Despite the world's highest death toll from the COVID-19 pandemic, the American real estate market has held up quite well. The same doesn't necessarily hold true across the Atlantic as major cities like Paris, London, and Frankfurt are flashing some signs of danger.
So should European real estate investors and wealthy individuals start eyeing the American real estate market?
Euro Strength, US Dollar Weakness
Many Europeans might be tempted to take advantage of the recent strength in the Euro and buy American real estate prices that are denominated in U.S. dollars.
While the exchange rate will fluctuate over the near-term, Europeans should take advantage of unexpected and unprecedented momentum in the Euro and weakness in the U.S. dollar. But before exchanging euros to dollars, it is wise to compare foreign currency transfers and services to save the most on otherwise expensive transactions.
Now is a good time for Europeans to exchange their euros ahead of weakness in the U.S. dollar. One expert is predicting the U.S. dollar will fall 36% against the euro over the next few years. The end result would be the strongest Euro seen in more than a decade.
What this means is quite clear: all things remaining equal, a European buyer will see their American real estate asset appreciate by 36% by default of currency fluctuation.
The New Opportunity
The opportunity for foreign investment has always existed for Europeans but was held back by outdated banking technology and high fees. Today, the advancement of financial technology (fintech) and online money transfer services has made it much more cost-effective to transfer large amounts of money to buy real estate.
Several online money transfer services are able to complete an exchange at a cost that is very close to the mid-market exchange rate. Gone are the days of banks charging a default 2.5% fee on the transaction on top of a premium on the exchange rate.
European buyers can also take advantage of a unique feature if they want to lock in a favorable exchange rate today. Perhaps they want to wait for a widely distributed vaccine and feel safe traveling to see their property first-hand before making a purchase.
If this is the case, a forward contract guarantees a European can buy U.S. dollars at a future date at a guaranteed exchange rate. This is the complete opposite of a spot transaction that is settled immediately at the current foreign exchange rate.
American Real Estate Market Is Hot
Why should Europeans take advantage of cheaper currency transfers and invest in the American real estate market? The market is hot and with a few exceptions in several markets, it is showing no signs of slowing down.
Sales of U.S. single-family homes came in at the highest level in more than 13 years in July. The median national cost for a home in July also exceeded the $300,000 mark for the first time ever.
Median prices were the highest on the West coast, up 11.3% year-over-year at $453,800. But Europeans looking to allocate some of their euro in international markets can still find bargains in the South as the median price rose at a slower rate of 9.9% to $268,500.
Europeans Aren't Rushing To Buy... Yet
The process of exchanging euros to U.S. dollars can be completed in a few short days and at a cost that few imagined would be possible even five years ago. Despite this reality, Europeans and other foreigners are not counted as major buyers of American real estate -- at least not yet.
Even prior to the pandemic, foreigners bought 154,000 existing homes in the U.S. for the 12-month period ending in March 2020. This represents a decline of 16% from the prior year and marks the smallest foreign buying activity since 2011.
The largest group of international buyers was Chinese, followed by Canadians, Mexicans, Indians, and Colombians.
Europeans were notably absent from the list, likely due to an unfavorable exchange rate. The euro lost value against the greenback throughout 2019. The euro traded as low as $1.09 and some experts modeled the euro to fall to parity against the dollar.
But much has changed in such a short period of time and Europeans are likely keeping an extra close eye on key American real estate markets for an opportunity that comes once every few decades.
In fact, there will be less foreign competition as China's government is looking to better enforce rules limiting how much money a citizen can take out of the country.
Finally, average Americans worried about foreigners scooping up real estate, and leaving them with fewer choices and more pricey options is simply not based on any facts. Foreigners account for just 4% of existing-home sales and there is no sign it will rise, even if new European buyers merely replace the decline in Chinese buyers.
Conclusion: Real Estate Safer Than Stocks
Europeans looking to allocate part of their wealth to American assets are better off picking real estate over equity. A foreign real estate property can be used to generate an income stream through rental property or listing on a platform like Airbnb.
By comparison, U.S. stock prices rebounded sharply from their COVID-lows in March and some stocks are even trading at all-time highs. If a stock falls 35% and the euro gains 35% in value, the investor will break even.
But a 35% plunge in real estate prices is unlikely and even if this happens, the investment can still prove to be profitable from a steady rental income stream over many years.
