A White Paper for the Research Division of the NATIONAL ASSOCIATION OF REALTORS®

By Frederick E. Flick, Ph.D.

Real Estate Economics Consultant and

Lawrence Yun, Ph.D.

National Association of REALTORS®

Preface

Any recent media report about labor markets, the financial sector, or trade is likely to include at least a mention about the “globalization” of the worlds' economies. That globalization applies to housing as well.

NAR Research regularly reports on the level of foreign investment in U.S. real estate. Recently the Association has begun a series of surveys to determine the level of home-buying activity in the U.S. by non-U.S citizens or part-time U.S. residents (non-immigrants) whose primary home is in another country. Gathering data for these reports is relatively easy – there are public records of foreign companies purchasing stock in U.S. real estate companies, and NAR has developed the capability to survey its members relatively quickly about their experience with home buyers from other countries purchasing a U.S. property. With the U.S. dollar valued lower against many foreign (particularly European) currencies, the trend of foreign purchases of and investment in U.S. real estate is a trend that will probably continue for quite a while.

But the trend of Americans purchasing foreign real estate is not as easily discerned. The data is difficult to gather. Most REALTORS® do not broker properties located in another country. Other national (non-U.S.) real estate professional organizations – many which of which have cooperative agreements with NAR – do not necessarily survey their members about their business with American buyers of homes outside the U.S. While the U.S. Census Bureau, in its regularly scheduled surveys of all households residing in the U.S., does ask whether or not the household lives in a rented or owned domicile, it does not inquire whether or not the household owns a foreign-based property. Additionally, concerns about the number of and locations where Americans have purchased a foreign-based home raises issues of privacy and security.

To begin to answer the question – what is the level of foreign-home buying activity by

U.S. citizens and permanent residents – NAR commissioned a study to look at indirect measurements of those Americans moving, working and/or living abroad and whether or not they purchased a residential property in foreign countries. This report is just the start of a process to measure that level of home buying by Americans abroad. Although it does not provide direct, clean statistics on such activity, we hope this report does provide some approximations on the prevalence and direction of activity (increasing or decreasing) of home-buying by Americans in various foreign locations.

Introduction

Donald Trump is building condos to sell to Americans in Baja California (Mexico). In that same country, the Lake Chapala area near Guadalajara has been a popular retirement area for Americans for decades. Recently, condos in Costa Rica have become popular, as have as villas in Tuscany and the south of France. Even properties in the Balkans have become short-stay vacation residences for many Americans. Exclusive real estate property listing magazines such as Sotheby’s International and real estate ads in The Wall Street Journal promote properties in places from Morocco to Patagonia. All this is evidence that for many, owning a home abroad is as much a part of the “American Dream” as is owning a home in the U.S.

Given the apparent rise in international real estate transactions by U.S. citizens, the National Association of REALTORS® commissioned an investigation to determine what if any measures exist on the number of residential homes in foreign countries purchased by Americans.

The project also specified that several possible indicators of trends in this activity should be examined. These included U.S. State Department data on the numbers of Americans living abroad, Social Security Administration data on the number of American retirees collecting Social Security benefits abroad, and Internal Revenue Service statistics on the number of tax returns claiming the housing exclusion based on foreign-earned income.

This white paper looks at those indicators and analyses and discusses the issues and challenges involved in measuring American foreign-home buying trends. As part of this study, several experts on publicly available housing data were consulted. The organizations they represented included the New York Federal Reserve Bank Research Department, the Federal Reserve Board of Governors International Flow of Funds Section, the U.S. Department of State Consular Affairs Bureau, the Statistics of Income Branch of the Internal Revenue Service, and the Social Security Administration’s Policy Statistics Branch.^*

Finally, a Google search of private property listing sites on the Web suggested that while there are many online sources of information on buying properties in various foreign countries, neither they nor the three sources cited above provide any statistics measuring the aggregate numbers of properties owned by Americans (stock currently owned), or the flow of homes (sales volume trends) sold to Americans over a recent period.

Conclusions from the Research

It will always be difficult to accurately measure the stock or flow of foreign homes owned/purchased by Americans. This is because individuals can purchase property abroad and they do not necessarily file forms with the IRS or any government entity regarding these purchases. At this point, it is not known whether any foreign countries collect data on American real estate ownership or whether they have data processing systems that can produce any estimates. But even though there are no available official figures for the number of homes or vacation properties Americans have purchased in foreign countries, we can make some estimates based on an examination of the data from the State Department, the Social Security Administration and the IRS.

* The Bureau of the Census was also asked whether it had any measures of foreign-home ownership by Americans; unfortunately, the Bureau does not currently collect such information.

The most accurate potential source of information about American home purchases abroad on a country-by-country basis is the IRS Foreign Earned Income schedule, Form 2555, that is filed with the Form 1040. Form 2555 includes a line asking the filer whether he/she purchased a home abroad. Data from the U.S. State Department is also worth examining, as the department maintains records on the number of Americans living and working (even part-time) abroad. The Social Security Administration's (SSA) record-keeping includes information about the number of beneficiaries who receive SSA checks and where those checks are mailed.

A set of simulated estimates of potential housing purchases were constructed from the three data sources using known American rates of homeownership, household sizes, and a Census Bureau staffer’s estimate of the number of American retired workers living overseas. The figures varied widely by data set and essentially cover distinct segments of the market of possible American foreign property buyers. (Note: for purposes of this study, “Americans” includes U.S. citizens as well as those classified as “permanent” U.S. residents who may not be citizens.)

 Americans living abroad. An evaluation of the data series that were analyzed suggests that there were possibly as many as 500,000 to 600,000 foreign properties owned by Americans living abroad.

 American retirees living abroad. Analysis of retired American workers living abroad suggests their ownership rate is likely to be in the range of 54,000 to 63,000 properties.

 U.S. workers working abroad. Examination of Americans working abroad and filing Form 2555, suggests that their foreign-home ownership rates are probably in the range of 80,000 to 100,000.

Comparison of the estimates from the retirees (based on Social Security data) and those working abroad with the State Department base, suggests that domestic demand for vacation and short-stay foreign properties may be in the range of 370,000 to 440,000 units.

Overall, the latter two segments suggest approximately 150,000 foreign properties owned by retirees and Americans working in a foreign country.

One segment not explicitly analyzed was the number of Americans residing in the U.S. who own properties in North American, Caribbean or Central American countries. This is likely a substantial number given the easy access to countries in these regions through air transport or even automobile. These figures could substantially exceed the estimates for the last two segments.^*

* Unfortunately, even the Census Bureau cannot answer any questions regarding foreign properties owned by U.S. residents. There is currently no question on the Census Form addressing this. And while the National Association of REALTORS® conducts a regular survey on vacation/second-home purchasers, its study focuses on domestically owned properties.

Americans Living Abroad: A Baseline Measure

As part of the initial investigation, a general search of the Internet was undertaken seeking information on Americans buying homes abroad. This work uncovered a set of estimates of the number of Americans living abroad by country. A Geneva, Switzerland-based organization for Americans abroad provided a 1999 list, sourcing the “U.S. State Department Website.”¹ This file contains the most recently published figures on the number of Americans overseas and provides a baseline; however, no further data exists to determine a trend. A search of the State Department website turned up no similar information. Conversations with the State Department's Public Information Counselor Affairs section revealed that after the events of September 11, 2001, these statistics were no longer compiled in a public database for security reasons.

The 1999 figures are estimates and enumerate, by country, the number of American citizens living or working in foreign countries, including U.S. government employees and military personnel stationed abroad. It is important to note that these figures do not differentiate among these three groups. It is most likely that the demand for owner housing abroad is strongest for those who are private citizens, as they usually have to provide their own housing. But, there are Americans whose primary residence is in the U.S. and who spend time abroad working. They are more likely to have foreign residences as part-time or vacation properties. It is also likely that the State Department data do not reflect many of these individuals. Nevertheless, the State Department figures provide some base for honing in on those countries where Americans have been and may be likely to purchase homes.

Table 1 shows that just over one-half of Americans living abroad in 1999 were located in the Americas – Canada, Mexico, Central America, South America, and the Caribbean islands. Europe was next with 28%, followed by Asia/Pacific at 12%.

Table 1. American Citizens Living Abroad By Major Region: 1999

Region	U.S. Citizens in Country	% of All U.S. Living Abroad
Americas Europe Asia/Pacific* Middle East Africa Total World	2,113,295 1,169,438 517,800 295,645 67,632 4,163,810	50.8% 28.1% 12.4% 7.1% 1.6% 100.0%

*includes Australia as well as Oceania Source: U.S. State Department, July 1999

Americans seem to like to stay close to home. Table 2 lists the estimates for the top 10 countries, the cumulative total and percentages. In 1999, Mexico accounted for about 25% of all Americans living abroad, with Canada a distant second at 17%. Note that the numbers and percentages drop off dramatically after Mexico and Canada. The United Kingdom (England, Scotland, Wales, and Northern Ireland) is ranked third at just over 5%, with Germany accounting for about the same percentage of American residents. Israel and Italy comprise 4% each. Finally, the Philippines, Australia, France, and Spain each claim about 100,000 residing Americans with percentages ranging from 2% to 2.5%. In the rest of the world, the percentages drop to 1% or less for other countries.

Table 2. American Citizens Living Abroad

Top Countries: 1999
U.S. Citizens		% of All U.S.
Country/Region	in Country	Living Abroad
Mexico	1,036,300	24.9%
Canada	687,700	16.5%
United Kingdom	224,000	5.4%
Germany	210,880	5.1%
Israel	184,195	4.4%
Italy	168,967	4.1%
Philippines	105,000	2.5%
Australia	102,800	2.5%
France	101,750	2.4%
Spain	94,513	2.3%
Total of Top 10	2,916,105	70.0%

Chart 1 visually depicts the predominance of Mexico and Canada in terms of American foreign living locations.

Chart 1. Top Ten Foreign Countries (percentage distribution of Americans living abroad)

In the Caribbean, Central and South American areas, the Dominican Republic accounted for 2% of Americans living abroad, followed by Brazil at 1%. Colombia and Argentina each accounted for 0.7%, Venezuela 0.6%, Costa Rica and Panama each one-half of a percent, and Peru only registered one-third of a percent. Within Europe, Greece claimed 1.7% of Americans living abroad, followed by Ireland at 1.1%.

In Asia, ranking below the Philippines and Australia, was Japan with 1.7%, followed by China at 1.6% and Taiwan with 0.9%. Israel accounted for 4.4% of Americans living abroad, but other countries in the Middle East reported lower percentages: Saudi Arabia less than 1%, the United Arab Emirates and Yemen at 0.4%, and Lebanon, Jordan, Kuwait, and Turkey at 0.2%. South Africa led the African region with almost 11,500 Americans, accounting for 0.3%, with Egypt close at just under 11,000, about 0.3%. Nigeria followed at 0.2%, but the remaining African nations were at most about 0.1% of all Americans abroad. (More detail can be found in the Appendix tables at the end of this report.)

Analysis of Social Security Administration Beneficiaries

Most Americans anticipate receiving Social Security retirement benefits when they retire in their 60s or 70s. It is also the case that legal aliens who pay Social Security taxes are allowed to collect Social Security benefits when they retire. Table 3 shows the top 25 countries where these benefit checks are sent. The most recent data available is for December 2005. The data are taken from the Annual Statistical Supplement of the Social Security Bulletin which reports the total number of beneficiaries, retired worker beneficiaries, as well as the number receiving disability benefits, widowers’ benefits, and child beneficiaries.² We have reproduced the data for all beneficiaries and retired worker categories only. Not surprisingly, retirees are the largest group among all beneficiaries and the benefits largely accrue to that group.

Table 3. Top 25 Countries by Number of Social Security Benefit Recipients Living/Working Abroad- December 2005

All		Retired	Pct. All	Total	Pct. Retired	Total
Beneficiaries		Workers	Beneficiaries	Percent	Workers	Percent
All countries	441,693	263,387	100.0%		100.0%
Canada	100,747	59,022	22.8%	22.8%	22.4%	22.4%
Mexico	47,384	22,973	10.7%	33.5%	8.7%	31.1%
Italy	33,865	20,010	7.7%	41.2%	7.6%	38.7%
Germany	33,448	20,837	7.6%	48.8%	7.9%	46.6%
U.K.	30,210	18,884	6.8%	55.6%	7.2%	53.8%
Greece	22,640	13,416	5.1%	60.7%	5.1%	58.9%
Philippines	19,309	9,165	4.4%	65.1%	3.5%	62.4%
Portugal	12,050	8,243	2.7%	67.8%	3.1%	65.5%
France	10,661	6,930	2.4%	70.3%	2.6%	68.1%
Spain	9,875	5,817	2.2%	72.5%	2.2%	70.4%
Israel	8,571	4,879	1.9%	74.4%	1.9%	72.2%
Ireland	8,518	5,738	1.9%	76.4%	2.2%	74.4%
Japan	7,972	3,980	1.8%	78.2%	1.5%	75.9%
Australia	6,656	4,310	1.5%	79.7%	1.6%	77.5%
Dom. Repub.	6,503	4,270	1.5%	81.1%	1.6%	79.2%
Switzerland	6,435	4,367	1.5%	82.6%	1.7%	80.8%
Norway	6,432	3,820	1.5%	84.1%	1.5%	82.3%
Poland	5,268	3,607	1.2%	85.3%	1.4%	83.6%
Netherlands	4,407	2,798	1.0%	86.2%	1.1%	84.7%
Costa Rica	3,540	2,418	0.8%	87.0%	0.9%	85.6%
Sweden	3,464	2,287	0.8%	87.8%	0.9%	86.5%
Colombia	3,301	2,427	0.7%	88.6%	0.9%	87.4%
Argentina	3,221	2,052	0.7%	89.3%	0.8%	88.2%
Jamaica	2,724	2,182	0.6%	89.9%	0.8%	89.0%
Austria	2,452	1,559	0.6%	90.5%	0.6%	89.6%

Source:Table 5.J11, Annual Statistical Supplement 2006, Social Security Bulletin, 2006.

Examining the 2005 data, we find that the top 25 countries, by all beneficiaries and retired workers categories, account for 90% of all recipients in those groups. Canada and Mexico account for almost one-third of all beneficiaries living abroad. The percentage rises to 54% when including Italy, Germany, and the U.K. Finally, the Philippines, Portugal, France and Spain push the cumulative percentage total to around 70%; and, Israel and Ireland bring it to 75%.

Similar to the results from the State Department data in which the top five countries account for slightly more than half of all Americans living abroad, the the top five countries comprise about 50% of all Social Security beneficiaries, and another seven countries raises the cumulative to 75%. Canada and Mexico are the top countries in terms of Social Security beneficiaries, followed by Italy, Germany, and the U.K. (Interestingly, the top 5 countries in terms of residence also included Mexico, Canada, the U.K. and Germany.)

Charts 2 through 4 graphically depict the trends for all beneficiaries and retired workers, in aggregates and on a country-by-country basis. For the most part the relationships are linear with a slight positive slope, reflecting gradual increases. There have not been any dramatic changes in the figures over the period 1999-2005. Canada and Mexico are by far, the top locations. However, these numbers and locations could show significant change in a few years as the number of baby-boomers – who are affluent and have traveled more extensively – retire.

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Over the past decade, private ownership of housing has dramatically increased around the world, with many countries experiencing ownership and building booms. Housing in many of western European countries is expensive, relative to that in other foreign countries and to the

U.S. national median home price. But housing in a number of countries on this list are quite affordable when compared to the price of homes in large U.S. metropolitan areas. A retiree who has worked for years in the U.S. and owned property could easily afford to relocate to Mexico, Canada, and southern and eastern Europe.

Analysis of Internal Revenue Service Data

Those Americans with jobs located abroad and who are residing overseas do not have to pay taxes on foreign earned income; however, they are required to file a 1040 return. Along with the 1040, they file a Form 2555, Foreign Earned Income.

Under U.S. tax law, citizens and resident aliens living and working abroad can exclude a certain amount of foreign earned income and foreign housing costs exceeding those provided by an employer. For those who are self-employed, a housing deduction can be taken above a certain base housing cost. An individual has to have a foreign tax home, which usually means the taxpayer has established and maintained residence in a foreign country for an uninterrupted period that included an entire taxable year.

Foreign-earned income includes the standard components (wages and salaries, consulting fees, etc.) as well as employer-provided allowances, overseas compensation differentials, quarters, education allowances, and the full rental value of property or facilities provided by an employer. Allowable housing expenses for the most part include rent, utilities, property insurance, lease fees, and household repairs. However, they do not include interest and taxes, the cost of buying or improving a home/property, mortgage principal payments, or depreciation of the home. These limitations on deductions do not favor home purchasing.

Among various questions about the employer and foreign residency period, Form 2555 contains a blank for the name of the country and a check-box to indicate whether the housing deduction is related to ‘purchased house’, rented property, or employer-provided housing. There is also a question asking whether the taxpayer maintained a home in the U.S. while living abroad.

The Internal Revenue Service publishes analyses of its tax return databases in the Statistics of Income Bulletin ^3,4,5 and provides downloadable summary data for many of its tax schedules. A major limitation of this data is that these results are available only at five-year intervals. This is because the databases are very complicated and database creation takes years to complete before analysts can start ‘mining’ the results. The available databases cover only the four tax years: 1987, 1991, 1996, and 2001. The 2006 tax year file data will be available in 2009.

Obviously, the IRS data should be further investigated as a future source of information about Americans who have purchased homes or own homes abroad. A request to the Internal Revenue Service for a special detailed cross-tabulation of data on Form 2555 would be needed in order to perform specific technical analysis. A detailed tabulation frequency by country for those filers who checked ‘purchased house’ could provide some useful information. Unfortunately, this information is not publicly reported and would have to be obtained through special computer tabulations by the IRS. This requires a Freedom of Information Request and would take several months or perhaps longer to process.

This specially tabulated data would provide estimates of the flow of housing purchases for Americans who are earning income abroad through working; however, it would not cover home purchases by Americans who work and reside in the U.S. and have purchased a foreign property; or, retirees who purchased a home overseas and still live in the U.S. Another limitation of the data gleaned from Form 2555 is that it only indicates that a taxpayer was living overseas for a tax year and lives in a purchased home. But that home could have been purchased earlier, so such a tabulation would measure only a year's worth of information that does not tell us much about either the stock of houses purchased over a period of time or the flow of purchases in a particular year.

Form 2555 Country-by-Country Data

We can, however, examine the aggregate use of the deductions for the latest year data is available. In tax year 2001 there were 130,255,237 individual tax returns filed with the IRS. Of these, 294,763 filers – 0.2% of all returns --submitted a Form 2555 with their 1040. Table 4 presents data from the 2001 Form 2555. The table shows, for the top 28 countries, the number of returns filed and average amounts of the foreign income earned. The countries are ranked by percentage of returns with Forms 2555 filed. [Note, the IRS does not provide the number of returns filed claiming the income exclusion, housing exclusion, or housing deduction on a country-by-country basis. This is likely due to sample size considerations on an individual country basis.]

Europe and Asia accounted for almost 70% of the Form 2555 filings. The percentage increases to 80% when one includes North America. Foreign income earned was about $100,000 in Europe and Asia.

On an individual country basis, most Americans earning foreign income were working in the U.K. (11.3% of all filers), followed by Canada (8.4%), Japan (8.3%), with Germany (7.9%) close behind. Hong Kong is 5^th on the Form 2555 list (accounting for 4%), most likely for international business reasons. France (3%), Israel (2.9%), and Australia (2.7%) are also well ranked, and Saudi Arabia-based filers accounted for 2.5% of all Form 2555 filers. All of these countries taken together pushed the cumulative percentage figure to 51.4%. Switzerland, Taiwan, and ‘other Asian’ contributed 2.4%. But unlike the rankings based on the State Department and Social Security data, Mexico was in 13^th place (at 1.9%), Italy (1.5%) was ranked 20^th with the Philippines and Spain only 1%. Obviously, the rankings are following the top international business locations. Three of the top five top countries on this ranked list – the U.K., Canada and Germany – are similar to the top five in the previous analysis.

In 2001, of the 294,763 filers submitting foreign-earned income, 292,615 took the foreign earned income exclusion; the average foreign-earned income exclusion was $48,097. However, only 64,349 taxpayers filed for the housing exclusion which averaged $29,765 per filer and totaled $1.915 billion for all who took the exclusion. For the housing deduction only 4,186 filed (for a total of $92.1 million) with the average amount $21,996. The end result was that approximately 55% of those who claimed the foreign-earned income and housing exclusion, or housing deduction, or any foreign tax credit (Form 1116) had no U.S. income tax liability.

Table 4: Number of 2001 Form 2555 Filers by Top 31 Countries and Average Foreign Earned Income

Number		Percent	Cum.	Avg. For.
Region/Countries	of Returns	of All	Percent	Earn. Inc.($)
All Areas	294,763	100.0%		$93,024
Europe	105,590	35.8%	35.8%	$100,488
Asia	98,037	33.3%	69.1%	$101,815
North America	30,493	10.3%	79.4%	$77,350
South America	15,307	5.2%	84.6%	$80,224
Oceania	11,521	3.9%	88.5%	$64,616
Africa	10,661	3.6%	92.1%	$63,731
Caribbean	5,525	1.9%	94.0%	$86,203
United Kingdom	33,344	11.3%	11.3%	$165,449
Canada	24,790	8.4%	19.7%	$72,023
Japan	24,578	8.3%	28.1%	$93,141
Germany	23,432	7.9%	36.0%	$52,461
Hong Kong	12,476	4.2%	40.2%	$139,000
France	8,975	3.0%	43.3%	$82,714
Israel	8,491	2.9%	46.2%	$61,039
Australia	7,864	2.7%	48.8%	$75,046
Saudi Arabia	7,449	2.5%	51.4%	$112,479
Other Asian	6,977	2.4%	53.7%	$80,208
Taiwan	6,840	2.3%	56.1%	$72,236
Switzerland	6,370	2.2%	58.2%	$99,780
Mexico	5,571	1.9%	60.1%	$102,856
China	5,103	1.7%	61.8%	$140,248
South Korea	4,885	1.7%	63.5%	$92,637
Singapore	4,624	1.6%	65.1%	$185,018
Brazil	4,466	1.5%	66.6%	$88,717
Italy	4,301	1.5%	68.0%	$67,730
Unit. Arab Emir.	4,100	1.4%	69.4%	$90,334
Netherlands	3,926	1.3%	70.8%	$90,057
Thailand	3,368	1.1%	71.9%	$110,463
Philippines	3,266	1.1%	73.0%	$56,425
Belgium	3,121	1.1%	74.1%	$94,674
Spain	2,874	1.0%	75.0%	$59,546
New Zealand	2,569	0.9%	75.9%	$41,953
Indonesia	2,519	0.9%	76.8%	$128,328
Egypt	2,403	0.8%	77.6%	$80,665
Venezuela	2,281	0.8%	78.4%	$85,257
India	1,906	0.6%	79.0%	$70,199
Russia	1,816	0.6%	79.6%