Foreign purchases of U.S. homes had their biggest drop ever, bringing relief to waves of American house hunters who have struggled to compete in affluent neighborhoods with wealthy buyers from abroad.

Purchases by international buyers totaled $121 billion in the fiscal year ended in March, down from $153 billion the previous year, according to a survey by the National Association of Realtors released Thursday. That 21% decline was the largest on record, the NAR said.

The...