The Center of the Universe

St Croix, United States Virgin Islands

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Foreigners Make Run on US Housing Market

Posted by WARREN MOSLER on June 19th, 2011

This is what happens when the Fed scares the heck out of global portfolio managers with otherwise benign QE2, and they deallocate dollar holdings to the point where the currency sells off enough to find real buyers of dollars who want them to buy cheap real assets like US real estate. That’s how ‘price discovery’ finds the real bid side for the dollar for large scale selling.

And when the deallocating stops, this process ends, as that selling pressure fades.

And with the Fed’s portfolio removing maybe $10 billion/month in interest income that otherwise would have gone to the economy, and lower crude prices and a narrowing trade gap in general making $US harder to get overseas, market forces then work to find the offered side of the dollar for that much size.

Foreigners Make Run on US Housing Market

By Diana Olick

June 15 (CNBC) — Falling home prices may be plaguing the US economy, but they are candy to foreign investors, who already have a weak dollar on their side.

Buyers from overseas spent roughly $41 billion on US residential real estate last year, a bump up from the previous year. US real estate agents report a surge this Spring especially, as foreign buyers see continued pressure on home prices and ample bargains.

“I don’t think they’re so concerned about the prices dropping as they are about getting value for their money,” says Rick Ambrose, a Coldwell Banker agent in Lake Mohawk, NJ.

Ambrose and his colleague Mary Pat Spekhardt recently hosted two groups of Japanese investors searching for homes on the scenic lake just about an hour outside of New York City.

“They can work here, be close to the city, be close to their corporations and still feel like they’re on vacation. I think that’s really what grabbed everybody. That’s what got them,” says Spekhardt.

The group of about 35 from Japan also toured properties in Las Vegas and Los Angeles, which are more popular choices among foreign investors.

A new survey by Trulia.com that tracks searches from potential foreign buyers found LA ranked number one in potential interest traffic, trailed by New York City, Cape Coral, Fl, Fort Lauderdale, FL and Las Vegas.

The greatest interest is from buyers in the UK, Canada and Australia.

“Prices now in the US are generally 30-40 percent off from the peak.

In addition, the weakness of the dollar gives the Japanese an advantage, as it does the Europeans, of another 20-25 percent off, so they’re seeing real bargains and opportunities,” notes Ambrose.

The interest is pretty widespread, with Brazilians trolling Miami and Russians and Chinese hunting in Chicago, according to Trulia’s survey.

What’s so interesting to me, though, is that foreigners are so much more ready to jump into the market now than US investors. Granted, they have, as noted, the weak dollar on their side, but they also seem to have a longer term view. US buyers are so afraid to a lose a little in the short term on paper, they don’t realize they could gain a lot in the long term. Of course foreign buyers are largely using cash, which many US buyers are lacking. Credit, or lack thereof, is playing against the US investor.

Prices in Miami are actually beginning to recover, especially in the condo market, thanks to foreign buyers, so much so that the foreigners are beating out the Americans.

I remember all the rage a long time ago when the Japanese were buying up commercial real estate in New York City.

Everyone was so appalled. Not so much now, even up in Lake Mohawk, NJ…

“It isn’t popular. It is unforeseen territory, and it’s unique. I think it’s a very smart choice. It’s not where everyone is looking,” says Spekhardt.

17 Responses to “Foreigners Make Run on US Housing Market”

  1. rvm Says:

    Is buying property in US by foreigners considered US export?

    Reply

  2. Damien Says:

    Another point is that foreign holders of US assets are more likely to hedge the currency than a US holder of foreign assets. This asymmetry can explain the high correlation between the USD and risky assets i.e. when risky assets rise, some more USD have to be sold to hedge the increasing assets.

    Reply

  3. macrosam Says:

    Don’t believe it’s considered an export, much like how tourism revenues aren’t considered exports (nor are the ancillary revenues such as food, clothing, etc.)

    Reply

  4. Mario Says:

    Warren,

    MMT states that bond savers and bond interest doesn’t really go out into consumption in the economy. Once a bond investor or saver enters his money into bonds, it really never leaves those bonds. This is what MMT states from what I know.

    However you seem to think that all the interest income that the Fed took away from QE2 has effected our economy. This is just another way of saying that bond investors actually DO USE their investment profits in the economy and consume no?

    Reply

    Peter D Reply:

    @Mario,

    MMT doesn’t state that. It states that owning bonds doesn’t preclude any consumption since bonds are just the same as “cash” only with maturity and earning interest. It also doesn’t preclude speculative activities and trading, since bonds can serve as collateral (while earning you interest to boot!) But bond interest is definitely going into the economy. Think about owning $X in principal and living off the $X*r% of interest as part of your income stream.

    Reply

    Peter D Reply:

    @Mario,

    What you might be right about is that the interest removed from the economy in QE2 might not have been spent anyway. It all depends on who sold the bonds to the Fed, I think. If it is all just a bunch of financial institutions, as I think is the case, then I am not sure the point about removed interest income is very strong. But I might be missing something. Warren?

    Reply

    WARREN MOSLER Reply:

    could be. no one does any actual work on the topic so it’s all conjecture and inference.

    but we do know 79 billion in fed profits that would have been earned by the economy is a good chunk of change, and a pension fund with lower income needs higher contributions, however indirect, etc.

    Reply

    Mario Reply:

    @Peter D,

    MMT considers bonds and savings as demand leakage, which implies that it is not being consumed. That is my point. I think the pension fund issue is definitely valid. It would be interesting for someone to do work on this issue of the rate of bond profits as consumption in the economy so we could really find out what the story is.

    Reply

    Peter D Reply:

    @Mario,

    Principal might be demand leakage but interest might not.

    Mario Reply:

    @Mario,

    that’s an interesting point as well ;) cheers!

    Mario Reply:

    @Peter D,

    also it might not just be pension funds but also foreign holdings as well…like china. This would mean that at least some portion of that 79 billion is really not a problem (or a loss) for the US.

    Reply

    WARREN MOSLER Reply:

    could be. but it sure isn’t ‘stimulative’ either…

    WARREN MOSLER Reply:

    mmt says that a govt can deficit spend to the extent of tax liabilities and savings desires.

    so the question is how offering tsy secs alters savings desires.
    in my experience i’d say not much, if any, and most likely the reverse of what most think

    Reply

    roger erickson Reply:

    @WARREN MOSLER,

    Isn’t it even more useful to say the following directly?

    “The purpose of currency issuance is to deficit spend to the extent of tax liabilities and savings desires.”

    That changes “can” to a purposeful goal. How else does currency issuance support group adaptive rate?

    Reply

    WARREN MOSLER Reply:

    the purpose is to provision the govt

  5. hamish Says:

    Given that housing values in all Australian cities are still in a huge un-popped bubble, and with the currency at parity with the US dollar, US houses look incredibly cheap to us at the moment. I also believe parts of Canada are similar – Vancouver – so I can see that driving some of the foreign interest in your real estate.

    Reply

  6. beowulf Says:

    “Foreigners Make Run on US Housing Market”

    If that’s not a leading indicator for a land value tax, I don’t know what is. :o)
    The US could phase out the income tax at any time by phasing in a federal tax credit for land value taxes paid to state/local govts (like the old “sponge” tax credit for state inheritance taxes against the federal estate tax). After which, any state that didn’t move as much of its tax burden as possible to an LTV would leave its in-state taxpayers (aka voters!) on the hook for federal taxes they shouldn’t have to pay.

    Its not like Tsy needs the income tax revenue, it’d actually be easier for Uncle Sam to drain bank reserves without it. The Fed governors already levy transaction fees on everything that moves through the FRS. Since Fed net earnings are rebated to Tsy, the FRB could mark up or down its fee schedule to adjust fiscal stance as easily as it adjusts IOR rate.

    Reply

Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>