In spite of a slowdown during the last half of 2006, the U.S. real estate market remains the envy of most nations in the world. The homeownership rate in the United State is at a record level. More than 72 million households in the country own their own homes.

Housing activity – while off its peak levels – is still healthy, with existing home sales likely to post more than 6.4 million units for 2006. Commercial real estate, after underperforming in the years after the 2001 recession, has returned to health. Vacancy rates are declining, helping to push up asking rents in most of the commercial sectors. This has attracted more investment in commercial properties, and returns from investment in commercial properties have also been in positive territory.

One factor helping to support the U.S. real estate market and industry is the role of foreign investment. The “globalization” of the economy extends to real estate. Foreign governments, international financial institutions, foreign companies, foreign pension and equity funds, and foreign individuals are all taking note of the performance of U.S. real estate, and see opportunities to take advantage of healthy returns on their investments. U.S. real estate provides a safe haven for many foreign investors.

NAR Research recently released a study on the trends in and impact of foreign investment in the U.S. economy with particular attention to U.S. residential and commercial real estate markets. The report, Foreign Investment in U.S. Real Estate: Current Trends and Historical Perspective looks at the level of foreign investment in real estate companies through 2005 along with a breakdown of the major players – countries – with significant holdings in the U.S. While information on the number of foreign home buyers is not available, the report does analyze trends in foreign visitors to each state which can suggest the impact on local real estate markets. Below we present some highlights of this report.

What Attracts Foreign Investors to U.S. Real Estate?
Foreign investors are attracted to the U.S. market for various reasons, not the least of which is that foreign participation in U.S. real estate is relatively free and open. There are few barriers to foreign individuals or entities investing in U.S. real estate markets. And U.S. markets welcome them. Foreign investment in U.S. real estate companies—either directly or through ownership of company stock -- allows those companies to expand, creating new jobs and expanding services for real estate consumers. In addition, foreign capital flows into U.S. securities contribute to the health of our nation’s economy by putting downward pressure on long-term interest rates. Investment from other countries helps to stabilize U.S. interest rates and, thus, helps to keep mortgage interest rates low, spurring business investment in commercial properties and enabling consumers to become homeowners.

Foreign Investment in the U.S.
Foreign investment in all U.S. holdings increased 8.5 percent from 2004 to 2005. In fact, in 2005 the level of foreign direct investment rose to a record $1.87 trillion. The amount of foreign purchases of stock in U.S. real estate related companies also rose – for a second consecutive year – to $41 billion in 2005, a 5.2 percent increase from 2004. Foreign direct investment in U.S. real estate accounts for 2.5 percent of total foreign investment in U.S. markets. Germany and Latin America accounted for the major share – 13 percent -- of foreign direct investment in U.S. real estate.

Impact of Foreign Visitors to the U.S.
Visitors from foreign countries to the U.S. can have significant influence on local real estate markets. Aside from tourists and students, many foreign visitors come to the U.S. to work for foreign companies that have operations in the U.S. In California alone in 2004, more than 34,000 foreigners arrived as traders or investors, and more than 37,000 as intra-company transferees. Those workers require housing. A steady flow of foreign visitors helps to support housing demand in local markets.

Impact of Foreign Funds on U.S. Real Estate Market
The flow of foreign funds into the U.S. securities market helps put significant downward pressure on long-term interest rates. NAR estimates that in the absence of foreign capital, long-term interest rates would be four percentage points higher than current levels. Such an increase would result in a four-percentage point rise in the 30-year mortgage rate, thus depressing home sales activity and, therefore, real estate industry revenue.

Impact on the U.S. Economy
Foreign investment helps create jobs through either direct investment in a business by providing funding for domestic businesses to reinvest or spend money on expansion. Those reinvestments and expansion spur job creation, which in turn fuels demand for commercial real estate. In 2005, $785 billion of foreign funds were invested in the U.S. Nearly $12.7 trillion were held by foreign entities in the same year.

The Foreign-Born
Foreign-born purchases of residential real estate are likely to offset any downturn in demand from the smaller population cohorts following the baby-boom generation. The share of foreign-born homebuyers is expected to rise steadily, based on the significant increase in immigration in recent years.

Looking Ahead
Prospects for an increase in foreign direct investment in U.S. real estate look bright. U.S. economic growth, while not in record-territory, looks healthy through 2006 and beyond. Such a stable environment augurs well for the U.S. as a growth opportunity for foreign investors. About two million net new jobs are expected to have been created by the end of 2006. Demand for office and industrial commercial space looks positive as jobs in the service and financial services sector are expected to increase and from the rising demand for warehousing needs associated with sharp increases in imports and exports. And with consumer spending still increasing and immigration levels healthy, demand for retail and multifamily properties should continue to be robust.


*The report was released at NAR’s annual conference in November.
Read the full report