Chinese stock market woes impacting Bay Area real estate market

It would not be exaggerating to say that a large percentage of buyers here in the bay area, the silicon valley in particular, are from China. Anyone who has been in real estate more than 10 min knows this to be true. So then to learn that because of the turmoil in Chinese stock market last week could have a negative impact on the real estate market here is more than a little worrisome. Of course one of the Realtors they interview for this ABC 7 news segment seems to think everything is alright, and for the most part it is. There are still many homes selling over asking with multiple offers. Property values are still going up, but I am thinking long term. If the Chinese stock market widen into an overall depression in that country, what impact will that have on the real estate market over hear long term?

Chinese stock market woes impacting Bay Area real estate market

As Stocks Fall, Real Estate May Be the Best Defense

Pencils ready? Here’s today’s investment pop quiz.

Which asset class has performed as well as bonds during U.S. equity bear markets of the past 60 years?

The answer, perhaps surprisingly, is residential real estate. During the Great Recession, of course, the real estate market collapsed along with stocks. But residential real estate’s performance during the 2007-2009 bear market was anomalous, according to data from Yale University’s Robert Shiller, winner of last year’s Nobel Prize in economics and the co-creator of the Case-Shiller Home-Price Index.

In 14 of the 15 previous U.S. equity bear markets, going back to 1956, the home-price index rose. And in that lone bear market prior to 2007 in which home prices did fall, they did so by just 0.4%.

Besides bonds, no other asset class comes close to this good a track record during bear markets.

Residential real estate’s ability to hedge equity bear markets is of more than just historical curiosity, of course. The stock market recently experienced a full-scale correction, and it’s possible that we are already in a new bear market. And even if we’re not, a 20% or greater decline will happen sooner or later.

Residential real estate might even be a superior hedge than bonds in the next equity bear market. While real estate historically has risen along with inflation (positive correlation), bonds have been inversely correlated, tending to fall when inflation rises. If inflation were to heat up during the next bear market — as it did during the stagflation era of the 1970s, for example — bonds would be battling stiff headwinds.

The $64,000 question for investors seeking a hedge: Was residential real estate’s crash during the 2007-2009 equity bear market an anomalous event?

Professor Shiller’s response, when I put that question to him, was “To some extent, it must be… Overall there just isn’t much correlation of home prices with the stock market. So it [what happened in 2007-2009] looks like just chance.”

He added that residential real estate’s terrible performance during the Great Recession was in no small part caused by idiosyncratic developments such as “subprime mortgages, securitized in tranches, and dubious innovations, [as well as] liars loans.” Those developments are unlikely to play as big a role in the future, due to the greater “vigilance” that regulators now exercise over the real estate market — such as the Dodd-Frank act, which became law in 2010.

All of this suggests that investors should consider the possibility of hedging their equity portfolios with an allocation to residential real estate. Unfortunately, however, as Professor Shiller hastens to point out, that’s easier said than done. Many of the obvious investment vehicles don’t actually provide genuine exposure to home prices.

Take your home, for example, or investments in any other individual properties, for that matter. Idiosyncratic factors that are unique to each property will cause its investment return to diverge widely from that of the residential asset class as a whole. In addition, the market for physical real estate is relatively illiquid and transaction costs are high.

Real estate investment trusts (REITs) have a different set of drawbacks as a hedge. Though the market for them is quite liquid, they tend to “pretty much track the stock market” rather than the average price of residential real estate, according to Professor Schiller.

The same goes for stocks of home construction companies. Over the past two decades, for example, there has been a statistically insignificant correlation between the S&P 1500 Homebuilding index and the Case-Shiller Home Price Index. In contrast, those home building company stocks have been highly correlated with the overall stock market.

It is difficult to construct an exchange-traded fund pegged to the Case-Shiller Home Price Index – in fact the one ETF that attempted to do shut down just a year after it was established.

That leaves the futures market. Investors can bet on the performance of residential real estate via futures on the Chicago Mercantile Exchange that are tied to the Case Shiller Home Price Indices. But the market for these contracts is relatively illiquid, so even this alternative is not ideal. If you do invest in these futures contracts, be sure to use limit orders rather than market orders to buy and sell.

If you were convinced that a bear market in stocks had begun, you could hedge your equity holdings with an investment in residential real estate by allocating a small portion of your portfolio to these futures. You would pick a contract with a long-enough maturity to encompass the likely length of the bear market.

According Ned Davis Research, the average bear market of the past century lasted 13 months — and no bear market since the Great Depression has lasted two years.

Many individual investors have an aversion to playing the futures market on the grounds that they are too risky or hard to trade. But what makes futures risky is the leverage that traders employ, not the contracts themselves. The standard deviation of the Case-Shiller index’s annual returns, for example, is less than half that of the S&P 500 — and even more than a third less than that of long-term U.S. Treasuries.

Furthermore, most of the largest discount brokerage firms now allow you to trade futures as easily as you would an individual stock or ETF. So the aversion to futures may be a legacy of days of old when you had to jump through a lot of hoops to trade.

Investors with no experience trading futures would be advised to consult a financial advisor before doing so. If residential real estate performs as well in the next equity bear market as it has in most declines over the past half century, you will be glad you included it in your portfolio.

Source: Barron's, Mark Hulbert
http://www.barrons.com/articles/as-stocks-fall-real-estate-may-be-the-best-defense-1441104699

The Chinese are about to flood the U.S. real estate market

There are a number of Realtors here in the Silicon Valley who specialize in foreign buyers, particularly Chinese investors, and the stock market troubles in China last week left many of those agents wondering where that leaves the US real estate market. The real estate market here in the Silicon Valley is largely propped up by the tech workers and Chinese investors, without them we wouldn't be enjoying the robust market we are having. Many of my clients came from the tech sector or foreign investors. 

Anyhow, check out the great article below from The Real Deal about the growing concern of Chinese investors with their money in the Chinese stock market and how they are increasingly looking to U.S. real estate as a safe place to park their money.



After yet another drop in the Shanghai stock market and Hang Seng index on August 6, Daniel Chang heard his cell phone ping. The real-estate agent was on a business trip in Shanghai, and he was mid-bite during a dinner when he saw his phone light up from a message on his app, WeChat.

It was a Chinese client concerned over a $6 million property she was about to buy in New York City. She was visiting New York at the time.

“I don’t know if I can do this,” she told him over voicemail. “I might have to back out.”

She wanted some time to reconsider, she said, and maybe recoup her losses on the Chinese stock. She was considering dropping the $600,000 she had already put down on the cooperative — she had already lost as much on the stock market.

Then, over the course of a week, the Shanghai Composite had a brief and unsteady rise, while the yuan devalued by 3.2%. Chang’s client surveyed the apartment one more time.

She closed the deal.



Chang’s client is one of the group of wealthy Chinese caught in between a rock and a hard place: Leave their assets in China to potentially weather additional market volatility and yuan devaluations — or put it in real estate that is now more expensive than just a few weeks earlier.

“Lots of my clients have been hit heavily by the equity market,” Chang, who was once a vice president at HSBC’s private bank, told Business Insider through a series of interviews. “But that only makes them more determined to diversify out of China.”

The chaos of the past few weeks is likely to lead to an acceleration in the rate of real-estate purchases by wealthy Chinese buyers in the US and elsewhere.

“[Chinese] Investors who were looking at investing overseas may bring forward their purchases,” James MacDonald, head of Savills Research in China, wrote in an email to Business Insider. “While some of those that may not have been considering the purchase of property in the U.S. may now look at doing so.”

The Chinese see US real estate as a relatively moderate risk, high-return investment, Svenja Gudell, the chief economist at real-estate-research site Zillow, told Business Insider. Especially if buyers anticipate further RMB devaluation and market volatility.

Wealthy Chinese are already the largest group of foreign real-estate buyers in the US, with 16% of the single homes and condominiums purchased by foreign buyers snapped up by Chinese last year, according to the US National Homebuyers Association. They were trailed by Canadians, who bought 14% of homes.

These houses are typically more expensive properties, worth an average $831,800. Domestic buyers average $345,800 on a new single-family home, according to the US Census Bureau.

Brokers in the US can see the shifting sentiment among their Chinese real-estate clients.

Emma Hao, a broker for Douglas Elliman who specializes in Chinese clients, told Business Insider she’s already felt an increase in urgency among her buyers to purchase property in the US before the yuan devalues further.

“Because they are insecure about the economy and the politics, with the RMB devaluation, the stock market got mashed, and the real estate in China is a big bubble — there is nowhere to go.”

Chinese homebuyers also like the US real-estate market as a base for children who have been educated abroad, and as way to diversify holdings.

Andrew Wu, a real-estate agent at Daniel Gale Sotheby’s who caters to Chinese luxury-real-estate buyers in Long Island, told Business Insider: “They’re looking for a safe haven, and the real-estate market has always been looked upon as a safe haven for Chinese buyers.”

The US is also seen as more politically and socially stable, according to Hao. Chinese President Xi Jingping started focusing on an anti-graft campaign back in November.

Many of China’s rich have ties to the political figures, and many will look for somewhere to stay away from government scrutiny, Hao said.

“Because of the crackdown, many people got thrown into prison, and the political people are always connected to the rich people — they do business. They need their help,” she said. “People worry about their own position.”

More and more Chinese buyers will also be eyeing residential property as an investment, according to Gudell, the chief economist at Zillow.

She said she expects to see a different kind of Chinese buyer seeking property in the US: A reduction in buyers looking for homes, but an increase in those looking for investment properties.

“Where they are buying will also be different. The investor will buy in higher-tier neighborhoods, such as New York or Los Angeles,” she said.

Chinese individuals are also being actively encouraged to buy abroad by the government.

Thus far, Chinese individuals have been allowed to convert $50,000 into other currencies annually — though there are ways to skirt the regulation.

That is about to change, with the Chinese government readying the launch of the Qualified Domestic Individual Investor program.

The QDII2 is an overseas-investment scheme that would allow Chinese citizens to invest overseas directly. Those with at least $160,000 in financial assets qualify.

The program is likely to launch this year and will bolster overseas real-estate purchases on the part of the Chinese.

“With QDII2 in mind, within five years we might look back and think of the current levels of Chinese cross-border investment as quaint,” Andrew Taylor, co-CEO of Juwai.com, a website that helps Chinese to buy properties abroad, said to The Wall Street Journal in July.

Source: The Real Deal
http://therealdeal.com/blog/2015/08/30/the-chinese-super-rich-are-about-to-flood-the-us-real-estate-market/

'Black Monday' Rattles Housing Market

Chinese home buyers, in particular, may be more cautious in entering the U.S. housing market following Monday's massive stock market sell-off that sent stocks tumbling, according to housing analysts. The sell-off began in Beijing on Monday and sent shares plunging by record amounts across the globe. Chinese media dubbed it "Black Monday" as markets fell nearly 8.5 percent there.

In the U.S., the Dow Jones industrial average plunged more than 1,000 points just minutes after the opening bell alone on Monday. The Dow made up some ground later in the afternoon but still closed nearly 600 points in the red.

John Burns, CEO and owner of John Burns Real Estate Consulting, explained in a blog post that Chinese home buying will likely be under a cloud of uncertainty.

"While the recent Chinese stock market correction has caused a decline in sales (one of my builder clients has noticed a sharp pullback, another just told me about a home sale cancelation specifically due to the buyer's stock market losses, and one publicly traded home builder even mentioned the pullback on their earnings call), our research has convinced us of tremendous Chinese demand to buy US real estate for their families and as investments," Burns says.

However, Burns says there is some doubt over whether the Chinese will continue their big U.S. buying spree. He questions the number of people who will still be able to afford to purchase a home in the U.S. after the stock market correction and currency devaluation.

Chinese home buyers have been strong in the U.S. market lately. Sixteen percent of international home buyers come from China, according to the National Association of REALTORS®. The Chinese spent $29 billion last year on U.S. real estate, surpassing Canada as the top spenders.

Source: Realtor Magazine Online
http://realtormag.realtor.org/daily-news/2015/08/25/black-monday-rattles-housing-market?om_rid=AAFmZk&om_mid=_BV3LQtB9E6SrO7&om_ntype=RMODaily

Is China's Falling Stock Market Good for American Home Buyers?

I wrote about this yesterday for my blog post, but here it is from Realtor.com with more detail about how the Chinese stock market turmoil may affect Bay Area and Silicon Valley real estate.



You have likely heard: The stock market of the world’s second-largest economy, China, took a nosedive last week, falling 11.5%, causing a panic among global financial markets, and losing nearly $10 trillion since a June 3 peak.

And for the ripple effect, Japan’s Nikkei closed 4.6% lower last week, Hong Kong’s Hang Seng index closed 5.2% lower, and Australia’s main index closed 4.1% lower. The S&P 500 fell 3.2% on Friday, Nasdaq futures fell 5%, and, on Monday morning, the Dow lost 1,000 points. Ouch.

Could this possibly be good news, at least for the little-guy home buyer?

Well, the Chinese don’t have just their toes dipped in American real estate; they have their entire bodies submerged in it. Chinese investment in American real estate markets exceeded $10 billion in 2014.

“Chinese buyers have become the most aggressive foreign investors in New York City, surpassing Russians in volume and mass,” reports The Epoch Times.

San Francisco’s KCBS reports that the Chinese have largely been driving the Bay Area real estate market.

“Chinese buyers have spent more than $600 million on Bay Area real estate in the past two years,” it says. (By the way, home prices have been steadily rising in China, too.)

But tough economic times could mean less competition from Chinese investors, possibly cooling some markets and making a wee bit of room in inventory at least in the luxury market.

“There’s still a strong desire to buy in America, but maybe they’re not coming in with quite as strong offers,” Ken DeLeon told KCBS. Agents, the piece continues, are worried that “an extended global financial crisis could bring a chill wind to the Bay Area’s red-hot—and still-rising—home prices.”

But apparently it’s a different story on the East Coast. The Epoch Times reports that the stock woes may benefit New York.

“Interest in luxury tower apartments, as well as larger commercial real estate opportunities, is likely to even increase as China’s millionaires seek safe investments and higher returns in the United States,” it writes. “The Chinese stock market crash may encourage Chinese corporations to seek higher returns in New York.”

But tell that to New York City real estate brokers, who, according to the Real Estate Board of New York, lost confidence last month.

“Anticipation of an interest rate increase in the future and uncertainty about some aspects of the global economy, particularly the Greek and Chinese economies, were the key concerns cited as impacting their confidence in the market six months from now,” REBNY reported in a survey.

Is there any clearly good news for the home buyer? OK, no, not totally clear, but there’s a little something foggy on the horizon. Janet Yellen, chairwoman of the United States Federal Reserve, was moving toward an increase in interest rates, the first time since December 2008, when it was slashed to near zero.

Now, there’s speculation that “higher interest rates could further rattle markets,” writes The New York Times. That interest hike looks pretty unlikely right about now. And that is good news if you’re mortgage shopping.

Source: Realtor.com, Lisa Selin Davis
http://www.realtor.com/news/trends/chinese-stock-market-effect-on-american-real-estate-market/

China's stock market turmoil and Silicon Valley real estate.

So, in case you've been living under a rock the past 24 hours, the Chinese stock market as well as the US stock market is taking a beating. Apparently China's currency is doing well compared to the US dollar which in turn is making their exports more expensive, so China is trying to manipulate their currency to make it cheaper, and this in turn is freaking out investors both in China and on Wall Street.

What does this have to do with Silicon Valley real estate? Well, this is just speculation on my part, but these investors in China are losing allot of money and because of that, they may want to recoup at least some of their wealth by selling the real estate they own here. If too many of these properties get put on the market it could drag the market down by creating an artificial buyer's market - a good thing for those in this valley looking to buy but have been sitting on the sidelines because property values are too high, but a bad thing if you are a non investor seller looking to sell. 

Another important thing to think about with regard to market crash is that there are many here in the Silicon Valley who are invested in the stock market through their 401K and/or their tech stock options they were given for getting hired on with the company they work for. Companies such as Google, Apple and Facebook give out stock options all the time to new employees as an incentive to come work for them. Anyhow, allot of these same individuals who haven't bought a home already here in the valley might have been planning on buying a home by cashing in their stock options. Now that stock prices of many of these companies are taking a beating, these buyers might deciede to sit on the sidelines longer, which will cause property values to go down. 

This could be a temporary market hiccup or a longterm market correction. It's too early to tell.
  

Here's a simple explanation for what just happened to the stock market