Business Beyond the Reef

The U.S. real estate market is attractive and lively – if you are not from the United States. The American media is so full of doom and gloom about housing and foreclosures, that it is ignoring one of the few bright spots: foreign purchases of U.S. real estate, which are helping to keep U.S. home prices higher than they would otherwise be in this soft market. You would think they would get some credit for that, but they have largely passed under the radar.

CreditSesame has published a marvelous graphic that lays out what is happening when it comes to foreign buying of U.S. houses – Modern Land Grab: Where & Why Are Foreigners Buying U.S. Real Estate? Foreign buyers spent $82 billion buying U.S. housing in the year leading up to March 2011.  That supports 7.7% of the total U.S. housing market. 31% of the foreign buyers come from Canada and Mexico, no surprise, and 13% from central and south America. I was surprised to see, given their own housing and other financial troubles, that 24% of the foreign buyers were from Europe. We have a stereotype in some quarters of oil-rich sheiks buying up U.S. properties, but the Middle East accounted for only 3%. Asian buyers led them all with 26%.

Who's moving in?

Florida is the primary target (both Latin Americans and Europeans), followed by California, Texas and Arizona. Illinois, New York and New Jersey follow them. Hawaii is low on the list, though there is continuing interest from Asian buyers. I expect we will see a small surge in foreign buying in the months following this fall’s APEC meetings in Honolulu. (One of my next-door neighbors is a Japanese family that we only see for about ten days a year; makes for a quiet neighborhood.)

Foreign buyers show a strong preference for detached single family homes (61% of their purchases) and surprisingly little interest in commercial real estate. The latter represents only 3% of the total, perhaps reflecting negative opinions of the U.S. recovery.

One big difference between foreign buyers and U.S. home buyers? Foreigners often pay cash. 62% used folding money, while only 36% went to a mortgage broker. So, if you see foreign visitors with large suitcases, make sure and treat them nicely.

Sallie James wants to abolish the Export-Import Bank. Probably not a bad goal. ExIm hasn’t had anything to do with imports in decades and its policies certainly smack of industrial policy (it isn’t known as “Boeing’s bank” for nothing). But there is one role that ExIm can still fill – that of counter-subsidy agency.

James acknowledges that – though her headline writer didn’t catch it. Her piece ended up being called “Time To X Out The Ex-Im Bank“, though that is not precisely her conclusion.

If Congress wants to help U.S. exporters compete with foreign firms backed by official export subsidies, it could accomplish that task with a far smaller footprint than the Ex-Im Bank currently creates. The first step in narrowing the bank’s scope should be to immediately restrict Ex-Im financing to only those cases in which—and only to the extent to which—an American exporter faces verifiable subsidized competition abroad. The next step should be to terminate the bank as soon as possible. Such corporate welfare programs have no rightful place on the U.S. trade policy agenda. In the meantime, negotiations to eliminate export subsidies worldwide should be vigorously pursued …

She advocates eliminating ExIm only when its counter-subsidy role is no longer needed. That is going to take some doing, but she is right that we can start hacking off the other bits of ExIm without delay. The problem is that our competitors have not become enlightened enough to get rid of their export finance subsidies. And, until they do, we are at a disadvantage when trying to compete with officially supported exports from other countries. James asks ExIm to produce evidence of foreign credit subsidies, but – while some stats are available from the OECD – this is not the sort of thing that other governments like to keep us informed about.

How much could you get for this bank?

She asks that ExIm only finance exports for which competing companies verifiably receive support from their governments. That is a pretty tough bar to meet, since our competitors are not likely to notify us of who they are supporting in which competitions. U.S. companies often suspect official interference in favor of their competitors, but proving it and measuring the value of those subsidies during the competition is probably an impossible ask. When I was a U.S. commercial officer, I often worked with American companies that suspected they were up against subsidized competitors – but the extent of the subsidy was unknowable until the competition was over, if then. Often the U.S. firm was approached by a foreign procurement official with gentle advice that they needed to “sweeten” their bid because their competitors were doing so. We rarely knew for certain if that was true or just a negotiating ploy by the foreign buyer.

By all means, cut ExIm back to what has become its essential role of countervailing lender or guarantor – and use it as a negotiating chip to convince others to stop predatory export lending. But don’t expect to achieve that nirvana anytime soon.

Anybody want new jobs in America? Going after new foreign direct investment (FDI) is a dandy way to do it. Attracting FDI is entirely feasible and produces some great, often high-paying employment – as much as 30% more than standard U.S. pay scales. We may poor mouth our economy and there is unending bad news, but we too often ignore how the U.S. market looks to the rest of the world. It looks wonderful! Still the world’s strongest market, suffering a temporary slowdown in growth – the perfect time to enter and get ready to ride the next U.S. boom. We tend to think in straight-line predictions, but nothing stays the same in economics. There is always another boom coming; we just don’t know precisely when. That means the down times are a great time to attract investment. If the next boom has started, it is too late to build a new factory.

Since writing Monday’s post about Commerce’s new portal site for FDI, I have discovered a recent (and blessedly short) report that details the relationship between foreign direct investment and jobs. Here are the major take-aways:

• During the last ten years, majority-owned U.S. affiliates of foreign companies have employed between 5-6 million workers.
• FDI supported 2 million manufacturing jobs, which have been less affected by the sector-wide losses in employment than domestic manufacturing jobs.
• Workers at majority-owned U.S. affiliates of foreign companies receive 30% higher pay than non-FDI supported jobs.
• U.S. FDI totaled $194 billion in 2010, and $1.7 trillion over the last ten years.
FDI flows vary greatly year-to-year and generally follow the U.S. business cycle: FDI hit a low of $64 billion in 2003 and then surged to an historical peak of $328 billion in 2008.
• At present, relatively few countries invest in the United States. In fact, 84% of FDI in the U.S. in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada.

Most of the employment created in the United States by foreign investors is in manufacturing – the jobs we popularly think we are losing to other countries.

FDI fills the jobs we think we are losing.

What can we do to obtain more FDI? The Commerce report suggests four avenues. One, of course, is to go after more investment from the top eight investing countries identified above. They already know the U.S. market and how to operate in it, and the apparently like it. A second approach is to make more effort to attract investment from other developed countries, such as Australia, Sweden, Belgium or Spain. The experience of the top eight gives them a good track record to follow.

It may take more work, but we can go after investors from economies that run a trade surplus with the United States. China, Mexico and the OPEC countries come to mind. Of course, I have to note that some of these (e.g., China) have shown interest in investing in the United States and have not always been welcomed by our political class.

And we can target countries that hold a lot of U.S. liquid assets (read U.S. bonds and dollars) to encourage them to turn those investments into something more concrete. Again, China and Belgium leap to the head of the chart.

One avenue the Commerce report doesn’t mention would be to go after the many and growing sovereign wealth funds around the world. (SWF has a whole different meaning these days.) Many of those are OPEC members, but not all. Singapore, for instance.