Mortgage Market Update

Foreign real estate investors are spooked, and California is paying the price The undeclared recession is making its rounds and foreign real estate investment in California is not exempt. Since the latter half of 2021, the U.S. dollar has dominated other financial markets. A strong dollar offers a better exchange rate for the U.S., which sounds good for U.S. tourists visiting other countries. However, on an economic scale, it causes trouble for states like California — a major player in the global economy, as noted in the New York Times. Globally, commodity prices fall when the dollar appreciates relative to other currencies, according to Brookings Institution. In other words, when the U.S. goes high, other global economies go low. The negative exchange rate for investors from other countries causes an immediate reduction in purchasing power. Much like 2022’s mortgage interest rate hikes have caused buyer purchasing power to plummet, international buyers reliant on exchange rates are now paying more for the same-priced home. The result is buyers of all types now are unwilling — or unable — to pay the same high prices as earlier this year. California home prices have already begun to fall back due to spiking mortgage interest rates and decreased buyer willingness to jump into a spiraling market. On top of these market pressures, regions and industries which rely heavily on foreign investment are experiencing declining demand, too. The ghost of Chinese ownership Of the many international buyers who currently own California property, the greatest number of investors are from China. Consider a buyer from China who purchased a home in California in January 2021. At the time, the Chinese Yuan Renminbi (¥) was trading at 6.48 Yuan per one U.S. dollar. The purchase price was $1,000,000, equivalent to ¥6,480,000. In October 2022, the Yuan is trading at ¥7.22 per $1. In other words, the U.S. dollar has become significantly more expensive to purchase using the Chinese Yuan. However, the buyer who purchased in January 2021 and sells today has essentially seen their investment grow from ¥6,480,000 to ¥7,220,000. This is an increase of ¥740,000 or $102,493 due to the strengthening dollar alone. In other words, a Chinese investor is significantly more likely to try to sell in this higher exchange rate environment rather than hold onto their investment, especially with today’s declining prices — and is most unlikely to buy under these oppressive exchange rate conditions. In 2021, Chinese investment began to slow both here and abroad, and the decline doesn’t seem to be stopping. Instead, China and others are pulling back from California assets in hopes of gaining liquidity. In doing so, international homebuyers provide themselves a cushion as they wait out negative exchange rates. This allows international buyers to recover from the loss of the strong dollar as they prepare to compete for California properties again. International buyers will eventually return around 2025-2026 along with other investors. In the meantime, this will just be one of the many blows to real estate for the next two-to-three years.