high coming in at $92.2 billion dollars of volume. Overall this was 7 percent of the $1.2 trillion in transactions but keep in mind this is highly targeted action. Not much buying in Nebraska, Kansas, Alabama, Kentucky, North Dakota, etc. This is a big deal when it comes to purchasing in a market with low inventory. What I find fascinating is that in these prime areas is that even local area families simply cannot afford to purchase their own home should they compete in today’s market and buy again. These are your lottery holding Fancy Feast eating baby boomers in most cases. In one prime area, you have a home selling for $700,000 and all similar homes around this property sold for $250,000, $300,000, or $150,000 yet there are very few homes for sale in this area. This is similar for other markets where crap shacks are going for $700,000 or more.

In other words, not only are locals being priced out but even professionals in the area are being priced out because of added international competition. Take a look at sales volume:
international buying
Source: NAR
This is definitely impacting certain markets:
“(LA Times) That’s driving prices in parts of the region that have long been popular with Chinese buyers. Home values have returned to pre-recession levels in parts of the San Gabriel Valley, for instance. And in Irvine, home to a booming population of young Asian families, new residences are getting scooped up by Chinese buyers.”
Volume of purchases is still largely driven by Canadians but they are looking at other areas outside of California. Take a look at NAR searches for perspective:
- Canadian Searches: Las Vegas, Detroit, Los Angeles, Ft. Lauderdale, Miami, Orlando, Chicago, Naples.
- Chinese Searches: Los Angeles, San Francisco, Irvine, New York, Las Vegas, Detroit, Seattle, Miami, Orlando, Boston Anderson SC, Chicago, Houston, San Diego
And the boom in China is definitely impacting local markets here in SoCal:

investor buying

Can you spot which country is booming? And where are Chinese buyers focused? Now as we had mentioned, volume is actually falling in many parts of California and prices are plateauing. You’ll notice that for these investors they are first targeting tier-one areas. I love how some people then try to justify this and say that a certain run-down market is going to experience a new renaissance because all of a sudden they have a Starbucks and a Chipotle. Some crappy stucco box sub-division in L.A. County is not the next Vancouver or La Jolla although people want to push this narrative forward. The figures don’t show this. Look at the top city searches. These are prime locations and places for true low cost investing (i.e., Las Vegas and Detroit). Investors are not looking to flush money down the toilet in a blanket nonsense strategy. If that were the case, inventory would not be rising and prices would be on a more furious path upwards. Yet that is not happening.

Canadians appear to be driving their purchases via avoiding the cold. These snowbirds are looking for cheaper digs to escape the brutal cold months in Canada. With Canadian real estate in an epic bubble, hot money is flowing everywhere and especially to neighbors in the south. While the US did see a correction in housing values, Canada never underwent any sort of correction.

The point of this is that foreign money is speculating in certain markets in California. If you are buying in the Inland Empire or Central Valley, you probably won’t face much competition from foreign money. But if you are looking at buying in San Marino, Arcadia, or Irvine get ready to face some international competition. In the end however, most locals don’t even have the income to compete even with a 20 percent down payment in some of these markets. For the housing industry, all money is green so as long as your cash or check clears, it is all good.

This idea that foreign money is flooding into crappy neighborhoods and somehow, this is going to make them the next San Francisco is comical. There is no proof of this. What we do have is the data above and it shows that foreign investors just like Wall Street investors are hungry in turning a profit. They are not interested in being the greater fool holding the bag at the end.


1 comment:

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