The Global Economy and the U.S. Real Estate Market

Since America is not immune to the impact of global economic and political trends, it may not be the case that the current rosy growth projections will ultimately be realized.
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The collapse of the price of oil, turmoil in the global economy, and ongoing upheaval in the Middle East are sending mixed signals for what lies ahead in for the U.S. economy, and by extension, the real estate market, even though the U.S. is one of the few countries to enjoy a genuinely optimistic outlook for 2015. Since America is not immune to the impact of global economic and political trends, it may not be the case that the current rosy growth projections will ultimately be realized. When looking back on 2015 a year from now, those projections may end up looking foolish.

While a variety of economists are anticipating growth in excess of 3% for the U.S. next year, consider the headwinds facing the U.S. economy. As much of the rest of the world grows at an anemic pace, American exporters will continue to feel the pinch. While American consumers rejoice at the declining price of gasoline, companies in the oil space are laying off workers, and oil producing countries will suffer badly this year - possibly for several years. And as economies decline and uncertainty continues to be the rule in global politics, it is entirely possible that social unrest will become more prevalent in more places throughout the world. All this will have a knock on effect in America, including its ability to attract foreign direct investment (FDI), which is an important component of our ability to grow.

According to the Organization for International Investment (OII), America's share of FDI dropped from 37% in 2000 to just 19% in 2013, the result of increased global competition and the rise of emerging economies. The U.S. has been losing ground at an accelerated pace for more than a decade. Even with its recovery well under way, the U.S. attracted 44% less FDI in 2012 than it did in 2008. This is also important, because according to the OII, 8 of the top 10 countries contributing to U.S. FDI are European countries, most of which remain in a depressed economic state. Japan, the top contributor to U.S. FDI, is also enduring yet another recession.

According to, 40% of all foreign real estate buyers in the U.S. come from Europe and Latin America, with about a third coming from Asia, resulting in great geographical disparity in terms of where those buyers actually buy. For example, 74% of foreign buyers of real estate in California come from Asia, while 59% of such buyers in Texas come (not surprisingly) from Latin America. So the relative health of entire regions of the world can have a profound impact on the health of local real estate markets.

That's why the idea of generalizing about trends on this subject is not justifiable. California may be doing great vis-à-vis real estate, while Texas or Florida may be doing poorly, and not because the state economies may be under or over performing, but because foreign buyers may end up positively or negatively influencing local real estate markets, depending on whether those buyers' own countries economies are doing well or not.

It has just been announced that China narrowly missed its growth target of 7.5% last year, making it the slowest year of growth in a quarter century. As the world's second largest economy, and the engine of global growth, the implications are not good. As if evidence of the link between real estate and economic health were needed, much of the reason for the poor Chinese performance was reduced property prices. While some would argue that this is a good thing - meaning China's real estate market may come down to earth gradually, rather than in an abrupt fashion - the residual impact is likely to be substantial, not only in China, but around the world, as more and more countries have tied their economic fortunes to China.

The U.S. real estate market faces some other headwinds as well. According to the National Association of Realtors, first time home buyers are at their lowest level since 1987. While the growth in jobs is encouraging, it has not been good enough for long enough to turn the market around. It is increasingly difficult for home buyers to become qualified for mortgage loans. While mortgage rates are at historic lows, they are creeping up, which will also gradually price home buyers out of the market. And some 15% of homes with a mortgage remain worth less than the amount of their mortgages.

So, there are plenty of challenges from international and domestic sources that will continue to influence the U.S. housing market. Anyone who thinks the plethora of forces emanating from abroad will not have an impact on real estate in this country is simply wrong. While the range and degree of challenges is not as severe as it was 5 years ago, it may still take another 5-10 years before the market returns to more consistent and conventional pattern. It certainly looks as though the U.S. real estate market will see at least as many headwinds this year as it did last year - and quite possibly more.

*Daniel Wagner is a realtor with Berkshire Hathaway Home Services in Ridgefield, Connecticut.

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