Foreign Exchange: The Impacts Of A Stronger U.S. Dollar On International Home Buyers

May 24th, 2015
in econ_news

from Zillow

Foreign buyers of U.S. homes represent a double-edged sword. And as the dollar continues to strengthen against a basket of foreign currencies, that sword will increasingly cut buyers from abroad.

Follow up:

On the one hand, foreign buyers diversify the pool of potential homebuyers, creating additional demand that can be especially helpful in minimizing the effect of localized recessions on housing markets. But if foreigners purchase homes in the U.S. without the intent of moving here full-time, thereby removing these properties from the market, then affordability and inventory can suffer - particularly in very desirable urban areas.

Given these implications, Zillow analyzed how much U.S. homes cost over time in several foreign currencies, as well as how sensitive foreign buying activity is to changes in exchange rates.

According to the National Association of Realtors, foreign buyers spent an estimated $92 billion on homes between March 2013 and March 2014, representing 7 percent of the existing home sales market. When deciding to purchase a home in the U.S., foreign buyers must consider currency exchange rates. When the dollar is strong relative to a foreign buyer's native currency, they face a purchasing headwind relative to U.S. buyers. Conversely, when the dollar is weak relative to their national currency, foreign buyers have an advantage over U.S. buyers (figure 1).

Especially over the past year (February 2014 to February 2015), a stronger U.S. housing market and a stronger U.S. dollar have combined to cause sometimes striking growth in the amount of a given foreign currency needed to purchase the typical U.S. home (figure 2).

For U.S. residents buying a home with American greenbacks, the median home costs 3.9 percent more today than it did a year ago ($178,400 as of March 2015, up from $171,700 last year). The dollar, however, has strengthened in the past year against each of the ten currencies analyzed, making U.S. homes substantially more expensive for foreign buyers from these countries. Russians, for example, can expect the median U.S. home to cost them almost double what it did a year ago (from just under 6 million rubles to more than 11.5 million rubles). While no other foreign buyers face a headwind so extreme, buyers paying with six of the remaining nine currencies can all expect to pay 15 percent more than they did last year, or almost four times the appreciation rate experienced by U.S. residents paying with U.S. dollars.

This leads to the question: How will a stronger dollar impact foreign home buying activity in the U.S.? Intuitively, the group of foreign buyers most sensitive to this strengthening dollar are those not intending to become full-time U.S. residents. In other words, foreign buyers seeking to move to the U.S. permanently may actually benefit from a stronger U.S. dollar - a stronger dollar signals a broadly stronger U.S. economy and likely means more money they can potentially send back home. But foreign buyers purchasing a second home may not experience these benefits and may be more sensitive to shifts in exchange rates (though these drawbacks could be offset by returns on their investment in U.S. real estate, especially compared to potentially riskier investment options at home).

Oh, Canada

Because of this, we analyzed foreign purchases of U.S. homes where the buyer maintained a primary residence abroad [1]. Canadians comprise the largest share of this foreign owner group, so we used our friendly northern neighbors as guinea pigs. Specifically, we tracked Canadian purchases of second homes in the U.S. over time, and compared this number to fluctuations in exchange rates between the Loonie and the greenback (figure 3).

Our analysis shows Canadians purchase more U.S. homes when the Canadian dollar is strong against the U.S. dollar, and vice versa. If the historical relationship between year-over-year changes in the U.S./Canadian exchange rate and Canadian purchases of second residences in the U.S. continue to hold as the U.S. dollar rises against the Canadian dollar, we can expect Canadian purchases of second residences in the U.S. to dry up. The U.S. dollar has strengthened throughout the first quarter, and as a result we expect Canadian purchases of second homes in the U.S. will show declines of 9.6 percent in January from a year prior, 16.4 percent in February and 17.7 percent in March.

By extension, continued strengthening of the dollar against other currencies could also lead to fewer purchases from buyers of other nationalities, paying in other currencies.


About the Author:

Jamie Anderson is a Data Scientist at Zillow.


[1] We identified these purchases though home sales where the purchaser maintained a mailing address in Canada after the sale.

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