Has the United States ever experienced a time when a foreign nation has attempted to buy up so much of our land all at once? As you will read about in this article, the Chinese are on a real estate buying spree all over America. In fact, in some cases large chunks of land are actually being given to them. Yes, you read that correctly. China is on the way to becoming the dominant land owner in the entire country, and that is starting to alarm a lot of people. Do we really want a foreign superpower to physically own so much of our territory?
There are some that are playing down this threat by making a distinction between the Chinese government and Chinese corporations, but things work differently over in China than they do here. In China, the government is involved in everything. In fact, 43 percent of all corporate profits in China are produced by companies that the Chinese government controls. And all of the rest of the companies are very careful to follow the lead and direction of the Chinese government.
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Did you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st? We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“. In other words, it could be a “Lehman Brothers moment” for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that “hot money” has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?
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If you have a job that involves building homes, buying homes, selling homes or that is in any way related to the mortgage industry, you might want to start searching for alternate employment. Seriously. Interest rates are starting to rise dramatically, and mortgage lenders such as Bank of America, Wells Fargo and JPMorgan Chase are all cutting thousands of mortgage-related jobs. Last week, mortgage refinance activity plunged to the lowest level that we have seen since June 2009 and total mortgage activity dropped to the lowest level since October 2008. Unfortunately, this is only the beginning. Mortgage rates closely mirror the yield on 10 year U.S. Treasuries, the the yield on 10 year U.S. Treasuries has nearly doubled since early May. But it is still only sitting at about 3 percent right now. As I have written about previously, it has a ton of room to go up before it hits “normal” historical levels, and so do mortgage rates. As I noted the other day, some analysts believe that the yield on 10 year U.S. Treasuries is going to hit 7 percent eventually. If that happens, mortgage rates will be more than double what they are today. And we have already seen the average rate on a 30 year fixed rate mortgage go from 3.35 percent in May to 4.57 percent last week. If interest rates continue to rise we could be heading for a “housing Armageddon” that will make the last housing crash look like a Sunday picnic.
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There are very few segments of the U.S. economy that are more heavily affected by interest rates than the real estate market is. When mortgage rates reached all-time low levels late last year, it fueled a little “mini-bubble” in housing which was greatly celebrated by the mainstream media. Unfortunately, the tide is now turning. Interest rates are starting to move up steadily, even though the Federal Reserve has been trying very hard to keep that from happening. A few weeks ago, when Federal Reserve Chairman Ben Bernanke suggested that the Fed may start to “taper” the rate of quantitative easing eventually, the bond market had a conniption and the yield on 10 year U.S. Treasuries shot up dramatically. In an attempt to calm the market, the Fed stopped all talk of a “taper” and that helped settle things down for a brief period of time. But now the yield on 10 year U.S. Treasuries is starting to rise aggressively again. Today it closed at 2.71 percent, and many analysts believe that it will go much higher. This is important for the housing market, because mortgage rates tend to follow the yield on 10 year U.S. Treasuries. And if mortgage rates keep rising like this, another great real estate crash is inevitable.
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Something very strange is happening to Detroit. Once upon a time, it was the center of American manufacturing and it had the highest per capita income in the United States. But now the city is dying and the Chinese are moving in to pick up the pieces. Lured by news stories that proclaim that you can buy homes in Detroit for as little as one dollar, Chinese investors are eagerly gobbling up properties. In some cases, this is happening dozens of properties at a time. Not only that, according to the New York Times “dozes of companies from China” are investing in businesses and establishing a presence in the Detroit area. If this continues, will Detroit eventually become a city that is heavily dominated by China?
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