America’s surging export of homes
Ben Cole directed me to this interesting story:
The National Association of Realtors released a report Tuesday that said foreign buyers and recent immigrants spent an estimated $153 billion on American properties in the year ending March 2017. That was a 49% increase over the previous year and the highest level since record-keeping began in 2009.
The purchases accounted for 10% of the total value of existing home sales in the U.S. The report did not include new homes.
The breakdown of sales between foreigners and recent immigrants was about 50:50.
[I wish they had data on new homes, as that’s the sort of home that foreigners tend to prefer.]
Of course the sale of homes to immigrants is not an export, but it does have a similar economic impact. However the sale of homes to foreigners does represent a US export, and creates lots of goods jobs for American blue collar workers. (Note that it doesn’t really matter whether they buy new or existing homes; the net effect on the housing market is the same.) So the protectionists should be rejoicing, right?
Actually, just the opposite. The US government does not even count these as exports. Instead they are treated the same as net borrowing. They are considered a part of America’s current account deficit, leading to all sorts of silly hand-wringing about how America is borrowing too much and living beyond our means. In fact, we do borrow too much (due to the tax advantage of doing so), but that has nothing to do with the current account deficit.
I have a solution. Treat international trade the way that we treat trade between American states. Stop collecting records on imports and exports. We don’t have data on the CA deficit of Texas or the CA surplus of Massachusetts, and that lack of data doesn’t seem to cause any problems. So stop doing so for the US as a whole.
You can still collect data on America’s net debt position (good luck with that!), if you wish to.
PS. I have a post on “The German Problem” over at Econlog.
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19. July 2017 at 06:03
“In fact, we do borrow too much (due to the tax advantage of doing so), but that has nothing to do with the current account deficit.”
1) If the borrowing is for the purpose of capital creation why wouldn’t the tax advantage of debt be a welcome offset to the distortions created by taxing income instead of consumption?
2)If it is Uncle Sam doing too much borrowing then there is a link to the current account deficit.
“Stop collecting records on imports and exports.”
How about instead we do better education on what the current deficit means. Here are some questions I wish were discussed more often: Current account deficit means capital account surplus so, does this mean the US does a better job of creating new capital than say Germany? Is the new capital we create increasingly owned by foreign interests? If the answer to this last question is yes then is that a good, bad or neutral outcome, from either an economic or national interest standpoint.
19. July 2017 at 07:03
Professor, far from proving that a trade deficit is nothing to be worried about, and has no real effects, your post shows that transfers of real estate to the citizens of the surplus nations can result from them. That is a pretty real effect.
And while a city like New York in the very powerful USA may not have to worry about losing sovereignty over territory, would that hold for a smaller less powerful nation just the same?
And what about increased demand for prime real estate pushing up prices for local citizens? And foreign ownership reducing supply of it available?
So your proposed solution is to ignore the potential problem by not collecting data on it? That doesn’t seem reasonable to me.
I hope you have a good car trip across the US. Please don’t let my questions distract you if you are driving!
🙂
19. July 2017 at 07:45
Captain, I agree about offsetting the taxes on investment income, but I meant that it distorts the way we finance investment–toward debt and away from equity. But you are right, and the ideal solution is to tax equity more lightly, not debt more heavily.
2. There is a link, but the issue is the government budget deficit, not the CA deficit.
Jerry, Is the transfer of real estate a bigger problem than Japan transferring ownership of its cars to the US? Or the Saudi’s transferring ownership of their oil?
Spain sells lots of vacation homes, I don’t see that they’ve lost any sovereignty.
19. July 2017 at 08:30
Unfortunately, I think this is a weak post.
The foreign demand for housing takes place in the context of restictive property zoning.
Increasingly Americans in key cities face the same problems they face in Sydney Australia. Housing prices rise above what the middle class can afford.
True, the solution to this problem is to eliminate property zoning. But that outcome is unlikely.
Modern-day macroeconomists need to inform the public that they will face housing price appreciation if the US runs large current account trade deficits but maintains domestic property zoning.
Basically a tightly zoned city like Los Angeles, in concert with federal trade policies, is telling middle-class Americans to move out to accommodate wealthy foreigners.
The same article Sumner cites refers to refugees from Vancouver arriving in America having been displaced by wealthy Chinese.
Sumner says selling scarce housing to wealthy foreigners is helping blue-collar workers, but that certainly has not been the case in Los Angeles.
The connection between current account deficits, property zoning and skyrocketing house prices is becoming a recurring feature of the developed world.
19. July 2017 at 08:49
Great post.
You would think that people worried about US buyers borrowing foreign capital to buy “overpriced” homes would be pleased to hear that some of those buyers were foreigners using foreign capital.
19. July 2017 at 08:51
While some homes get bought by foreigners for speculative reasons, there’s plenty bought by immigrants: Do we really think that a large percentage of silicon valley housing is unoccupied? I’d find it very surprising.
This doesn’t mean that rising housing prices are good: changing zoning is obviously better for the US as a whole, and blue collar workers in particular, but we still have to see foreign home purchases and immigration from people that can afford a home, as something that is good for the country.
Interestingly, while it seem that, in general, the executive today sees immigration as a negative, that doesn’t stop the Kushners to try to try to sell rich chinese on innvesting with them to get visas. Interesting times indeed.
19. July 2017 at 09:03
X-M seems useful to understand net savings when it is combined with fiscal position, but is it getting distorted because they are mis-counting the domestic real estate purchses by foreigners?
19. July 2017 at 09:06
I agree. Collecting metrics/data leads to a desire to “tune” or “refine” things to improve the metric. The old saying is “you get what measure”. Government tries to tune too many markets based on metrics that are not key metrics. What is the key metric or currency accounting anyway?
19. July 2017 at 10:49
Benjamin Cole, yes, of course zoning is bad. Ideally you want no (or at least sensible) zoning and land value taxes.
19. July 2017 at 12:59
I saw that too. The secondary market sale of a house does not add to GDP (except for fees, moving expenses, etc). I am not sure what that means for export/imports but, in any event, I would assume that a house purchase by a foreigner would add to foreign investment—-an obvious function of our trade deficit.
I think your characterization of existing home sales as an export is not correct. New homes are another matter of course—-but aren’t they also considered investment rather than exports?
19. July 2017 at 15:27
Apparently Facebook founder Dustin Moskovitz is making millions available for funding better macroeconomic policy. Should apply to him for money for prediction markets. (Assuming he hasn’t gotten in touch with you already.)
http://www.openphilanthropy.org/focus/us-policy/macroeconomic-policy
19. July 2017 at 16:21
I cannot quite put my finger on it, but there is something missing from this post.
I know, how is any of this Trump’s fault?
19. July 2017 at 17:54
Add on:
“Stop collecting records on imports and exports.”–Scott Sumner.
I regret to see an academic, who should embrace knowledge and light, instead suggest we embrace ignorance.
There is a reality afoot in Great Britain, New Zealand, Canada, Australia, and parts of the United States. Perhaps other nations too.
Large inflows of foreign capital into artificially scarce housing markets are exacerbating house price explosions and often squeezing the middle-class out of housing.
The New York Fed released a study concluding with this rule: Nations that run current account deficits will see powerful house price appreciation. This same study was published in the peer-reviewed Journal of Money, Credit & Banking, considered prestigious.
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr541.pdf
http://onlinelibrary.wiley.com/doi/10.1111/jmcb.12202/abstract
The orthodox US macroeconomics profession has paired blind spots:
1. The orthodox macroeconomist does not regard property zoning as a macroeconomic topic, despite the fact that nearly every parcel of land in the U.S. is zoned, and the bulk of bank lending in on property, and housing is large fraction of living costs.
2. It is orthodoxy to praise global trade, even chronic and large trade deficits.
As an aside, there are Nobel Prize-winning economists, such a Joseph Stiglitz, who note globalized economies result in globalized wages. Yet many nations are mired in low-income traps, perhaps due to intractable structural impediments in those nations. That means U.S. workers will compete against workers in low-income traps as economies become globalized.
Nor is productivity the end-all, be-all.
U.S. full time adult male workers make less today than in 1979, despite a doubling of their output per hour in that time frame.
https://fred.stlouisfed.org/series/LES1252881900Q
This does not mean that all global trade is bad, of course.
But it would be an advance for the U.S. macroeconomics profession to ponder trade questions within context, and to introduce the topic of property zoning to the discussion.
Also, really is mercantilism so bad? China is booming, run by state planning, a growth-oriented central bank, and a mercantilist trade policy.
Sumner says China living standards will soon rival those of the US, and anyone who has been to Shanghai thinks they already do.
Tokyo, a city with “loose” property zoning, in a nation that runs trade surpluses, is again rated as the world;s most livable big city, in large part due to low housing costs.
http://en.rocketnews24.com/2017/07/04/tokyo-ranked-as-most-livable-city-in-the-world-in-annual-survey/
Life is better in Tokyo than any large US city (setting aside weather). A result worth pondering.
Declining real wages and a middle-class often boxed out of housing markets—and we want the voting public to embrace globalism?
19. July 2017 at 18:59
Scott,
If you think selling a house sitting on U.S. land to a foreign buyer is the same thing as exporting a car (of comparable market value), would you be OK if the IRS treats the revenue from your Boston house sale the same as a bonus check from Bentley? I mean, in both cases you’re selling something for money, so they’re both “exports” from Scott Sumner, right?
19. July 2017 at 19:01
(For those who don’t know me, I think Trump is completely mixed up on trade and I am a staunch free trader. But Scott’s argument in this post is goofy, in my opinion.)
19. July 2017 at 20:18
[…] Then Scott writes: […]
19. July 2017 at 20:53
BTW not sure if he was defending Scott’s honor or just knocking me off the top of the hill, but Ryan Murphy gets more subtle with my argument.
20. July 2017 at 00:46
I like the critique of the stupid articles by The Economist. It was about f time. If TE was “the best magazine in the world”, the world would be dreadful.
20. July 2017 at 09:53
After the housing collapse, buying a house was a great deal. Now with raising price I expect sales to foreign buyers will drop.
http://freedomnews.today/
21. July 2017 at 16:34
“Jerry, Is the transfer of real estate a bigger problem than Japan transferring ownership of its cars to the US? Or the Saudi’s transferring ownership of their oil?
Spain sells lots of vacation homes, I don’t see that they’ve lost any sovereignty.”
Wait a minute Professor- the way this works is that I ask You questions, not you asking me them. But I am quite flattered and since you have answered many, many of my questions, I will try to answer yours. My answer is Yes- it is a bigger potential problem to give up real estate rather than real production such as cars or oil.
Land is very difficult to produce, even more so than the best automobile is. And oil happens to be obtained from ‘land’ in any event. So far at least, people pretty much have to live and work on ‘land’. Ownership of land implies the ability to exclude all others from using it. Excluding a country’s citizens from the use of that land can very well become a problem, because people have to live and work somewhere.
Owning real estate is different from owning a new car, which does not preclude your ownership of an exact replica usually. There is no exact replica for real estate.
As far as Spain- they gave up a boatload of their sovereignty when they joined the Eurozone. I don’t know, but I would guess that they have agreed to abide by restrictions as to how they regulate sales and tax property held by citizens of other European countries. Plus that whole other issue about giving up their ability to have an independent monetary policy. Spain is not a sovereign country such as the US or Japan is.
25. July 2017 at 16:56
Bill Gross says a recession would “do the economy some good”
https://www.bloomberg.com/news/videos/2017-07-20/gross-recession-would-do-the-economy-some-good-video
26. July 2017 at 06:49
Everyone, Suppose a car is manufactured in December and exported in January. That’s not a part of this year’s GDP. So is it an export? In other words, the distinction between the sale of new homes and the sale of existing homes is silly.
Trade is trade. We sell something of value for something else of value. What’s happening to our capital stock/wealth/etc., is a completely separate question.