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The downside of rising home prices

July 24, 2012: 10:20 AM ET

It wasn't that long ago when it seemed foreign buyers were propping up the U.S. housing market. Just as fast, they're leaving.

FORTUNE – During the past few years, the world's uber rich had helped drive what little bright spots there were across America's housing market. From Canada to Australia to China and elsewhere, foreign buyers saw worthwhile investments in U.S. homes as prices plummeted to record lows.

U.S. investors and policymakers welcomed foreign buyers, especially at a time when domestic buyers struggled to even get approved for mortgages. Many foreigners were armed with cash; they bought pricier homes, making for relatively speedier closings. U.S. lawmakers and investors welcomed them. And at one point, two senators proposed a bill that would grant U.S. tourist visas to foreign homebuyers paying with cash.

But early signs suggest that interest from abroad has waned as U.S. home prices rise, according to Trulia. In a report released today, the residential real estate website found that online searches from abroad relative to all searches fell nearly 10% during the past year. This comes as home values nationwide rose 0.2% year-over-year to a median $149,300 during the second quarter, the first annual increase since 2007, real estate listing site Zillow reported today. Despite the rise, overall home prices are still down almost 24% since April 2007.

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Miami topped Trulia's list of most searched cities by foreigners. Traffic from abroad fizzled to 15.7% during the second quarter of this year from 16.3% the same period last year. Other parts of Florida saw interest weaken, including West Palm Beach (10.3% from 12.2%) and the Cape Coral-Ft. Myers area (10.2% from 11.9%).

Web traffic also weakened in San Francisco, where foreign searches fell to 9.1% from 9.5% during the same period. Las Vegas saw similar declines, as the housing market hit bottom in March and prices slowly rise.

This might sound like good news. Rising prices would suggest that the housing market's recovery has sped up. But in era of tighter lending standards, it's uncertain if Americans could make up for the fall in foreigners' lofty appetite for cheap real estate.

To be sure, Americans still make up the vast majority of home sales. But in places that have seen the steepest declines in prices since the bust of the housing bubble in 2007, wealthy foreigners increasingly latched on to bargains in Florida, California, Arizona and Texas. But as home prices have risen, albeit very slowly in some parts of the country, foreign demand has softened. During the three months ending in June, foreigners accounted for 4.1% of home sales, a decline from 4.5% during the same period the previous year, said Jed Kolko, economist with Trulia.

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"It's a reminder that foreign demand could come and go," he said.

While Trulia reports online searches by U.S. users have grown faster than those abroad, it may not necessarily suggest U.S. buyers are in any position to pick up where foreigners might leave off. Many paid in cash for their homes. Needless to say, most Americans haven't been so lucky. It's harder to get mortgage approval these days, as banks have been reluctant to lend even as interest rates have hovered around 3%.

Some might have turned their noses to foreigners gobbling up cheap U.S. real estate. But just as quickly as they were to judge, they might miss the interest from these buyers almost just as quickly.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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