Tuesday, October 27, 2015

Million Dollar Shack: Why Real Estate Prices Will Collapse In Southern California

The following video is a treasure because it provides real life look into the housing bubble brewing in Southern California through the eyes of a "normal" middle class family in that area. They have been priced out of the housing market and, like many families living in the area, they are watching prices runaway to the upside while they try and save for a down payment.

The video shows tour buses filled with wealthy Chinese investors looking to deploy excess cash in American real estate. Most do not remember, but this exact same process occurred in the late 1980's when Japanese investors flooded the American real estate market with their excess capital. Their economy experienced a tremendous asset boom during the 1980's and money was flooding into America driving real estate prices higher. There was a fear at the time the Japanese were going to purchase "everything" in America and essentially take over the country.

The Japanese asset bubbles burst in the early 1990's and the buyers of American real estate quickly became sellers which helped create the savings and loan crisis that struck American banks in 1991. Once hot properties were bundled and sold to investors at a fraction of their late 1980's prices (both residential and commercial).

The echo bubble today is following the exact same process. China has experienced a real estate price surge over the last 10 years due to a government sponsored debt fueled mania. To help put the magnitude of their debt growth into perspective think about this: The entire U.S. banking system is $15 trillion in size. China has increased the size of their banking system debt from $10 trillion in 2007 to over $25 trillion today. That means they have added a debt mountain equal to the size of the entire U.S. banking system in just 8 years to an economy that is almost 40% smaller than the United States in terms of GDP. Almost all of this money has found its way into the Chinese real estate markets causing prices to explode higher. Excess capital from wealthy developers and real estate investors has poured onto American shores. While areas like New York and Miami have felt a surge in Chinese real estate investment, Southern California has been the focal point.

When China finally reaches its Minsky moment in terms of debt growth and the marginal buyer becomes the marginal seller this process will reverse, just as it did with Japanese investors in the early 1990's. If the technology bubble in Southern California were to burst at the same time China begins to deleverage you will see SoCal real estate prices plummet the way Las Vegas prices did during 2008-2009. Why? It will become a market of real buyers that must qualify for a mortgage. To help explain why prices will collapse in this environment please see the following excellent walk-through from Realty Trac on the impact from mortgage rates rising:

Why Real Estate Markets Could Quickly Stall

Perhaps my favorite part of the video below is the rock star Realtor who is confident prices will "double again" from their current levels over the next six years;

"The amazing part, I don't think it's going to end. I think fundamental supply and strong demand is going to drive this market forever."




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