Foreign investors hold down U.S. mortgage rates
by Peter Miller
Do foreigners play a big role in U.S. real estate?
The answer is “absolutely.”
A new study by the National Association of Realtors estimates that foreign purchases of U.S. real estate amounted to $41 billion in the one year period that ended in March. That’s about 3.8 percent of all existing home sales.
In addition, recent immigrants–those who have been in the U.S. for less than two years–purchased property worth another $41 billion, according to the study.
In effect, internationally oriented sales amounted to about 7.6 percent of the market.
This is a big number in several respects:
First, we need as many transactions as possible to support a housing market which is less than robust.
Second, can you imagine the pricing impact if the number of interested buyers fell by 7.6 percent? Falling home prices would fall even more.
What attracts international buyers?
Homes in this country are less expensive than comparable foreign properties, are viewed as a secure investment, and provide rental and long term appreciation possibilities.
Actually, though, real estate purchases largely understate the impact of foreign capital.
Go back to 2007 when the subprime crisis began to hit. A major problem was the issue of liquidity, the need for cash. For a number of large U.S. financial institutions, the answer was to get money from abroad. As an example, Citigroup got $7.5 billion from the Abu Dhabi Investment Authority in exchange for a 4.9 percent interest in the company.
The authority is an example of a sovereign wealth fund, a type of investment vehicle used by a number of countries to funnel national funds into various investments. The Abu Dhabi fund says it holds “between $650 billion to $875 billion, making ADIA the world-s largest sovereign wealth fund and the world’s second biggest institutional investor behind the Bank of Japan.”
Keeping mortgage rates subdued
The importance of the sovereign funds is that they not only seek equity interests in the U.S., they are also major buyers of mortgage-backed securities. This is good news for us in the sense that it keeps mortgage rates down.
Interestingly, there’s an argument to be made that sovereign wealth funds are virtually required to invest in the U.S.
Why?
Overseas investments in the U.S. are enormous because it’s in their interest to keep our economy strong. This means that when times get tough, sovereign wealth funds are likely to increase their funding here to acquire assets at a low price and to protect the U.S. investments they now have in place.
The other reason concerns security: The U.S. is a very safe place to invest. That’s important when one looks at the upheavals and uncertainties which mark much of the markets around the world.
We have to get the budget right
But, we have to ask if our good fortune will continue. We are now debating what to do about the budget and the deficit. The wrong answer could suddenly result in interest levels that are far higher than today’s mortgage rates.
Higher mortgage rates would mean that a certain number of ARM and home equity line of credit borrowers would quickly have steeper monthly payments. The inevitable result would be more foreclosures and less consumer spending.
It has been suggested that the impact of a default by the U.S. would not be a big deal, that worries are grossly overstated. This is nonsense. Just ask what happens when you don’t make a mortgage or credit card payment, and then multiply that by billions and billions of dollars.
