Following the Herd of Foreign Money into US Real Estate Markets

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Foreign money is flowing heavily into US real estate markets. Now some think that foreign money is going to prop up the entire market but this is simply not the case. The money flowing in from abroad is going specifically into targeted markets. This isn’t necessarily a US trend only. Canada is experiencing a massive housing bubble from money flowing in from China in particular. Here in Southern California many cities are seeing solid money flowing in from Asian countries. You have this occurring while big fund domestic investors are buying up low priced real estate cross the country as investments. What occurs then is the crowding out of your typical home buyer. I get e-mails from local families looking to buy saying they were outbid by $50,000 or $100,000 for properties that had nothing special. Even after the crash, why does it seem hard for domestic buyers to purchase a home?

Higher net worth group jumping ahead while middle and lower class grows in size

The below chart is an interesting look at net worth by percentiles:

net worth by percentile 2012

Most Americans are still in a worse economic condition than they were over a decade ago. The numbers in terms of net worth, the true measure of wealth, highlight this very clearly. There are two primary drivers for this:

  • 90 percent of households have negligible holdings of actual stocks
  • Most households derive their wealth from real estate

This explains why after the near non-stop run-up of the stock market since early 2009, most families are still in a tight financial pinch. High net-worth households with higher stock holdings rode this boom and bust much nicer. Part of this has to do with the fact that real estate is a small part of their portfolio and the massive stock market run has aided in boosting net worth back up.

This has implications on purchasing homes. Those in SoCal making $100,000+ think they should reasonably afford a “nice” home in a prime city. Well those are the places currently being targeted heavily by flippers, investors, and foreign money. This group is part of the net worth group that is in much better shape relative to the other 90 percent of households. So in essence, what was once viewed as affordable just doesn’t match anymore in a more uneven market of wealth.

People talk about simply picking up and leaving yet this trend is tiny.

"(The Atlantic) There's a connection between certain places and certain jobs. Silicon Valley is to tech what New York is to finance what Detroit is to cars. Call it the Synecdoche Economy. It's what Paul Krugman dubbed the new economics of geography: small differences beget more differences that become big differences. Regions specialize -- or do they still?

Maybe not quite as much. Silicon Valley still does computers, New York still does trading, and Detroit still does automobiles, but all of us do a whole lot less of one big thing -- moving. Consider that gross interstate migration has halved in just the past two decades, as the chart below shows."

InterstateMigration2

Overall, people for the most part tend to stay where they are. Our cities copy one another so there no longer is the one city hub of say automobiles (i.e., Detroit) so you have tech jobs in Austin, Silicon Valley, or even Utah. In California, those trying to cope and stay are simply using up the easy money from the Federal Reserve and going into massive debt. These families typically also have large auto loans and other luxury expenses that they consider essential. This is why many are willing to take out a $500,000 mortgage for a shack. All debt and no cattle.

Japan and CRE bubble

In the late 1980s and early 1990s money was flowing into Hawaii and California heavily from Japan. This was during their real estate and stock bubble. Back then the fears were similar and that somehow, all of California was going to go to Japanese investors. That bubble was mostly focused on commercial real estate however. Of course that bubble ended and Japan finds itself in a stagnation of over two decades.

China is experiencing a massive real estate bubble. We recently discussed how Hong Kong instituted a 15 percent tax on foreign investors to cool the market down. Yet these actions are merely methods of slowing down the inevitable. People forget that money is flowing here because it largely wants to opt out or hedge against internal risks. Think about this clearly. If things were so fantastic domestically why is so much money eagerly looking to get out? Don’t you think that these local investors in China know what is going on domestically more than some Bloomberg report from New York? Whenever I see money escaping a country with a passion I think of two things:

  1. Domestic investments are looking weak
  2. Long-term growth is slowing down which is likely to bring economic and political instability

Just look at global stock markets since the lows in 2009:

world-indexes-since-090309

While the S&P 500 is only off by 5.86 percent from its peak, the Shanghai index is off by a whopping 40 percent. The Hang Seng index is off by 14 percent. Even the Nikkei is off another 22 percent from its recent high. Again, when you see money flowing out of a country in epic fashion you have to ask what is going on internally. You don’t see European investors coming over with suitcases looking to buy properties in large droves. Yet you see this literally happening in California and Canada.

Supply Is Low

So you have this flood of money coming in competing with the Federal Reserve pushing interest rates to record lows. Add to the mix record low inventory and you can see why prices are jumping in some areas:

Supplies of new and existing homes in months

It isn’t that sales are back to bubble day levels. Not even close. Yet what is happening is inventory is incredibly low and the mix of foreign money, big domestic funds, and folks moving off the fence is causing some markets to move up in price. Take California for example. The share of foreclosure re-sales are moving lower and lower:

calif foreclosure resales

Foreclosure resales as a share of all sales is now back to levels last seen in 2007. So the sales that do occur, non-distressed sales are pushing the median price up giving the impression that we are in some sort of large appreciation movement. This is why the median price of a California home is now up 15 percent from last year even though incomes are stagnant.

I’m always weary about home prices rising so fast while incomes remain stagnant. This is a hot money scenario. Congress is likely to do nothing substantive this year but we have some major challenges in 2013. $16+ trillion in national debt is enormous and bigger than our actual GDP. As we have stated before, something needs to give and something will need to be done. The public of course is now accustomed to low interest rates, high levels of services, and a political machine that runs more like a corporation with large advertising arms. Those thinking they can buy homes in certain markets at rock bottom prices are now contending with the above trends. Hey, you can still get deals in probably 40+ states of the nation or even in places like the Central Valley or Inland Empire in California. Yet most want to live where the foreign and big money is. Following the herd is usually not a good long-term investment strategy.

Source: Dr. Housing Bubble

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