First, bad news for China is bad news for the world economy. We are already in a bleak environment, with difficulties in Europe, Japan, the US, . . . → Read More: Uncomfortable times in real estate in store?]]> Patrick Chovanec has a fascinating article in Foreign Affairs, titled China’s Real Estate Bubble May Have Just Popped. This is interesting and important from two points of view.

First, bad news for China is bad news for the world economy. We are already in a bleak environment, with difficulties in Europe, Japan, the US, and India. It will not be pretty if China runs into trouble as well. I am reminded of the feeling of carefully watching real
estate in the United States in 2006, with a sense that the future of the world economy was going to turn on how it turned out.

Second, it made me think about real estate in India. As with China, one often sees buyers of real estate in India have the notion that
this is a safe financial asset. This is a questionable proposition. Real estate is perhaps not an asset
class with a positive expected return in the first place; and it is certainly not a convenient asset class with features like liquidity,
transparency, diversification and easy formation of low-volatility diversified portfolios. I find it hard to explain the prominence of
real estate in the portfolios of even educated people in India.

In the article, Chovanec says:

For more than a decade, they have bet on longer-term demand trends by buying up multiple units — often dozens at a time — which they then leave empty with the belief that prices will rise. Estimates of such idle holdings range anywhere from 10 million to 65 million homes; no one really knows the exact number, but the visual impression created by vast `ghost’ districts, filled with row upon row of uninhabited villas and apartment complexes, leaves one with a sense of investments with, literally, nothing inside.

This has not happened in India. So in this sense, the situation in India is not as dire. But his second key message seems uncomfortably
close:

As 2011 progressed, developers scrambled for new lines of financing to keep their overstocked inventories. They first relied on bank loans (until they were cut off), then high-yield bonds in Hong Kong (until the market soured), then private investment vehicles (sponsored by banks as an end run around lending constraints), and finally, in some
cases, loan sharks. By the end of last summer, many Chinese developers had run out of options and were forced to begin liquidating inventory. Hence, the price slashing: 30, 40, and even 50 percent discounts.

Part of this looks familiar. There is a lot of leverage in Indian real estate development and speculation. Real estate speculators and
developers are finding themselves in a bit of a scramble hunting for credit. One hears about very high interest rates being paid by
developers. Other sources of financing are also weak. This reminds me of the dark days before the global crisis, when borrowing by real estate companies was the canary in the coal mine.

If business cycle conditions and financial conditions worsen, the problems of borrowing by real estate developers and speculators will get worse. How might this turn out? Perhaps the borrowers will merely get uncomfortable. Or, a few firms could really get into trouble, and start liquidating inventory. That would have substantial repercussions.

Suppose there is a situation where there are many people who have speculative positions in real estate, but significant selling of
inventory has not yet begun. The longs would then be nervously looking at each other, wondering who would be the first one to sell, to take a better price and exit his position. The ones who sell late would get an inferior price. In such a situation, conditions could change sharply in a short time.

On a longer horizon, I would, of course, be delighted if real estate prices are lower. This would help shift the supply function of
labour, reduce the cost of setting up new businesses, etc. But that’s more about the long-term policy changes, which would remove barriers for converting land into built-up housing, while rising vertically into the sky with FSI in Indian cities ranging from 5 to 25.

The Conference Board’s index of U.S. leading economic indicators rose for the fifth straight month in August. The streak represents the longest string of LEI gains in five years. The data further bolsters our view that growth likely began in June and will continue to strengthen through the end of the year. . . . → Read More: Leading Indicators Now Up for 5 Straight Months]]>

The Conference Board’s index of U.S. leading economic indicators rose for the fifth straight month in August. The streak represents the longest string of LEI gains in five years. The data further bolsters our view that growth likely began in June and will continue to strengthen through the end of the year. The index was up 0.6 percent in August after a jump of 0.9 percent in July.

Stock price gains, consumer confidence, and homebuilding increases helped push the leading index higher as more and more economists are beginning to finally share our view of much better than lackluster results in the second half.

“This is another signal that economic growth is turning sharply positive this quarter,” said Dean Maki, chief U.S. economist at Barclays Capital. “All of the elements for a robust recovery are falling into place. As we look ahead, job losses will end and the unemployment rate will stop rising…”

Wednesday saw significant spikes in confidence from four important market groups:

1. The Consumer: On Wednesday the Rasmussen Consumer Index, which measures consumer confidence on a daily basis, rocketed to its highest level in exactly one year.

2. Investors: Also on Wednesday, the Rasmussen Investor Index spiked to its highest level in . . . → Read More: Confidence Spike: Consumers, Small Business, Builders, Investors]]>

Wednesday saw significant spikes in confidence from four important market groups:

1. The Consumer: On Wednesday the Rasmussen Consumer Index, which measures consumer confidence on a daily basis, rocketed to its highest level in exactly one year.

2. Investors: Also on Wednesday, the Rasmussen Investor Index spiked to its highest level in over a year. Investor confidence is up 28 points since Jan 1.

3. Builders: Confidence among U.S. home-builders rose in September for the third straight month. The National Association of Home Builders/Wells Fargo confidence index bounced to it’s highest level in 16 months.

4. Small Businesses: Economic confidence among small businesses leaped to its highest level in 18 months in August as more owners expressed faith in U.S. economic recovery. According to the latest Discover Small Business Watch, their small business index rose 7.7 points from July, reaching the highest level since February 2008.

It is no wonder 2009 growth is coming on strong and the stock market might just be poised for a major leg up.

As this recovery begins we’ve continued to look . . . → Read More: Housing Starts Rachet Up in May]]> U.S. home builders started construction on many more residencies than expected in May. The Commerce Department reported that housing starts increased by 17%. Building permits also rose 4% — significantly more than expected. The increase in starts was punctuated by a 29% surge in the West.

As this recovery begins we’ve continued to look to strength in the housing sector as an indication of how strong this recovery will be. Sales of new and existing homes increased in April and buyers signing contracts to buy previously owned homes has now risen for three straight months.

Home prices are now at record affordability levels across the country. First time home buyers are also rushing to take advantage of the $8,000 tax credit included in Obama’s stimulus plan.

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