Housing Market

Following the default on major Chinese developer Kaisa this week, and with the continued softness in the Chinese property market, many are asking who's next among the highly-leveraged firms. However, as The Real Deal's Konrad Putzier notes, Kaisa’s default carries significance for New York’s real estate industry. Chinese investors spent $3 billion on New York properties in 2014. Many in New York continue to associate Chinese real estate companies with limitless funds and a never-ending ability to invest... But what if they are wrong?

Hence, if and when a genuine price for risk reappears, the effect may be greatly magnified as it was in the US housing market a few years back under not dissimilar circumstances. As Karl Popper noted, volatility can be suppressed in a capitalist system, but it must ultimately reappear. Sooner or later, we will face a good deal of fireworks.

After failing to comfortably beat expectations for the last 7 months, March Existing Home Sales surged 6.1% to a 5.19mm SAAR - the highest since Sept 2013. Despite collapsing macro data throughout March all blamed on 'the weather' The Midwest saw existing home sales rise the most (by 10.1%). All this 'pent-up demand' has crushed affordability as home prices are up 7.8% YoY - the largest gain since Feb 2014.

In January when we first brought news of one of China's largest developer's inability to cover interest payments on its debt, we raised the question of who's next. Now that it is official - China's first major developer to default on its US currency debt - and property prices are falling at a record rate, we suspect the likes of Wanda and Agile will also start to collapse once again (after being bid up incredibly amid China's latest exuberant bubble). Kaisa’s debt problems underscore the slump in China’s property sector, which has been hit by the slowing economy and a series of cooling measures instituted by Beijing to avoid a bubble in what had been an overheated housing market.

As we observed yesterday when we showed that if comparing the collapse in China's housing market with that of the US following their respective peaks then China is already a recession, we added that "as shown in the chart below [China] has recently engaged in several easing steps, with many more to come according to the sell-side consensus." Sure enough, just a few hours later, the PBOC announced its second Reserve Requirement Ratio (RRR) for all banks since February 4, when China had its first industry-wide RRR cut since May 2012. The move will be effective Monday, April 20.

Moody's puts $3 billion in student debt-backed ABS on default watch leading us to wonder when 30% delinquency rates in a market where nearly $1.3 trillion in credit has been extended will finally result in the bursting of what is America's most spectacular debt bubble.

Just as the S&P appeared set to blast off to a forward GAAP PE > 21.0x, here comes Greece and drags it back down to a far more somber 20.0x. The catalyst this time is an FT article according to which officials of now openly insolvent Greece have made an informal approach to the International Monetary Fund to delay repayments of loans to the international lender, but were told that no rescheduling was possible.  The result if a drop in not only US equity futures which are down 8 points at last check, but also yields across the board with the German 10Y Bund now just single basis points above 0.00% (the German 9Y is now < 0), on its way to -0.20% at which point it will lead to a very awkward "crossing the streams" moment for the ECB.

Three former Freddie Mac executives who understated the amount of subprime exposure on the GSE's book by a factor of 28 came to terms with the SEC today on a settlement which imposes fees no one has to pay and "limitations on future behavior" that "will not limit [anyone] in any practical way."

If yesterday stocks surged on the worst 4-month stretch of missing retail sales since Lehman, one which BofA with all seriousness spun by saying "it seems not unreasonable to suspect that the March 2015 reading on retail sales gets revised up next month", then the reason why futures are now solidly in the green across the board even as German Bunds have just 14 bps to go until they hit negative yields and before the ECB is fresh out of luck on future debt monetization, is that overnight China reported its worst GDP since 2009 together with economic data misses across the board confirming China's economy continues its hard landing approach despite a stock market that has doubled in the past year.

Back in January we asked the following: “who will be the first to offer a negative rate mortgage?” As WSJ reports, this bizarre characteristic of the new paranormal is spreading throughout Europe on the back of Mario Draghi’s trillion-euro adventure in debt monetization land: "Tumbling interest rates in Europe have put some banks in an inconceivable position: owing money on loans to borrowers. At least one Spanish bank, Bankinter SA, the country’s seventh-largest lender by market value, has been paying some customers interest on mortgages by deducting that amount from the principal the borrower owes."

While today's macro calendar is empty with no central bank speakers or economic news (just the monthly budget (deficit) statement this afternoon), it’s a fairly busy calendar for us to look forward to this week as earnings season kicks up a gear in the US as mentioned while Greece headlines and the G20 finance ministers meeting on Thursday mark the non-data related highlights.

If there was any doubt that global trade is stalling, it was promptly wiped out following the latest abysmal Chinese trade data which saw exports tumble by 15% - the most in over a year - on expectations of a 8% rebound, with the trade surplus coming in at CNY18.2 billion, far below the lowest estimate. While unnecessary, with the Chinese GDP growth rate this Wednesday already expect to print at a record low, this was further evidence of weak demand both at home and abroad. Weakness was seen in most key markets, and the strength of China's currency was partly to blame, which again brings up China's CNY devaluation and ultimately QE, which as we wrote some time ago, is the ultimate endgame in the global reflation trade which, at least for now until the CBs begin active money paradropping to everyone not just the 0.01%, is only leading to inflation in stocks and deflation in everything else.v

The problem with the relentless scramble into London real-estate is that it was almost entirely driven by the high end, which as we have reported tirelessly over the past 4 years, has become - alongside the US ultra luxury real estate market - the new "Swiss bank account": a mostly anonymous place (with anonymous LLCs and Corps buying on behalf of uber-rich foreign oligarchs) where tax evaders can park their cash, with the NAR's, and the government's, blessing. And now, the party is over. As the FT reports, "sales of homes worth more than £2m have dropped by 80 per cent in the past year."... "It is like the 1970s again, when waves of wealthy people left Britain and it was a disaster.”

And it’s dragging down the economy.

We know it will be next to impossible to wait until October when this book of toner repair and printer cartridge replacement wisdom comes out, here is a sampling of timeless soundbites by the former Fed Chairman and current blogger, that should be enough to hold readers over.