The countrywide hot housing market exists despite a massive reduction in foreign investment over the course of the pandemic. Loosened travel restrictions may reignite foreign interest in U.S. real estate — pushing home prices even higher in certain markets in the process.
On Monday, the White House announced that it would begin to allow international travelers to come to the U.S. if they could show proof of COVID-19 vaccination and of a negative COVID-19 test taken within 72 hours of their departure. Since the pandemic began, travel restrictions have remained in place prohibiting entry to most international travelers from parts of the world with high levels of COVID transmission.
These travel bans haven’t just hurt the hospitality sector — it’s also led to a significant downturn in international investment in U.S. real estate. International buyers only purchased 107,000 residential properties in the U.S. between April 2020 and March 2021, a 31% decrease from the previous year, according to data released in July by the National Association of Realtors. It represented the lowest level of foreign investment in a decade.
“There was a 31% decrease in the number of homes bought by foreign investors over the course of the COVID-19 pandemic.”
The downturn was especially prominent among the top buyers of U.S. real-estate. China, Canada and Mexico regularly rank among the five largest buyers of American homes and condos, but the dollar volume of investments from these countries dropped by 50% or more this year.
“We’ve seen in the major markets a tremendous decline in foreign investments primarily due to travel restrictions — and separate from the travel restrictions, the lack of consular offices and embassies beign open to give out visas,” said Edward Mermelstein, founder of One and Only Holdings, a New York-based advisory firm for high-net-worth investors.
The ‘psychological issue’ facing international investors
Even before lockdowns and social distancing began in the U.S., real-estate agents were reporting a downturn in interest from foreign buyers. As international travel quickly became challenging amid the pandemic’s onset, buyers were less inclined to spend their money on American real estate.
“They are used to touching and feeling their investments, because for them the U.S. is their safety net,” Mermelstein said of foreign investors. “For them to not be able to look at and experience whatever they’re putting their money into is a psychological issue.”
While some Americans have opted to purchase homes virtually during the pandemic — in many cases relying on video tours and 3D technology to get a sense of what the property looks like — there’s not been the same degree of adoption of these methods from international buyers. During the pandemic, international buyers may have become even more hesitant about going this route.
“‘They are used to touching and feeling their investments.’”
— Edward Mermelstein, founder of One and Only Holdings
For Auction.com, an online platform for foreclosure and bank-owned home listings, the share of purchases by out-of-country buyers dropped from 12% in the first quarter of 2020 to 8% in 2021. “Part of the gap in demand left by some foreign investors exiting was filled by demand from buyers coming from out of state,” said Daren Blomquist, vice president of market economics at Auction.com.
But even with this week’s announced relaxing of travel restrictions, it could be some time before foreign investment truly recovers. Part of the problem lies in the vaccine requirements: If the U.S. requires international visitors to have been treated with FDA-approved vaccines, it could preclude a great deal of travel from countries that have invested in other vaccines such as China and Russia.
“We are going to preclude much of the world outside of Europe,” Mermelstein said. “I think we’re going to see a continued lag, especially from emerging markets.”
Certain markets are poised to benefit more from international investment
More expensive, coastal markets generally attract the most attention from international investors, according to real-estate experts.
For the past 13 years, Florida has represented the top destination for foreign buyers, representing 21% of international purchases. In 2021, California came in second at 16%, followed by Texas (9%) and Arizona (5%), with New Jersey and New York close behind at 4%.
Where foreign money flows now that travel is easier, home prices will likely increase.
“The travel ban likely contributed to an easing of demand from foreign buyers of U.S. real estate, but that didn’t do much to slow the rapid rebound in the U.S. housing market in the second half of 2020 and so far in 2021,” Blomquist said. “Adding the foreign buyer demand back into the mix will likely only add more fuel to fire of the already red-hot housing market.”
At the city level, metro areas like San Francisco, Los Angeles, Miami and New York attract tons of foreign dollars, due to the strength of property values in those markets. But Blomquist argued that the dynamics of the pandemic-era housing market mean that investors from overseas may turn their attention away from major metro areas.
“I wouldn’t be surprised to see the investment thesis of foreign investors shift to more affordable, less dense inland housing markets given the pandemic-accelerated shift toward those types of markets and away from the higher-cost, denser housing markets on the coasts,” he said.
Will the Evergrande crisis propel foreign investment in the U.S.?
Another overseas issue, but one not related to foreign travel: Chinese property-giant Evergrande
has attracted a significant amount of attention over the past week after it hired financial advisers as analysts have raised concerns about a possible default.
Fears that Evergrande’s financial woes could turn into a repeat of the 2008 financial crisis caused a decline in the stock market earlier this week. There are also reports that indicate the Chinese government may move to split Evergrande into multiple entities in light of its troubles.
The situation was a reminder of the primary reason why international investors continue to pump money into the U.S. real estate market, Mermelstein said.
“While China has had explosive growth over the last decade and more,” Mermelstein said, “the safety of the United States is something that’s very hard to argue against.”