Aug272015
Are today’s homebuyers counting on continued Chinese home purchases?
The flow of money into the US from China slowed recently. Is this an alarming new trend, or a temporary setback?
Stories about foreign buyers circulate periodically in the mainstream media. The plot is always the same: foreign buyers loaded with cash are buying houses as an investment. The nationality changes from time to time, but the narrative is always the same, and the implied urgency to buy before a foreigner buys your dream home is always present as well.
Foreign homebuying has been part of the landscape in California since the gold rush, comprising a steady 5% to 7% of the housing market. These news stories imply the number of foreign buyers is large and growing, but the reality is that these numbers are little changed over time — the composition changes, but the numbers don’t vary much.
This leads many California homebuyers to be complacent about foreign demand. Over the last several years, Chinese buyers, equity locusts from their domestic real estate and stock market bubbles, poured money into high-end homes across California, particularly in Irvine. In the case of Irvine, the Chinese buyer has become an outsized portion of home sales, anecdotally more than half of new home sales. Any disruption in this flow of money would have major repercussions for sales and price.
What happens if deflating Chinese housing bubble or stock market bubble turns local real estate buyers into desperate sellers? Realistically, Chinese money is hot money escaping a collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China.
Most California real estate market bulls and enthusiasts blithely assume the influx of Chinese money will never stop because everyone in China wants to live here, right? Unfortunately, in the real world, for money to leave China, it generally has to pass through a Chinese bank and get wired to an overseas location. The Chinese government could easily stop the flow of electronic capital by decree.
Another concern over the influx of Chinese capital has little to do with the government. Similar to the stock market and real estate market collapse in Japan in the late 80s, a simultaneous collapse of both bubbles (And they are bubbles) could severely disrupt or even abruptly halt the flow of money from China into the United States. People can’t export money they don’t have.
Betting on Chinese Home Buyers in the US
by John Burns August 19, 2015
Chinese home buyers comprise roughly 2% of US housing demand—and far more than that in the gateway metro areas with excellent airport access.
- According to the NAR, 16% of international home buyers come from China and spent $29 billion last year, surpassing Canada, which has fallen from 24% of foreign activity to 13%.
- CNBC reported that 39% of foreign buyers in Manhattan are Chinese, up from 12% last year. Passenger travel to the US from Beijing has increased 141% in the last 5 years and has increased 127% from Shanghai.
- Of the 8 currencies we track for foreign buying activity, the Chinese currency is the only one that has held up against the dollar in the last year, and that just began changing last week.
News reports confirm John Burns’s observation. (See: As Stocks Fall, China’s Big Spenders Pull Back) Boom times for luxury in China are largely over, after the recent stock market rout and currency devaluation, compounded by an already slowing economy and a government crackdown on lavish gift-giving.
- The Chinese economy has grown more than 800% in 14 years, clearly creating many millionaires along the way.
These gains are remarkable even considering the small base it grew from. Over the next several years we will know how much of this wealth is real and how much is manufactured by the Chinese Central Bank.
I live and work in Irvine, California, which many consider to be ground zero for Chinese new home investment in the United States. In addition to everything else great about living in America, Irvine has fantastic schools, many new homes (Chinese have a huge preference for new over resale), a very well established Chinese culture, and is within one hour of Los Angeles International Airport. Some of the new home communities we have worked on in Irvine have sold more than half of their homes to Chinese buyers, and I am being conservative here. Prices often exceed $1 million, and frequently there is no mortgage. CNBC recently featured Irvine in their story on Chinese home buyers. …
My last rental in Irvine was owned by a Chinese family that paid cash. I know from first-hand experience that this phenomenon is real. It doesn’t take a demographics study to notice the increasing percentage of people of Chinese descent around Irvine.
Chinese interest in US housing is not confined to California, as our consulting team has noticed Chinese home buying in areas served by all of the major airport hubs. In South Florida, agents have been flying directly to China to compensate for declining demand from South America.While the recent Chinese stock market correction has caused a decline in sales (one of my builder clients has noticed a sharp pullback, another just told me about a home sale cancellation specifically due to the buyer’s stock market losses, and one publicly traded home builder even mentioned the pullback on their earnings call.), our research has convinced us of tremendous Chinese demand to buy US real estate for their families and as investments.
Is the current disruption an aberration? Should we expect a quick rebound and an ever-increasing influx of Chinese money?
Nonetheless, we remain very uncertain about the level of future Chinese home buying:
- Is the number of people who can no longer afford to purchase a home after the stock market correction and currency devaluation greater or less than the number of people who will be encouraged to buy here by the stock market and currency instability?
- How real is the economic growth, and is there underlying debt (as reported by the Wall Street Journal in December) that could cause Chinese wealth to unravel?
- Will the government lift the $50,000 annual overseas investment cap later this year as anticipated, which could cause a flood of Chinese investment in US housing?
We don’t know the answer to any of these questions, but the future success of many new home communities depends on the answer.
Future success of the resale market also depends on this flow of capital.
What do you think will happen?
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Is anyone surprised by this?
New York Fed President Says September Rate Hike is ‘Less Compelling’ Now
While many experts have expressed doubt as to whether the Fed will raise rates in September following Monday’s Dow Jones crash, a rate hike seems even less likely after an influential policy maker from the Federal Reserve Bank of New York weighed in on the issue.
At a press conference following a speech on the regional economic outlook in Buffalo on Wednesday morning, New York Fed president and CEO William C. Dudley expressed the idea that a rate hike at September’s Federal Open Market Committee meeting seemed “less compelling” than it was a few weeks ago following the turbulent stock market activity earlier in the week.
“From my perspective, what we’re going to do is going to be data dependent,” Dudley said. “But data is not just about the monthly economic releases that come out, which have actually been pretty positive.”
Dudley pointed out that the recent reports on consumer confidence, new home sales, and durable goods were all strong – but that only tells part of the story, he said.
You also have to look at all the other things that could potentially affect the economic outlook,” Dudley said. “At the end of the day, we’re concerned about the outlook – how is the economy going to perform in the future? So it’s not just how we’re performing today, it’s all the things that affect the outlook beyond the next few months.”
The term “data dependent” includes all those things as well as international economic developments and U.S. financial market developments, Dudley said.
According to a report from the New York Times, Dudley’s remarks on Wednesday were the first public indication that recent events are influencing the Fed’s plans for the September meeting. His comments on Wednesday make it seem less likely that the Fed will raise rates in September, since many investors are betting heavily against a rate hike and Dudley has previously stated he does not want the Fed to surprise markets, according to the report.
Dudley Puts The Kibosh On September
Monday’s action on Wall Street was too much for the Fed. That day, Atlanta Federal Reserve President Dennis Lockhart pulled back his previous dedication to a September rate hike earlier, reverting to only an expectation that rates rise sometimes this year. But today New York Federal Reserve President William Dudley explicitly called September into question. Via the Wall Street Journal:
In light of market volatility and foreign developments, “at this moment, the decision to begin the normalization process at the September [Federal Open Market Committee] meeting seems less compelling to me than it did several weeks ago. But normalization could become more compelling by the time of the meeting as we get additional information” about the state of the economy, he told reporters.
While this comment was sufficiently nuanced to leave open the possibility of September, in reality Dudley pretty much ended the debate. He only reinforced expectations that September was off the table, and time is running out to pull back expectations. Incoming data, what little there is at this point, would need to come in well above expectations to bring September back into play. And that is just mostly like not going to happen.
Economists prove they’re ignorant optimists
Housing Market Strong Enough to Bear Fed Rate Hike, Poll Suggests
As the housing market strengthens, many economists believe that it could withstand an interest rate hike by the Federal Reserve this year, pending stabilization among home prices.
According to a Reuters poll, 20 of the 22 economists surveyed said that the market could withstand the Fed’s anticipated rate hike, indicating that employment and housing demand from millennials as the major contributors to the markets stability.
However, earlier this month, the minutes from the July 28-29, 2015 Federal Open Market Committee (FOMC) meeting confirmed that the economy is still unprepared for a hike in the federal funds rate, but the increase is imminent.
In the Committee members’ discussion on economic conditions and monetary policy most participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” according to the FOMC minutes.
However, Yellen did allude to the rate increase possibly occurring before the end of the year in a Senate Banking Committee hearing also held in mid-July .
“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy,” Yellen said. “Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end. But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise the rates at any particular time.”
Further doubt about the pending rate increase were shown Monday as the performance of the stock market brought about some anxiety among big U.S. businesses and other stakeholders, while the Dow Jones dropped by 1,000 points and spent the rest of the day fighting its way back toward the break-even point.
“The real effect—if any—from the stock market volatility of the last few days won’t occur for a while,” said Sean Becketti, Chief Economist at Freddie Mac. “It will take time for investors to analyze the depth of the economic weakness in China, the effectiveness of the Chinese government’s responses, and the ultimate impact on various sectors of the U.S. economy. The interesting near-term impact is on the Fed’s September decision to raise rates or not. Market sentiment was split roughly even before this event. Today it’s tilting toward no action in September.”
In terms of housing, the committee found that recent data on housing starts and permits as well as the higher levels of sales and prices are signs of continued recovery in the market, according to the minutes.
The Reuters survey predicts that the S&P/Case Shiller composite index of prices in 20 metropolitan areas would rise at an average pace of 5.0 percent this year.
“Economists say home price increases of about 5 percent are just strong enough to raise equity for homeowners to encourage some to put their properties on the market and help address a persistent shortage of houses available for sale,” Reuters said. “The increase is also not big enough to price out first-time home buyers.”
Yesterday’s market and the first fifteen minutes of trading today clearly prove that the economy is in great shape.
Either that, or the markets were deeply oversold and due for a bounce….
Perspective,
Since you are buying a new home now, the topic of today’s post impacts you.
What is your opinion of what will happen with Chinese buyers in the new home communities in Irvine?
The inevitable Chinese economic downturn was something I was waiting for while preparing to buy a house again. But, I’m not prepared to wait for however long it takes, for whatever will be the result, and however that will affect Irvine housing.
We decided to buy because we were ready and found something we both really liked.
I’ve written many times that people buy homes because the time is right for them, irrespective of what’s going on in the world. You are as analytical as anyone, yet you are buying because it’s the right time for you. Don’t take that as a criticism. As you pointed out, nobody knows what the future brings, and putting off what your family wants for what may or may not happen is counter-productive.
There is little danger of a 2008 style collapse. Realistically, even if prices slowly grind lower due to higher rates, any decline would be matched by loan amortization, so the chances of real damage are small, even in the short term.
Yep. There is a long list of things beyond your control, but you control how much house you buy relative to your income and wealth. Keeping this under control at purchase, will help you weather any storms brewing here or abroad.
Bingo. This is what helped us survive our purchase in 2006 and I’m sure your prior purchase in 2007. Congrats BTW.
Thanks. We survived our 2007 purchase with luck. This time, we’re putting 20% down, our back-end DTI is 20%, and the equity in our house will represent ~25% of our net worth.
Once you buy a house, the focus shifts from the price to the loan balance. Rates won’t rise in a vacuum. Either housing prices fall, incomes rise, or a little of both. If housing prices fall, then property taxes fall. If rates rise, then incomes also rise; since the same mechanism that drives up the price of money also drives up the price of labor, i.e. economic expansion.
Either way, if housing prices rise or rates rise, household finances are likely to improve for those with a fixed rate mortgage. Can the same be said for renters? Sure equity may take a hit, but as long as the house is bought right, then does having 20 or 30% equity after five years really matter? After five years, the interest portion of the payment will have fallen significantly. If prices have fallen, property taxes will fall too.
Assuming prices adjust proportionately to the rise in rates, the payment will be the same, but the amortization will be less than if the house was bought today. I don’t see a lot of benefit to waiting in a non-speculative, fully-qualified buyer market.
As long as you plan to live in the house for 20 years or more, amortization and Prop 13 will help compensate for price fluctuations. Once the house is paid off, shelter costs drop significantly.
Yep, and we are locked at 3.75% (which might decrease to 3.5% after discount points). Adjusting the interest for our marginal tax rate, the principal nearly matches the interest paid from the first payment! It will amortize quickly at what is effectively a ~2.10% rate (subject to change due to our income fluctuations and tax policy over the next 10+ years).
This is my bottom line.
I am cautious, and I write to point out the issues in housing, but since October of 2012, I’ve been telling people to buy, mostly because the cost of ownership-to-rent ratio has been favorable. Plus, waiting until we have a non-speculative, fully-qualified buyer market may take a very, very long time.
Au contraire, recent market action clearly proves that capital continues to be FORCED into distortive speculation instead of productive investment, which means it no longer is an indicator of ANY economic realities.
Are you looking to short this rally? I wouldn’t be surprised by one more leg down. When a market rally goes on this long, short-term corrections lead to complacency. The moment it looks like the correction is over (yesterday or today), everyone believes the worst is over. Often, this proves not to be the case as those who didn’t sell during the panic sell into the recovery rally and push prices to new lows.
RealtyTrac: Share of in-foreclosure sales hits 15-year low
Cash sales hit 8-year low
ales of properties in-foreclosure and cash sales were down from a year ago to multi-year lows while year-to-date U.S. home sales in 2015 are at an eight-year high, and the U.S. median home price in July was at an 82-month high, according to the July report from RealtyTrac.
The sale of properties sold while in the foreclosure process (not including bank-owned properties) accounted for 6.4% of all single family and condo sales in July, down from 6.6% of all sales in June and down from 8.0% in July 2014 to the lowest monthly share since January 2000 — the earliest that data is available.
All-cash buyers accounted for 22.6% of all single family home and condo sales in July, down from 23.7% of all sales in the previous month and down from 26.5% of all sales in July 2014 to the lowest%age of cash sales in a month since July 2008 – a 7-year low, and down from the most recent peak of 39% in February 2013 (highest going back as far as RealtyTrac has national data, January 2000)
Their economy (China) is a complete fraud. Don’t be surprised if more of them try to come to America:
http://www.rollingstone.com/politics/news/welcome-to-maternity-hotel-california-20150819
We had a commenter talk about this in Irvine. The Irvine Company comes across these baby farms in apartments periodically. It’s rampant here in OC.
And people wonder why?
Donald Trump
I was thinking this would be an issue made for Donald Trump. We could bash illegal immigration and the Chinese with a single issue.
I think Donald Tramp is tapping into something that is gaining momentum, and I don’t think it’s going to burn out. Though I never liked his smug, arrogant, attitude, I do admire the fact that he is giant middle finger right in the face of the political establishment … it’s like f*ck you Hillary, Jeb and the media.
And a F-YOU to immigrants, ugly bitches, and pretty much everyone else.
I know… It’s a refreshing change from the usual F-You to the middle class that the establishment is known for.
+1 to all three of you.
I recently saw a facebook post that linked a similar article about 3 recent busts on Chinese baby farms. The most ironic thing I saw however were the negative comments about these baby farms because they were ALL (literally 100%) posted by Hispanics…
Kinda reminds me of what happened in the 1800s in the east coast when different groups of European immigrants were attacked their predecessors.
Yes, just like every homebuyer wants to be the last person admitted to their neighborhood, every generation of immigrants wants to be the last one to allow entry into the United States.
Who knows how China’s issues will affect US and specifically Irvine housing. Is renting while all of this plays-out over the course of many years the better option? Maybe. If you control yourself, things beyond your control will have much less effect on you.
As long as you are aware of the monthly ownership premium over renting and are willing to pay it for the enjoyment of this consumer item, it doesn’t really matter at what point in the cycle you buy, particularly if you plan on staying long term. The reason people got burned buying from 2004-2007 is because many of them had a short-term speculative mindset.
As Stocks Fall, China’s Big Spenders Pull Back
Boom times for luxury in China are largely over, after the recent stock market rout and currency devaluation, compounded by an already slowing economy and a government crackdown on lavish gift-giving. The effect of those woes on Chinese shoppers — who make up as much as a third of global spending on high-end goods — has rattled both investors and global luxury brands.
After growing by double digits in the last decade, spending on luxury goods in China contracted for the first time last year to about $18 billion, shrinking 1 percent, according to the consultancy Bain & Company.
On top of the market turmoil, moves by the Chinese government to devalue the renminbi and concerns over further rounds of devaluation cast a new pall on the luxury marketplace.
“This is going to hit hard,” said David Friedman, the president of Wealth-X, a luxury intelligence firm. Mr. Friedman, who is based in New York, added, “It’s the straw that breaks the camel’s back for luxury brands that looked at the Chinese consumer as a driver of their revenue growth.”
“Is the Chinese consumer still incredibly important to luxury brands? The answer is absolutely yes. But is the Chinese consumer over the next several years going to be the same economic juggernaut of consumption for these brands? The answer is no.”
“Things are becoming more expensive, people are traveling less, and market turmoil is causing people to retrench and think about their luxury spending,” said Simeon Siegel, a senior equity analyst in specialty retailing and luxury for Nomura Securities. “So you walk down Fifth Avenue, and you see emptier stores.”
Tiffany’s had a nice gap down at the open today.
24 Million Households Needed Mortgage Assistance
Scale of destruction far larger than realized
Since 2007 the mortgage industry has completed a total of 24 million workout plans and six million proprietary loan modifications for homeowners — reaching another milestone in its efforts to assist families with troubled mortgages.
This compares to just over six million foreclosure sales completed in the same time period.
What HopeNow doesn’t discuss is that many of the workout plans and modifications are duplicate efforts on the same loans. There were not 30 million unique loan owners being helped here. Inconvenient truth.
These reported numbers are such a joke. Everyone knows they count these activities in a way to make it look like they are succeeding in actually helping people. The bigger the numbers the better. Everyone knows they are doing this and that it’s complete bullshit, but it makes the supporters feel better, and it deflects some of the criticism over the money wasted.
Stupid China Stories
Paul Krugman beats on the Republican nominees
So a stock crash in China triggered a big decline around the world, while I was trying to have a personal life (and succeeding, actually). Leaving aside whether this really made sense, why should events in China matter for the rest of us?
Well, you and I might think that it’s because China is a pretty big economy — a huge buyer of commodities and a significant importer of manufactured inputs too. So when China slumps, you can and should expect knock-on effects elsewhere.
But trust the Republican field to declare that it’s all Obama’s fault. Scott Walker wants Obama to cancel a state dinner with Xi; Donald Trump says that it’s because Obama has let China “dictate the agenda” (no, I have no idea what he thinks he means). And Chris Christie says that it’s because Obama has gotten us deep into China’s debt.
Actually, let’s play a bit with that last one, OK? You could, conceivably, tell a story in which America becomes dependent on Chinese loans; then, when China gets in trouble, it demands repayment, pushing us into crisis too. But any story along those lines has a corollary: we should be seeing a spike in US interest rates as our credit line gets pulled. What you actually see is falling rates:
Oh, why am I even bothering?
But remember: all the experts said that the GOP had an unusually strong field, a very deep bench, a lot of talent running for president.
That’s politics. If Romney were president, you think that the Democrats wouldn’t be doing the same?
I enjoy reading Paul Krugman for his political spin. I don’t agree with him much, particularly on economic issues, but his political writing is top-notch.
Five of ten fastest moving housing markets in California
California continues to hold most of the fastest moving markets, with San Francisco, Oakland, San Jose, San Diego and Orange County making the top 10 list of America’s fastest moving housing markets.
Trulia said that increases in home prices is what, usually, strongly impacts the share of homes on the market after two months, but in this new report, affordability might be starting to play a role in the priciest markets.
This is attributed to the fact that homebuyers, no matter how competitive the market is, have a limit.
“When the stock of cheaper homes dries up, not every buyer is able to up their budget and put offers on homes in a higher price tier. So some may delay buying a home, which leads to existing homes sitting on the market a tad longer,” the report said.
So many of these MSM stories read like re-worked versions of NAR press releases.
Fear sells newspapers, so why not give everyone a good scare?
If you buy into the NAR party line, the term “foreign buyer” almost takes on mythical dimensions. Do all these buyers stand 7 feet tall and carry bags of gold?
Sure, some very interesting statistics exist, such as the percentage of Chinese buyers in Irvine. But do such statistics co-relate with any meaningful trends?
They may not carry bags of gold, but they do occasionally have to be directed to the local bank because home builders won’t accept a suitcase full of cash for a new home purchase.
If the NAr can use this to generate false urgency in local buyers, they will make use of it. In that instance, these foreigners really do carry bags of gold — for realtors.
Just wondering if anyone else is noticing large price reductions starting to occur in North OC in the $800k – $1.25m range. I’m not sure if this is due to the end of summer markdowns or the Chinese stock market implosion causing a slump in demand. Perhaps a combination?
I was ready to pull the trigger on a property. Total fixer listed at $980k and they were ready to take $925. The day before I was to sign their counter a home around the corner closed for $1.07m that was originally listed for $1.25k. That home is turn-key with upgrades everywhere you look. Absolutely beautiful inside and out.
I’ve been tracking large price reductions plus the volatility in the global markets so I pulled out. I’ll wait for 3-6 months to see what happens.
I track my area of North OC (YL) pretty closely. I haven’t seen large price reductions, per se. What I have seen is plenty of trial balloons where the asking price is 100-150k above sold comps. When the seller doesn’t get the traffic or offers they want, prices are reduced to the point they get offers.
It pays to shop around. If you enjoy the fixer part more than the upper, buying at a discount can keep the monthly nut small, and minimizes the tax basis. If all you want is move-in-ready, you are going to pay more, but there are plenty of homes on the market right now. Float your own trial balloon 100-150k below asking and see what happens.
Waiting 3-6 months might be ok. If the Fed increases rates in December, then there will be a lot more selection with fewer buyers. You might be able to negotiate a good deal, but interest costs will be higher. If the job market continues to strengthen and the recent turmoil in the stock market passes, then wage growth may impact pricing in the spring.