With the United States economy outperforming many economies, including the Eurozone Area, the United Kingdom, Latin America, and Canada, the U.S. remains a favorable destination for business, investment, and residence.
The U.S. housing market is one area where Chinese buyers have made significant purchases compared to other foreign buyers. In this article, we’ll look at the performance of the U.S. economy, the housing market, and recent data on Chinese buyers purchasing property in the U.S.
Recent U.S. Economic Performance
The U.S. economy has continued to grow on a sustained although modest pace since the Great Recession of 2008-2009, increasing at an annual average of 2.2 percent since 2010. Strong residential investment spending and personal consumption spending are the main engines sustaining growth.
Personal consumption spending has picked up since 2014, with expenditures up by 4.2 percent compared to the year-ago level in 2016Q2. Meanwhile, residential investment spending averaged 10 percent annually since 2012, although investment spending contracted by 6.1 percent in 2016Q2. In contrast, non-residential investment spending has fallen in the last three quarters[2] given the continued decline in investments in the shale oil industry, with oil prices still in the $50 per barrel range.[3] Exports have also declined since 2014 amid the dollar appreciation of nearly 20 percent against most currencies since 2015.[4] Government consumption and investment spending remains restrained, with spending contracting again in 2016Q2 after increasing in 2015.
Underlying the strong growth in personal consumption and residential spending is the sustained job recovery, a relaxed monetary policy environment marked by low interest rates, and low inflation. As of July 2016, 14.7 million more people are employed compared to the level in February 2010 when the number of employed fell to its lowest level in the wake of the Great Recession. At this level, the economy has more than recovered from nearly 9 million job losses in 2007-2010, generating a net employment gain of 6 million. The unemployment rate has fallen below 5 percent since January 2016, although the decline in the unemployment rate has been accompanied by a lower labor force participation rate. With oil prices still at a slump, prices rose 1 percent in 2016Q2, well below the inflation target of 2 percent. With inflation remaining subdued, monetary policy has remained expansionary.[5] The Federal Operations Market Committee (FOMC) raised the federal funds rate by 25 basis points in December 2015 (to a new target range of 25 to 50 basis points), but have held off making any new increases since then.
Given the current momentum, the Federal Operations Market Committee, which sets the monetary policy for the U.S., expects the economy to grow at 2 percent annually from 2016-2018. The unemployment rate is expected to decline further to 4.6 percent by 2018Q4. The inflation rate is expected to rise to 2 percent target in 2018[6].
Residential Housing Market Trends
The U.S. housing market has grown strongly, supported by solid job growth and a low interest rate environment. Mortgage rates have remained at a historic low, with the contract 30-year conventional mortgage rate at 3.44 percent as of July 2016. As of June 2016, the annual pace of existing homes sold in the U.S. stood at 5.57 million homes. Although this figure is still below the 7 million homes sold in 2005, it represents a sustained recovery since 2008 when the level of existing homes sold dropped to 4.1 million.
Supply has not kept pace with demand, and this imbalance has pushed prices to levels that are now becoming increasingly unaffordable for many homebuyers. One indicator of tightness is how long it would take to exhaust the inventory of existing homes for sale at the current sales pace. Since 2012, the inventory of homes for sale has remained below six months, the rule-of-thumb for a balanced market. Fewer existing homes are being listed and sold on the market, with the turnover rate down to four homes per 100 from about six homes per 100 at the peak of the housing boom. Another indicator is the level of new housing starts compared to the level needed to meet household formation and replacement for housing loss/removal.[7] From 2008Q3 through 2016Q2, there were 6.3 million new households, while housing starts adjusted for obsolescence and loss is at 3.9 million units, resulting in a deficit of 2.4 million homes over this period. This deficit more than depletes the oversupply of 2.3 million units from 2000Q1-2008Q2.[8] The level of new housing starts has been improving, but household formation continues to outpace the construction of new homes, adjusted for obsolescence and loss, by 122,000 units as of 2016Q2.
With demand outpacing supply, home prices have increased strongly. As of June 2016, the median price of all existing homes sold in the United States was $247,700, a level that surpasses the median price of $230,400 in July 2006 before home prices started collapsing. Home prices have increased at a faster pace than income and other consumer goods. Since the 2012Q1, the median price of existing homes sold in the United States has increased by about 50 percent, while the median weekly earnings of full-time wage and salary workers have increased a mere 8 percent. California, Washington, Hawaii, Colorado, Florida, New York, Massachusetts, and the District of Columbia have some of the most expensive metro areas in the United States, based on NAR median prices in 2016Q2,: San Jose-Sunnyvale-Santa Clara, CA ($970,000), San Francisco-Oakland-Freemont ($770,300), Anaheim-Santa Ana ($713,700), and San Diego-Carlsbad-San Marcos ($554,300), Boulder-Colorado ($479,700), New York-Wayne-White Plains ($467,900), Los Angeles, CA ($458,900), Naples-Marco Island ($435,000), and Seattle-Tacoma-Bellevue, WA ($383,100).
With affordability becoming an issue, NAR forecasts a continued but subdued growth in existing home sales, to a level of 5.53 million home sales in 2017. NAR forecasts the median home price for existing homes to be at $238,600 and for new homes at $317,500 by 2017.[9]
Chinese Residential Investment in the United States
Chinese foreign buyers have displaced the Canadians as the major buyers of residential property in the U.S.
In the period April 2015-March 2016, Chinese foreign buyers purchased $27.3 billion worth of residential property, making up 27 percent of the $102 billion purchases of all foreign buyers.[10] California, New York, Texas, Washington, and New Jersey were the major areas of preferred destinations. The median price of a home purchased by Chinese buyers was $542,084, nearly twice the median price of all existing homes in the U.S. of $247,700, an indicator that U.S. residential property remains affordable to the typical Chinese foreign buyer.
[1] Unless attribution is made to the National Association of Realtors®(NAR), the views in this paper are the author’s and may not necessarily reflect the views of NAR.
[2] Non-residential fixed investment growth: -3.3% (2015Q4), -3.4% (2016Q1), -2.2% (2016Q2)
[3] The spot oil price for West Texas Intermediate averaged $47.52 per barrel in January 2015. As of July 2016, the average spot price was $44.69, and the average two-year futures price was $52.26.
[4] Based on the trade-weighted broad index published by the Federal Reserve Board, Table G5, downloaded from Haver Analytics.
[5] In the latest July 2016 announcement, the FOMC stated that “The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.” See https://www.federalreserve.gov/newsevents/press/monetary/20160727a.htm
[6] Latest projections as of June 2016, downloaded from Haver Analytics.
[7]Assumed to equal 0.25% of existing housing stock, based on estimates by Eric Belsky, Rachel Bogardus Drew, and Daniel McCue in ”Projecting the Demand for New Housing Units”, November 2007, http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/w07-7.pdf
[8] Author’s calculations assuming a 0.25% obsolescence/loss/removal rate estimated by Belsky, Drew, and McCue (2007) and U.S. Census Bureau data on housing stock and household formation (Housing Vacancy Survey) and housing starts and building permits downloaded from Haver Analytics.
[9] NAR forecast as of August 2016.
[10] NAR’s survey covers non-resident and resident foreign buyers. Non-resident foreigners are non-U.S. citizens with permanent residences outside the United States. These clients typically purchase property as an investment, for vacations, or other visits of less than six months to the United States. Resident foreigners are non-U.S. citizens who are recent immigrants (in the country less than two years at the time of the transaction) or visa holders residing for more than six months in the United States for professional, educational, or other reasons.
