Wednesday, January 13, 2010

China's real estate bubble...could it derail us?

As you're probably aware, China has a major role in the financial stability of the United States. They're the #1 buyer of our bonds which is critical to our government's ability to finance anything, including the economic recovery. The original story on MSNBC is here:

Now, China is facing its own potential real estate meltdown. Prices have risen substantially in recent years making real estate speculation more lucrative than actual work. Sound familiar? It should. That's what started the mortgage meltdown here.

How does this affect us here and our local real estate market? On several fronts, including buyers of luxury homes, the general health of the economy, and interest rates. Many buyers of luxury homes (and property in general) have come from overseas as the value of the dollar dropped in recent years. With the recent drop in real estate prices that buying has continued. However, if the economy in China takes a hit we could see many of those buyers disappear. I see a significant number of overseas buyers of luxury homes in Los Altos Hills. The high-end market is rough enough but that would hurt even more.

China put curbs on bank lending yesterday which caused a slight dip in our stock markets. From a psychology perspective, having the market drop again as it did when our mortgage meltdown started would damage what little confidence we have in the current recovery. So from a selfish perspective, we want China to stay strong so our recovery can continue.

As for interest rates, the impact from a meltdown in China is difficult to predict. However, it could mean more limits on our banks to lend with higher costs as a hedge against defaults or to cover losses. We're not done with our own foreclosure storm yet. With rates rising in recent weeks, the up-trend will take a little wind out of our recovery's sails.

I'll keep an eye on this issue and post again when and if we see a real impact.

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