The money flowing out of China into global real estate is simply astonishing. In Canada, Vancouver and Toronto are fully inflated thanks to investor funds, house humping locals that are deep in debt, and buyers from China. In the U.S. while domestic buyers are largely being priced out, investors are picking up the slack in big ways. In a previous post we noted how one new community in Irvine was bought out by 80 percent of investors from China. This is causing some dramatic changes in particular areas where money is flowing in. We’ve talked about the money flowing from abroad for a few years now since the housing market was largely propped up by various investor classes. For a few years it was big funds from Wall Street and today it is foreign buyers and flippers. China is by far the biggest foreign buyer of U.S. real estate. Even though the Chinese stock market has gone on a roller coaster ride this year, money is still flowing out of the country in dramatic fashion and finding its way in U.S. real estate.
Investors have been the rocket fuel of the housing market. Starting in 2014 however big money started exiting the market in a methodical fashion. Now, the large investment money is coming from foreign buyers into targeted parts of the country. Every time something gets so hot, there are ideas floating around trying to make things accessible to the masses so they can jump in and party like a hedge fund rock star. Usually the gig is getting close to a top when you start seeing hot money trying to seek a home in any investment possible. There is now a democratization of information for people including things like Zillow, AirBnB, Uber, or robo-investment software as well. Ironically, something like Zillow is merely showing people how priced out they are in certain markets unless they want to drop $700,000 for a crap shack. I ran into a site that actually allows you to crowd fund into real estate investments that in the past, were the realm of hard money lenders with deep pockets.
The housing market in California has hit a plateau in 2015. The latest figures show that 17 of California’s 26 largest counties posted monthly price declines. In many parts of the state home prices are well out of the reach for regular families. What has transpired is a massive move towards renting or for many adults to move in with their parents. Purina Dog Chow Taco Tuesdays are a way to save a few pennies for that down payment on your dream drywall junker. The latest figures of a tepid market will cause more people to pause and reflect on the insanity of the current situation. People have made it an art to justify the price of your typical crap shack. Junk is junk and people are in a fog overstretching their budgets once again. So it is no surprise when we find out that notice of defaults also jumped up by 8 percent in October. Whoops. And keep in mind this is happening at the top of a six year uptrend in the stock market, tech wealth overflowing, and lustful investors buying up real estate like hipsters chasing after the latest food truck phase. I’ve had a few e-mails from people saying that El Niño is somehow going to revive housing prices again! Do people even remember 1997 and 1998?
You have to realize what makes a bubble tick. People get caught up in a deep rooted herd mentality. The absolute blindness that occurred between 2005 and 2007 was incredible. Yet a decade later, people have forgotten many of the reasons why the bubble hit in the first place. Toxic loans were merely a symptom of the bigger issue – and that bigger issue was that stagnant incomes need riskier debt to keep prices moving higher. The system is built on everything moving higher and the Fed lives off of this. Yet somehow, we had an enormous housing collapse. Today, prices are being driven higher by investors and foreign money. In a previous post we discussed how one housing development in Irvine had 80 percent of buyers from China paying all cash – all cash for a median price of $1.16 million. Even a couple of professionals can’t compete with all cash offers. The driver for pushing prices higher today is different but the result is the same – local families need to take on more precarious levels of debt to buy in today’s market. And the homeownership rate shows that many simply can’t compete.
The Bay Area housing market epitomizes the word mania. I was listening to a few real estate agents from the Bay Area and what they were saying sounds like absolute insanity. Of course, for people drinking the Kool-Aid it is hard to have any sort of perspective especially when your paycheck is tied to you believing in the mania. Hard evidence tells us that something crazy is happening in San Francisco. The median price peaked in May at a stunning $1,225,000 based on MLS sales figures. That is 65% higher than the previous peak reached and a whopping 104% higher than it was in January 2012. Mania, mania, mania. The price increase is happening so quickly that people are getting gentrified out of the market in epic fashion. You have a large numbers of foreign investors buying properties and many leave the places unoccupied. So not only do you take inventory away from those in the area that would live in these homes but you also take away potential rental property. The rental market in San Francisco is just as crazy. Builders have been building where they can especially with luxury condos. But now, at the apex of prices we now have a record glut of luxury condos. Many of these condos are sitting on the market as we enter the slow fall and winter season. The median condo price is $1,100,000. So where do we go from here?