Housing Slump Creates Window of Opportunity for Foreign Investors

A weak dollar and falling home prices may be spelling gloom and doom for the U.S. economy, but they are good news for foreign investors eager to buy their own piece of the American dream. Yet others, lulled into buying during the housing boom earlier this decade, are finding themselves caught up in the American sub-prime mortgage nightmare.

Contrary to popular belief, the Washington area isn’t more immune to the national housing crisis than most markets. According to a Feb. 14, 2008, report by the National Association of Realtors (NAR), the median price of existing single-family homes in the Washington area declined 5.1 percent from 1,600 in the fourth quarter of 2006 to 0,100 in fourth-quarter 2007. In contrast, the report said that 73 of 150 metropolitan U.S. markets actually saw housing prices rise.

The area’s slump has created a window of opportunity for local expatriates whose home currency is stronger than ever and who would like to upgrade from an apartment. And these potential buyers may find eager sellers among countrymen who bought several years ago at inflated prices and now have to sell their pied-à-terre at a discount as they conclude their D.C. assignment and move home.

French Connection “I have in my pocket five listings that aren’t on the market yet, but sellers are anxious and have contacted me many months in advance,” said Guy-Didier Godat, a real estate agent with Evers and Co., Inc. “Some of these people have been here for five, 10, even 20 years. They are anxious about the market but are moving back home and need to sell.”

One such property Godat is marketing is a house in Forest Hills owned by a French investment banker and his family who are moving back to Paris in July. Godat, a native Parisian himself, has worked in Washington for 25 years and said that although few foreign owners have been directly affected by the sub-prime mortgage crisis, the housing slowdown hits them twice.

“Not only may they sell for less than they bought, but then they have to change their dollars into euros at a rate much lower than when they brought their euros to the U.S. in the first place,” he explained. “They are losing money [on both ends].”

Earlier this year, Godat spent three weeks in Paris and Geneva, where he spoke with investors and relocation agents about upcoming Washington listings. He said that despite the weak dollar, Europeans are still somewhat hesitant to invest in the United States.

“The strong pound and euro are counterbalanced by some fear of the American economy,” he said. “People are anxious because they don’t know if the U.S. economy is going into a recession or not. They’re also anxious about the upcoming election.”

Godat added that among European investors, New York properties are preferred over Washington’s. “We still need to do quite a bit of promotion for Washington real estate,” he said, arguing that a major event like the Olympics would catapult Washington’s housing market to international prominence.

Despite the downturn in local single-family home sales, NAR spokesman Walter Molony sees pent-up demand being “unleashed” this spring. One reason he cited is federal action to boost the housing market through interest rate cuts and easing rules on “jumbo” loans, which are common in expensive markets such as Washington. (A jumbo loan is currently defined as exceeding 7,000.) “A 1.25 percent rate cut on a jumbo loan is a lot [of savings] on a monthly basis,” Molony noted.

How the Other Half Lives One local agent said that although some local areas are struggling, the higher end of the market is still strong in the District.

“If you look at properties over class=”import-text”>2008March. Foreign Frenzy.txt million in Washington proper, the market’s up about 7 percent in sales volume,” said Michael Rankin, managing partner with Tutt, Taylor & Rankin of Sotheby’s International Realty in Washington. The average sale price for properties that Rankin’s firm handles is class=”import-text”>2008March. Foreign Frenzy.txt.2 million.

“Guys in the Maryland and Virginia suburbs are really struggling, but the market in the city is quite good,” he said, adding that he hasn’t seen a drop in prices for District properties that are more than class=”import-text”>2008March. Foreign Frenzy.txt million.

However, he acknowledged the need for some handholding. “Buyers start off skeptical because of the bad news they read, but it’s easy to demonstrate that the reality is different by showing them that buying is quite strong.”

Rankin said he hasn’t seen his clients get into the same sub-prime mortgage jam widely experienced across America, “if they bought well and bought in the city.”

“They are looking at this as a five- to seven-year hold and have a longer-term view,” he said. “I haven’t sold anything at a loss. It just hasn’t happened.”

Indeed, an in-depth 2007 NAR survey pointed to foreign investors as one of the few bright spots for most American realtors. One in five of all realtors surveyed sold a home to an international client from mid-2006 to mid-2007, and 25 percent of them reported an increase in their international business. However, foreign buyers still make up a negligible part of overall U.S. home sales, with their presence concentrated more in major cities such as New York and Washington as opposed to scattered throughout the country.

Obviously due in large part to the pound and euro’s strength, Europeans led the way among foreign buyers, with a third of all foreign purchases. Asians, Canadians and Mexicans were responsible for about half the remaining sales, with 16 percent of all purchases made by Latin Americans.

Among individual countries, Mexico composed the largest group of buyers overall at 13 percent, with Britain and Canada just behind (12 percent and 11 percent, respectively). India and China rounded out the top five.

Foreigners also bought bigger, with a median purchase price of 9,500 compared to 1,900 for Americans. Buyers from the United Kingdom and China spent the most, with British buyers spending a median of 5,000 and Chinese spending 0,000. Mexicans were the bargain-hunters of the group, spending a median of just 7,300. Indian buyers, meanwhile, paid close to the median average for foreign buyers, spending 2,000.

Interestingly, Canadian buyers were the most likely to buy a property priced over class=”import-text”>2008March. Foreign Frenzy.txt million and were more likely than any other nationality to pay with cash.

Another upbeat aspect of international sales for Washington realtors is how foreigners often buy—with cash. The survey found that 28 percent of international purchases are made with cash, compared to just 8 percent of American purchases. One reason for this is that mortgage-rate deductions enjoyed by Americans are often not available to foreigners through their home country’s tax code.

The survey’s authors added that U.S. housing markets benefit from foreign cash purchases because they lower both the overall risk of mortgage defaults and the risk of a decline in overall market prices.

Letting the Good Times Roll, With a few Bumps Another key survey finding was the reason why many foreigners bought U.S. property—just for fun. Nearly 50 percent bought homes exclusively for use as a vacation property, while 22 percent bought a home primarily as an investment.

“Just as many U.S. residents are looking overseas for retirement and second homes, people in other countries are considering a home in this country,” said NAR President Pat V. Combs.

However, the NAR survey pointed to several American disincentives to foreign buyers. One factor is tough U.S. visa restrictions, which usually prevent stays of more than six months. A third of all realtors called this a “barrier” to foreign purchases, especially foreign retirees, and some U.S. realtors are arguing for a special “retirement visa” to fix the problem and increase the pool of potential foreign buyers.

Another problem realtors reported was reluctance by American lenders to finance mortgages for foreigners due to the lack of a U.S. credit record. Additionally, the age-old problem of the language barrier was also an inhibiting factor, making complicated contracts even more difficult for non-native speakers to understand.

Nevertheless, the NAR survey reported that foreign real estate investors tended to view U.S. property as a “safe haven” for their money and were attracted by U.S. property laws, which are, on average, more liberal than those back home. The United States places few restrictions on foreign real estate purchases and grants generally the same protections afforded to American property owners.

“Washington real estate is a good place to park money,” said Rankin. “They may or may not have some use for the property, but [the exchange rate] is certainly allowing them to spend more and keep our market moving forward.”

Rankin recently hosted visitors from Abu Dhabi who were looking to invest between million and million in the housing market. He also reported several German investors who bought properties in the last several months and said British and Canadians are also active.

Rankin and Godat both agree that such traditionally sought-after areas such as Georgetown, Kalorama and Massachusetts Avenue are still selling quite well. “We don’t know where the market is going, but Northwest Washington is still strong,” Godat said. “People want to buy where it is less risky. Now is not the time to be eccentric.” Rankin and Godat both agree that such traditionally sought-after areas such as Georgetown, Kalorama and Massachusetts Avenue are still selling quite well. “We don’t know where the market is going, but Northwest Washington is still strong,” Godat said. “People want to buy where it is less risky. Now is not the time to be eccentric.”

About the Author

Mark Hilpert is a freelance writer in Alexandria, Va.