Aug182016

The flow of Chinese buyers in Irvine slows to a trickle

A rising US dollar makes Irvine homes much more expensive for Chinese buyers, and capital controls makes it much more difficult to move money out of China for those inclined to do so.

great-wall-irvine

Many Chinese investors consider Irvine, California, a safe haven where they can store their wealth far from the controlling hands of Chinese government officials. As a result of this perception, Chinese investors buy a significant number of homes in Irvine — anecdotally, Chinese Nationals buy 80% of properties in some new home communities. In fact, Irvine homebuilders depend on Chinese buyers to purchase their overpriced houses, which becomes a problem when this flow of money dries up.

Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China. Investment capital from wealthy individuals in China is hot money escaping an unstable market, subject to the policy whims of an unpredictable totalitarian government.

Rather than abruptly cut off the flow of capital, so far Chinese officials have allowed the Yuan to devalue to make US real estate more expensive and slow the outflow. Last year I stated new home sales in Irvine would be the canary in the coal mine, a sensitive indicator for the flow of Chinese capital. Any decline in sales or increase in incentives is indicative of a slowing inflow.

Although sales volumes are weakening now, it’s not clear if this is merely a seasonal effect, or if it’s a sign of a change in the flow of Chinese money. Now, we have evidence that perhaps the flow of money from China is slowing.homebuilding-wrong

Builder pricing

When prices decline in Irvine — and prices fell in Irvine on two previous occasions — like most smart homebuilders, the Irvine Company responds by first increasing incentives to drive sales while maintaining the illusion of firm pricing. Once a homebuilder starts lowering their prices, deflationary psychology sets in, and buyers lose all sense of urgency and sales crater — an outcome the Irvine Company is eager to avoid.

If conditions deteriorate to the point that the illusion can no longer be maintained, the Irvine Company typically shuts down its operations for a year or so, then they hit the reset button and start selling again at lower prices — whatever price the market will bear. However, the Irvine Company is no longer the only game in town. Five Points Communities will probably follow the Irvine Company’s lead, but if they felt more pressure to sell, they might continue building and push prices lower, just like Lennar did in Columbus Grove back in 2007 and 2008.

Homebuilders try to match their production to sales. If they produce too little, delivery dates get extended too far out into the future, and buyers refuse to wait, so sales fall. If they produce too much, they end up with standing inventory, with a carry cost, and they often must increase incentives to sell them.

The Irvine Company calls standing inventory Quick Move-In Residences. In the ordinary course of business, the Irvine Company rarely has any Quick Move-In Residences. When they do, it’s a sign that sales did not keep pace with earlier projections.

If this standing inventory stands too long, the Irvine Company will increase incentives to sell. Since lowering prices is a kiss of death to sales, the Irvine Company will increase incentives to the point of absurdity if necessary to move the product. Absurd incentive packages and offerings is a sign of desperation, and a sign that Chinese money is not flowing into Irvine like it once was.

orchard_hills

Earn $75,000 Co-Op on Quick Move-In Homes at Trevi

The Irvine Company just reached out to the brokerage community to help them sell their standing inventory. Ordinarily, the Irvine Company caps the sales incentives they offer agents on their higher priced homes. Now they are offering a $75,000 co-op fee to any agent who brings them a buyer. That’s more than most agents make in a year. Dramatically increasing this incentive is a sign they are desperate to sell homes — and it’s a sign the flow of Chinese capital is slowing.

Perhaps this is a stealth way for them to lower the price. Any buyer who works with us is provided a rebate on the amount over 1.5% of the sales price (See: New home rebates at Orchard Hills in Irvine). At that rate we would refund well over half the incentive back to buyers on most Trevi homes.

So why is the Irvine Company doing this?

It isn’t because sales are great.

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