Anonymous Capital Flows and U.S. Housing Markets

Abstract

Prior to 2016, all-cash purchases of residential real estate were a key loophole in US anti-money-laundering (AML) regulations. Beginning in January 2016, the Department of the Treasury announced orders requiring the owners of LLCs purchasing high-end residential real estate to identify themselves to authorities. We use a new detailed transactional dataset to identify all-cash purchases by corporate entities before and after the introduction of this new AML policy, and thus estimate the size and impact of anonymity-seeking capital on U.S. housing markets. We first find that all-cash purchases by corporate entities form approximately 10% of the dollar volume of housing purchases in our sample prior to the change in policy. After anonymity is no longer freely available to domestic and foreign investors, all-cash purchases by corporations fall by approximately 70%, indicating the share of anonymity-seeking investors using LLCs as “shell corporations.” Testing for potential distortionary market impacts, we find subsequent declines in luxury house prices in counties targeted by the policy relative to untargeted counties. Our findings are relevant to the (mis)measurement of international net investment flows, and to understanding a demand for anonymity that may impact certain asset classes (art, cryptocurrencies) regardless of their risk/reward characteristics.