July 10, 2015

Entering A Period Of Realism

It’s Friday desk clearing time for this blogger. “China’s stock market bubble is undergoing an epic deflation — and few U.S. industries have as big a stake in the potential economic damage as the tech sector that powers Silicon Valley. Peninsula-based agent Ken DeLeon said that ‘a client who’s building a new home in Palo Alto just texted me this morning. They had their pre-approved plans but wanted to know should they just sell the lot and not build their new home. They’re worried that this steep drop in Chinese equities will impact the value of new construction,’ DeLeon said.”

“Pleasanton-based agent Andrew Greenwell said the volume of overseas investments hinges ‘on Chinese regulations and laws,’ which have been tightening amid the rising economic concerns. ‘You can only get $50,000 a head out of Mainland China, so a lot of people wire money from Hong Kong. And if they clamp down on the amount of money getting wired out of Hong Kong, things could change.’”

“The Chinese share market rout is making Chinese investors more cautious and a small number will have to sell their properties in Australia because of share market losses, real estate agents say. Michael Pallier, principal at Sydney Sothebys International Realty, said one of his clients who bought a new apartment in Sydney had lost money on the Chinese share market. ‘She was young, she hadn’t seen a share market crash before, she was hoping the price would continue to go up of the shares and she made a poor judgement call and she now as a result of that is in some trouble,’ Mr Pallier said.”

“China’s stock market crash has already bled into the iron ore price, and it could have flow-on effects into Australia’s credit-fuelled housing market, economists have warned. Lindsay David of LF Economics has argued the impact of the Chinese crash on the Australian housing market could be twofold. ‘As the Chinese economy starts to deteriorate so will the bank accounts of many Chinese, restricting their ability to purchase real estate overseas,’ he said.”

“Of broader concern, however, are the macroeconomic implications. Mr David believes the iron ore price has much further to crash, which could in turn scare the wholesale lending community overseas lending to Australian banks for home financing. ‘House prices in Australia are dependent on debt growth, and if there’s no credit out there, house prices will begin to fall.’”

“‘The risk from Chinese equities markets is clearly impacting commodities markets,’ IG Markets strategist Evan Lucas said in a note on ‘commodities contagion.’ ‘Iron ore has just logged its worst trading day on record. The steel price in China is now cheaper per tonne than cabbage.’”

“After years of watching Vancouver housing prices climb, driven in part by Chinese investment, Eveline Xia came to a painful realization: Despite having a Master’s degree and solid career prospects, she might never be able to afford a home in the city where she grew up. So the 29-year-old grabbed a marking pen, hand lettered a sign listing her credentials, snapped a selfie, and posted it to Twitter under the hashtag #DontHave1million. ‘Average, hardworking Canadian residents are being forced to compete for housing with the global wealthy,’ said Xia, who immigrated to Canada from China as child. ‘People here are getting angry.’”

“In interviews, five real estate agents who primarily sell homes on Vancouver’s exclusive west side estimated that between 50 per cent and 80 per cent of their clients have financial ties to mainland China. Residents also have questions about the source of Chinese money being invested in Vancouver property, a concern that came to the fore last year when a prominent developer in the city, Michael Ching Mo Yeung, was named as one of the top 100 fugitives wanted by China as part of ‘Operation Skynet’.”

“The Saskatoon Region Association of Realtors warns prices are expected to flatten and drop in the city, thanks partly to a ballooning number of listings. Analysts say the market is soft due to a slowing economy anchored down by lower oil prices. Others say the market is just dropping to a realistic level. ‘House prices went up way more than they ought to have, given the size of the city. Now we’re entering a period of realism,’ says Daphne Taras, dean of the Edwards School of Business at the University of Saskatchewan.”

“The price of an average three-bed semi in Dublin has fallen by up to 7pc in the first indication that Central Bank lending restrictions are cooling the market. Real Estate Alliance (REA) CEO Philip Farrell said: ‘What we are seeing on the ground is a slowdown in interest in the traditional professional properties, as couples find that raising an €80,000 deposit for a €400,000 home is simply beyond their means. The rules were brought in to take the heat out of the market, and they have done that.’”

“According to a new Trulia study, it will take the average Bay Area college grad approximately 29 years to save 20% down for a typically priced home. For those prospective buyers with no degree, forget it. By this study’s calculations, that 20% down savings is impossible for millennials who didn’t earn a college degree. Trulia says, ‘Our study calculates how many years it will take a millennial (young adult aged 25-30) to save a 20% down payment in the 100 largest U.S. metros assuming that home prices and incomes will increase over time – with and without a college degree.’”

“Would-be homebuyers who were forced out of the market by short sales and foreclosures are trickling back in again, but that hasn’t resulted in stable prices, according to real estate experts. The median list price for existing homes in the greater Bakersfield area was $260,000 last month, up 6.1 percent from June of last year but down 0.4 percent from May, according to the Preliminary Crabtree Report, produced monthly by Gary Crabtree of Affiliated Appraisers. Sale prices have been bouncing all over the place, with no clear trajectory, Crabtree said. ‘That indicates to me that there’s not a lot of confidence in the pricing,’ he said.”

“He’s not pleased that lending standards are relaxing, worried another real estate bubble could be forming. ‘I don’t think we’ll see anything like we did before, but history does have a way of repeating itself,’ he said.”

“Investors always seem to be watchful of and enamored by the Federal Reserve, as though it possessed magical powers to restore a moribund economy or cool an overheated one. However, the Federal Reserve has a long and sordid history of miscalculations and misguided policy decisions. ‘The Fed has inadvertently helped create some of the biggest bubbles and trigger the most serious market declines,’ said James Stack, a market historian and publisher of InvesTech Research.”

“In other words, investors should not be under the delusion that current Fed chief Janet Yellen or her predecessors know with any precision when to raise or lower rates. More often than not, they screw it up. The first example Stack cited involved the 1987 ‘Black Monday’ crash, which occurred on Oct. 19, 1987. The Dow Jones industrial average dropped 22.6 percent (508 points) in a single trading day — the largest one-day percentage decline ever.”

“A second example involved the tech bubble of the late 1990s and subsequent market crash in March 2000. Greenspan was still at the helm of the Federal Reserve leading into this debacle. More than three years before the bubble burst, Greenspan at least seemed troubled by the high stock valuations. But he failed to do anything about the market frenzy, and he continued the Fed’s ‘easy money’ policy for another three years, even cutting rates again in 1998 after the collapse of the Long-Term Capital Management hedge fund. Ultimately, the Nasdaq lost 78 percent of its value.”

“A third example came as the housing bubble took flight in the early 2000s, again propelled by the Fed’s easy money policy. Following the collapse of the tech bubble, within 12 months the Fed cut short-term rates from 6 percent to 1.5 percent, and they were held too low for too long as housing prices skyrocketed. ‘The Fed fanned the flames of the housing bubble,’ Stack said. ‘By 2004, we were well into an economic recovery, but the Fed held rates at 50-year lows.’”

“During the height of the housing frenzy in 2006, newly appointed Fed Chairman Ben Bernanke said housing prices reflected a strong economy and he ‘doubted there would be a national decline in prices.’ He was wrong. Today, the Federal Reserve again is trying to extricate itself from an artificially low interest rate environment. The so-called Fed funds rate has been held near zero for six years.”

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