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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.

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Sat, 11/17/2012 - 17:54 | 2992284 supafuckinmingster
supafuckinmingster's picture

 

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Sat, 11/17/2012 - 14:15 | 2991903 MiniCooper
MiniCooper's picture

Money coming out of Asia is all capital flight money. Nobody in that region believes it will last and they are getting their money out into wine, art, property into the UK as well as certain markets in N. America.

Sat, 11/17/2012 - 11:03 | 2991493 falak pema
falak pema's picture

Attila on the run, hot money like blood hungry barbarians from the windy steppes of Oilistan. They be faster than the whirlwind and more hungry than the locusts. Before you know it they are gone!

Its called a rush to safety that follows a rush to depravity. As depravity feeds fear once the orgy is over and the cadavers rise like an army of Lazarus ghosts.

Sat, 11/17/2012 - 10:52 | 2991475 Never One Roach
Never One Roach's picture

Incomes are stagnant or dropping. In my area many employers are cutting salaries by 5-10% again this year so it is no surprise that the "middle Class" is locked out. Seems odd that USA politicians subsidize foreign buyers by opening the door to this laundered foreign money at the expense of our own middle class.

Why isn't Pelosi screaming about this?

Schumer?

Sat, 11/17/2012 - 09:05 | 2991355 Lloyd_Xmas
Lloyd_Xmas's picture

I can't wait till I can afford my own middle class family.

Sat, 11/17/2012 - 15:47 | 2992084 CoolBeans
CoolBeans's picture

Me to. 

Again.

Family of 6 and income has plummeted to 1/3 of 2010 levels.  Ugh.  I have come to think that this is the "new normal", however.

Sat, 11/17/2012 - 22:50 | 2992818 Lloyd_Xmas
Lloyd_Xmas's picture

I meant I want to own one

Sat, 11/17/2012 - 08:08 | 2991300 Joe A
Joe A's picture

The Chinese are looking 'Lebensraum'. Or it is a tactic to take over the US.

Sat, 11/17/2012 - 03:40 | 2991125 dark_matter
dark_matter's picture

I heard on the radio recently that they passed a law so that any foreigner who invests $500K in America and creates 10 jobs in targeted industries (like construction) automatically gets a green card for their entire family. In Portland, Oregon they got 40 Hong Kongians to put up $20 million for a new hotel in exchange for a couple hundred green cards. They have a guy in Portland who regularly flies to Asia to find these investors and there seem to be plenty of them. As others have said I think this is a bug out strategy for the wealthy abroad. O Brave New World, etc.

Sat, 11/17/2012 - 09:10 | 2991365 Winston Churchill
Winston Churchill's picture

Old news.

Investor green cards or their equivalent have always been available in most

country's.

Fri, 11/16/2012 - 21:26 | 2990380 Garristotle
Garristotle's picture

Make A stand for the safety of your children! BAN WEAPONIZED BODY PARTS AND BLUNT OBJECTS!!! SIGN THE PETITION NOW!!!

https://petitions.whitehouse.gov/petition/ban-private-ownership-all-blun...

WHY LIVE IN FEAR? BAN HANDS!

Fri, 11/16/2012 - 21:12 | 2990342 Stuck on Zero
Stuck on Zero's picture

A lot of people I know are moving their Wall Street based IRAs into self directed IRAs. Why?  They don't trust Wall Street and they are getting zero returns.  I intend to do the same thing. 

 

Fri, 11/16/2012 - 22:10 | 2990503 max2205
max2205's picture

Moved from Chicago to dc 2010. What a difference!

Glad I did

Fri, 11/16/2012 - 19:09 | 2989964 SmittyinLA
SmittyinLA's picture

Speaking as a native Californian, I ain't moving, my property taxes are locked in low and any increases voted on by "the mob" will hit "the mob" and foreign buyers hardest as a result of prop 13.

My assessed value is about $100K, my actual value in current market is 550K , my taxes are 1.X X 100K, my Asian neighbors are also taxed @1.X X their value but on 550K cuz they just bought, their taxes are 5.5X higher, I welcome any new taxes as they'll "pinch" the invaders the worst and they are the only folks buying. 

I ain't gonna sell on account of that Obama tax too, that's just more money to lose or give to the state, I'd rather burn my house down, I'm locked in like those people that bought unlimited lifetime airline tickets. 

As far as foreigners buying in now?  They're gonna get annihilated as well as their financiers-at least for the next 30 years or so.

FNM FRE FHA & the US treasury they're gonna run outa cash long before they "save" the RE market with loan fraud, when that day comes look out below, FIRE SALE.

What will happen to prices when the govt "programs" disappear? prices will go back to the old formula 3.X annual income (assuming no huge maga debt load, with debts prices will have to drop to 2.X annnual income), in LA that's about 150K, not the current 500-600K.

Don't think "i'll buy & rent to lots o illegals" either, rent revenue taxes are coming, I'll make sure of it, I don't care if you lose money after paying your mortgage, taxes & upkeep, your profits aren't my problem, your tenants are, you have tenant renter liability to pay for. 

As far as the Obama victory in CA, absolutely meaningless, the Obama people in CA are flat broke and bankrupt 5 years ago, they just don't know it, ya they have the mob, but the mob is all liability.  

The conservative people left in CA, the 'American vote", we're dug in, insulated, retired or about to be retired, if we never earned a dime or paid any income taxes for the rest of our lives we'll be OK, most others are far worse off, we're just rolling up our sleeves, its hammer time.

The free shit army is going to die a horrible death eating itself like the alien bugs in the Lost In Space movie, and I'll be there pouring ketchup on the whole enchilada.

Sat, 11/17/2012 - 16:16 | 2992140 Graph
Graph's picture

Dreamer,

Not that I want this happened to you.

Scarry scenario: You are 5 short years to pay off your mortgage, Finaly!!! My home!!! and then, and only then THEY come with crushing property tax, size of triple mortgage. What do you do? House is almost yours! Now, YOU finish the scenario,,,,,

Fri, 11/16/2012 - 19:53 | 2990082 NotApplicable
NotApplicable's picture

You might want to consider a Plan B in respect your belief that your low taxes are "locked in."

The invaders will use their mob status to push the Obummerites into "equalizing rates" in order to be "fair" to all.

Sat, 11/17/2012 - 10:50 | 2991474 andrewp111
andrewp111's picture

The Democrats now have 2/3 of both houses of the legislature, which means they can raise property taxes on those locked in by Prop 13.

Fri, 11/16/2012 - 19:47 | 2990061 jomama
jomama's picture

ketchup on an enchilada sounds disgusting.

i suggest tapatio.

Fri, 11/16/2012 - 23:41 | 2990743 eatthebanksters
eatthebanksters's picture

Tapatio on a 'Chill Out Cafe' breakfast burrito is about as good as it gets....especially after an epic dawn patrol...

Sat, 11/17/2012 - 15:52 | 2992091 toady
toady's picture

Valentina extra hot is the best

Fri, 11/16/2012 - 18:59 | 2989950 THECOMINGDEPRESSION
THECOMINGDEPRESSION's picture

When the gov. starts the tax process on housing, after they nailed the public jan 1..the running AWAY from the bulls will look tame.

Fri, 11/16/2012 - 18:43 | 2989915 CoolBeans
CoolBeans's picture

I will never purchase real estate again in the U.S.

Nope...just too risky, toxic titles, etc.

But, how sad it will be when the lot of us who take this position will be renting from foreigners.  Ugh...that's not right.

Sat, 11/17/2012 - 03:25 | 2991107 mkkby
mkkby's picture

Look at it this way.  The foreigners are going to be paying the massive property taxes govs need to pay those parasitic employee pentions.  Better them than us.  They will take big losses like they do in every bubble.

Sat, 11/17/2012 - 11:18 | 2991521 10mm
10mm's picture

They will pass tax increase to renters costs,nothing new.Higher rents,that's all.

Fri, 11/16/2012 - 18:13 | 2989851 Clowns on Acid
Clowns on Acid's picture

Yet another byproduct of Bernanke printing. Lower US dollar, malinvestment, higher commodity prices. Countries with socio-ecomomic imbalances in their societies are putting their excess $$ to work.

Flooding the universe with US dollars is an immoral deed. Who could possibly do that? Why would they possibl;y do that?

Sat, 11/17/2012 - 11:06 | 2991496 Papasmurf
Papasmurf's picture

They do it to transfer wealth to the top.

Fri, 11/16/2012 - 17:44 | 2989753 Dr. Sandi
Dr. Sandi's picture

 

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?

If you're stealing millions from the local branch of the Chinese government, you probably don't want to park it where they can steal it back. And when you have embezzled enough for a nice lifestyle for the family, you want a happy reunion with it somewhere that the Chinese government can't steal YOU back.

Fri, 11/16/2012 - 17:55 | 2989790 geno-econ
geno-econ's picture

Exactly why US has off shore Carribean Islands, Bermuda etc.  Just ask Romney

Fri, 11/16/2012 - 18:10 | 2989841 Invisible Hand
Invisible Hand's picture

And Obama stashes his money in the Cayman Islands!

Fri, 11/16/2012 - 23:49 | 2990768 scraping_by
scraping_by's picture

I tought it was Bahrain or Abu Dhabi. Which is why he's so hot against Iran.

Fri, 11/16/2012 - 17:33 | 2989712 kaiserhoff
kaiserhoff's picture

Iron Law of Markets:  Foreign money always comes in at the top.

Sat, 11/17/2012 - 01:13 | 2990932 archon
archon's picture

Boy, are they gonna be pissed when President Santa Claus communalizes land ownership.  Then they'll be all like, "WTF?!  I didn't have to leave China for this!..."

Fri, 11/16/2012 - 17:54 | 2989787 economics9698
economics9698's picture

I second that.

Fri, 11/16/2012 - 21:35 | 2990419 BeagleOne
BeagleOne's picture

Unfortunately, it really started in 1913 and was amplified in 1980 with "Morning in America" propaganda.

Fri, 11/16/2012 - 15:14 | 2989033 disabledvet
disabledvet's picture

Great stuff as usual. Obviously East Asians are terrified of inflation...let alone bad drinking water, mass starvation or a volcano blowing. This is real money and when the Money Printer in Chief says "go" markets listen. Those who have been short have been killed obviously. Only Marc Zuckerberg stands out as "the Big Loser"...but it sure feels like "the Endgame is nigh" as the inevitable wars that result from this insanity start proliferating as well. I know it's all b.s. for most but I'm done thinking about it and am 100 percent on board the "Blaming Sandy"bandwagon. I just can't deal with the all the conniving anymore and really would like to see some of my fellow citizens actually HELPED by those that really do have...or indeed have stolen "everything." I simply cannot imagine that "the idea behind 9/11 is simply what's your is mine too." I just can't go there.

Fri, 11/16/2012 - 17:24 | 2989682 economics9698
economics9698's picture

Real estate might go up in nominal terns but when interest rates increase real estate will decline in real terms. 

I would guess the bond market correction to be September 2013.  Just a guess based on past bubbles.

Sat, 11/17/2012 - 09:24 | 2991379 TrulyStupid
TrulyStupid's picture

The economic laws dictating higher interest rates were suspended years ago... interest rates won't go up because they can't without imploding the whole fiat ponzi. ZIRP and QE will continue ... to infinity.

Sat, 11/17/2012 - 11:01 | 2991488 Never One Roach
Never One Roach's picture

If HK is imposing a 15% taqx on foreign RE buyers, why doesn't the USA? This would curb another bubble aqnd also add revenue to cure the deficit if anyone were serious about the problem.

Sat, 11/17/2012 - 11:08 | 2991499 falak pema
falak pema's picture

but but but, the oligarchs love the bubble as they feed off it; as for the sheeple they be just that. HK is not reserve currency haven.

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