When RealtyTrac released its latest home sales report [12], "which shows single family home and condo sales through August were on pace for an eight-year high nationwide and in 110 out of 204" it was something else that caught our eye. According to RealtyTrac president Daren Blomquist, "the continued strength in sales volume across a wide spectrum of markets in August indicates that shockwaves from recent global stock market instability have not weakened the housing recovery and in fact there is evidence that the instability has fueled more demand for U.S. real estate."
Which was to be expected: as we have said for the past 4 years, one of the three pillars supporting US housing, or at least the very high end, is the money laundering of offshore hot money in the US, where courtesy of the NAR's exemption from anti-money laundering provisions, wealthy foreigners can park any amount of cash in US housing without any questions asked. In August this was particularly acute because as Blomquist adds, "cash sales share was more pronounced in markets that have traditionally been magnets for foreign cash buyers, including Boston, Las Vegas, San Francisco, Seattle and New York.”
[13]
And here was the stunner in question: "We are seeing more globalization as Southern California has become a destination for international buyers," said Mark Hughes, chief operating officer with First Team Real Estate, covering the Southern California market. "Eighty percent of new construction in Irvine last year was sold to Chinese buyers. International buyers are driving home prices up and sometimes out of reach for many local residents."
You read that right, a whopping 80% of all new housing in Irvine was bought by Chinese.
Which prompted some follow up reading. This is what we found [14]:
- California is the most popular U.S. destination for Chinese real estate buyers, according to Juwai.com, a Hong Kong-based property search engine.
- Chinese bought 32% of homes sold to foreign buyers in California, double the share sold to Canadians, according to an April 2014 survey by the California Association of Realtors. About 70 percent of international buyers pay cash, the survey showed.
- Buyers from Greater China, including people from Hong Kong and Taiwan, spent $22 billion on U.S. homes in the first quarter of 2014, up 72 percent from the same period in 2013 and more than any other nationality, the National Association of Realtors said yesterday in its annual report on foreign home purchases. That’s 24 cents of every dollar spent by international homebuyers, according to the survey of 3,547 real estate agents.
- "A lot of people are trying to hedge against a generally bearish outlook for the Chinese economy,” Hanemann said in a telephone interview. “Buying real estate overseas has been in the past limited to a relatively small group of wealthy individuals and sometimes government officials. But it’s become a much bigger trend, involving affluent middle-class people."
- Affluent being the key word: Chinese buyers paid a median of $523,148 per transaction, compared with a U.S. median price of $199,575 for existing-home sales. While Canadians bought more houses than the Chinese, they spent less -- a median of $212,500 per residence, for a total of $13.8 billion.
To be sure, the Chinese influx was felt particularly during 2014 when the first reverberations of the burst Chinese housing bubble were felt, and forced many to look to the US for parking capital for safety: "The uncertainties in China’s domestic market are contributing to a higher rate of growth in Chinese interest in U.S. property,” Andrew Taylor, co-chief executive officer of Juwai.com, said in an e-mail. “That interest began accelerating in the second quarter of 2014, in part because of China’s property slowdown."
It remains to be seen if the recent modest uptick in Chinese housing transactions, if not prices, will lead to a capital reallocation by Chinese buyers out of California and back into China. But in the meantime, Chinese buyers have made numerous domestic housing markets inaccessible to average Amercians:
- Buyers from China are driving up prices and fueling new construction in Southern California areas such as Arcadia, a city of about 57,500 people with top-rated schools, a large Chinese immigrant community and an array of Chinese restaurants and markets.
The median home price in Arcadia’s 91006 ZIP code was $1.28 million in mid-2014, up 18.5 percent from a year earlier, according to research firm DataQuick.
- “About 90 percent of my buyers are from China,” said Peggy Fong Chen, a broker with Re/Max Holdings Inc., who sold 80 homes in Arcadia last year. “They want new construction. They want two levels. In China, it is considered a mansion if it has two levels.”
- More than three out of four buyers pay cash, said Chen, a native of Hong Kong who’s been selling real estate for 10 years. At least 20 percent are absentee owners who don’t have long-term visas yet. Many purchase houses for their children to attend high school or college, she said.
- Buyers from China and Asian-Americans purchased about 80 percent of the 47 houses sold at Tri Pointe Homes Inc.’s Arcadia at Stonegate community in Irvine, about 40 miles southeast of Los Angeles, according to Tom Mitchell, president of the Irvine-based builder.
- Almost half of the buyers paid cash for houses in the development, at prices starting at $1.16 million, he said. The company has been surprised by how word travels among overseas buyers. “A Chinese national bought one of our houses at Arcadia in Irvine after reading about it on a blog,” Tri Pointe CEO Doug Bauer said in a telephone interview. “It was a Chinese blog. We couldn’t even read it.”
Which brings us to the key issue: uncontrolled Chinese money laundering which is the primary reason for this capital exodus, and billions in Chinese "hot money" bidding up luxury US real estate into the stratosphere. We have discussed it extensively before [15], and here is bloomberg:
Some wealthy Chinese have come up with ways to evade the yearly $50,000 per-person limit on taking money out of the country so they can buy U.S. real estate, Yu said. Methods include laundering money through Macau casinos and cooking the books of import-export companies, he said.
“A lot of people over-invoice export proceeds, so they can park some money outside,” Ha Jiming, chief investment strategist for Goldman Sachs Group Inc.’s China investment management division, said at a Los Angeles conference in April.
Putting a bottom line on the capital outflows, according to the NAR, sales of U.S. houses to long-term foreign residents and non-resident buyers accounted for about 7 percent of the $1.2 trillion of existing-home transactions in just the first quarter of 2014.
So realistically, call it 10%, which means that mostly all cash foreign buyers are responsible for about $500 billion in US real estate all cash investment every year, of which anywhere between a third and a half is Chinese.
And there is your massive Chinese capital outflows in a nutshell, which incidentally is also the biggest threat facing China's economy now that it has begun devaluing its currency and yet is desperate to avoid the capital flight from its economy.
Which makes us wonder: if asked what presidents Xi and Obama really discussed in private last week, a safe bet is it wasn't computer hacking, nor artificial islands in the South China Sea, but how the US plans to curb the outflow of hot Chinese money into US real estate.
Which is a problem for the US, because thanks to Chinese capital flows, it means half a trillion dollars in capital flow right into the US economy via real estate every year. Call it 3% of GDP, roughly what the US growth rate should be. Xi is angry that this capital is leaving his economy; Obama is delighted.
How will this very critical issue be resolved remains to be seen but as we will note in a follow up post, China is already taking very aggressive steps to finally limit and halt altogether the epic money laundering that is sucking China's economy dry and is leading to such dramatic outcomes as 80% of all buyers in a major US metro-area being Chinese.
