“It doesn’t mean the market is going to crash tomorrow.”
Money from Chinese investors “has dried up,” a residential real-estate broker in San Francisco told me a few days ago, as he was fretting about the local housing market. It’s a result of the crackdown by the Chinese government on capital flight, he said.
Chinese investors have been buying about 5% to 7% of residential properties in San Francisco, possibly more in parts of Silicon Valley. And other brokers are now publicly chiming in about money from China drying up.
“We’ve recently noticed a slowdown,” Jack Woodson at Alain Pinel Realtors in Menlo Park in Silicon Valley, told Bloomberg. “Buyers are taking more time to decide about making offers.” He fingered Chinese investors who’ve suddenly curtailed their purchases after they had “really been driving the market.”
Data coming out of China appear to support the thesis of a sudden money vacuum in some of the toniest West Cost Housing markets.
In February, foreign exchange reserves had dropped to $3.20 trillion as a result of rampant capital flight and the central bank’s efforts to prop up the yuan. It was the lowest level since December 2011, down $790 billion from the peak in June 2014, after a record plunge in 2015 of $513 billion. But in March, foreign exchange reserves rose to $3.21 trillion. And in April, instead of re-plunging, they rose again to the great surprise of the onlookers, hitting $3.22 trillion.
And China’s State Administration of Foreign Exchange (SAFE) reported that capital outflows have begun to ease. Net foreign exchange sales by commercial banks dropped to $23.7 billion in April, from $36.4 billion in March, and less than half of the $54.4 billion in January.
This money vacuum is being felt in Silicon Valley. It coincides with the tech slowdown, the iffy stock market performance, and the swoon in the IPO market. Bloomberg:
Silicon Valley, the most-expensive U.S. housing market, is seeing a pullback by the wealthiest homebuyers after a four-year real estate boom marked by bidding wars and multimillion-dollar prices.
In Palo Alto – where the median home price was $2.5 million in the first quarter, according to Zillow – the 11 listings of homes costing over $5 million as of May 14 have been on the market a median of 30 days. Gone are the bidding wars “when newly minted millionaires from tech initial public offerings raced against buyers from China to scoop up anemic inventory.”
And price cuts – the bane of the industry – are back in vogue. Bloomberg cites a home in a prime area of Palo Alto that, after sitting on the market since the end of March, had its price slashed by $500,000 to $7.5 million. It’s still on the market, having joined “a growing inventory of high-end homes in the area that are taking longer to sell.”
The slowdown in Silicon Valley also hit homes costing over $3 million, Realtor.com reported. In that range, the average selling price in April dropped about 9% from a year ago to $3.76 million. Homes in that price range sat on the market for 30 days, up from 26 days a year ago.
A similar trend is spreading across California. Homes costing over $3 million sat on the market on average 52 days in the first quarter, up from 40 days a year ago, Jordan Levine, an economist at the California Association of Realtors in Los Angeles, told Bloomberg. And more tidbits:
- In Santa Clara County, where Palo Alto is located, Q1 sales of homes costing over $5 million plunged 35% to just 13.
- In Atherton, a small town in San Mateo County, and one of the most lusciously expensive pockets in the US, the 25 homes costing over $5 million have been on the market a median of 100 days.
“The market is cooling down,” Avi Urban of Keller Williams in Palo Alto told Realtor.com. He’s seeing interest wane for homes costing over $4 million:
“It doesn’t mean the market is going to crash tomorrow,” he says. “This is a time where basically we have reached a point where it’s too expensive” for many would-be buyers, and it’s starting to pull down prices.
For example, Urban had a two-unit condo property in a prime Palo Alto location in the $2 million range that received only one offer in the first two weeks it was listed. A year ago, he would have expected it to receive more than a dozen bids for 10% to 15% over the asking price.
“We’re probably moving toward normalization,” Katharine Carroll, vice president at Pacific Union Real Estate in Palo Alto, told Bloomberg.
Alas, “normalization” is reminiscent of the famous explanations in 2007, as the housing bubble began to topple, that the market was “plateauing” and “taking a breather.”
So far, realtors claim that demand in Palo Alto’s middle segment, so in the $2 million to $3 million range, is still getting propped up as Facebook and Google are still hiring, unlike many of the other tech companies that have started laying people off. But there’s a snag.
“Palo Alto is at a crossroads, where some homes are doing very well, and some homes are lingering that last year would have sold with multiple offers,” Ken DeLeon, founder of DeLeon Realty in Palo Alto, told Bloomberg. “When they do sell, it’s when the seller cuts the price below what they would have gotten last year.”
And that would be a year-over-year price decline. Which is how it starts.
Apple and Alphabet, each worth around $500 billion, along with Facebook, Amazon, and LinkedIn, the Big Five in Silicon Valley, have a giant footprint on commercial real estate. So just how exposed is Silicon Valley’s office market to a slowdown among the Big Five? Because this could get very ugly! Read… Silicon Valley Commercial Property Boom Ends, Totally Exposed to Apple, Google, Facebook, Amazon, LinkedIn
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“Slowdown” doesn’t sound positive for further inflation and with the FED eager to begin lifting rates there’s a double whammy.
The average Bay Area home sold in April went for 7.1 percent more than the asking price, the largest percentage since the California Association of Realtors started keeping track in January 2008. On a typical home, that amounts to $62,000.
There are some housing markets in the Bay Area that are booming, like Oakland, with crazy price increases.
I seriously considered buying into E. Palo Alto during the 90’s, seemed like a great opportunity.
Although EPA home prices have gone up the area has not boomed as much as the rest of Silicon Valley due to the persistent crime problem there. Gentrification has not taken hold.
Interesting, politics no doubt can be thanked. My guess is crime has falling rapidly for the same reason, the area seemed ripe for turnaround. Maybe a good RE top indicator?
Sounds like the $3M market in PA is still ok. Thank god.
Can Yellin EVER raise rates, again? Good question. While what looked like the “Prime Time” may have passed, she may well be too chicken, forgive me, she has to read and digest all that data in her “data driven” organization before she does the inappropriate thing…
Why can non-citizens purchase property in a sovereign country?
Why shouldn’t they? Expats do that all the time.
Go buy in Asia and you see you not have this possibility in every Asia country.
True. Not all countries allow it. In some countries, no one can own land, not even citizens. They can only lease land from the government (China. for example).
Some folks (think fixed income, for example) might find it difficult to pay property taxes, despite low mortgage rates or having 100% equity without some form of government assistance.
It’s always about imbalances and distortions, tighter controls are necessary to minimize environmental impact……
Some countries (eg Bermuda) actual do it so that citizens can afford to live in their own country. It’s not always about “free markets.” There are such things as “society” and “community” that are higher and more important than just price.
For tiny countries (like Bermuda) with huge appeal to foreigners, this would make a lot of sense.
May I suggest a subtitle to the article: The Chinese “investors” money went looking for greener pastures.
If the Fed were to raise again it will be a big shock for sure.
Wow, impressive results from Salesforce. It’s hard to see the economy crashing/slowing down soon. Big tech seems to be barrelling ahead.
Don’t forget: Revenues of Apple, Microsoft, Cisco, IBM, and many other huge tech companies actually declined. Compared to them, Salesforce is small.
There are always winners and losers. So at the end of the reporting period we’ll know what the balance is.
Minor correction. Amazon is not a Silicon Valley company.
Amazon is everywhere. It’s considered one of the BIG 5 in Silicon Valley.
Just curious if you’re seeing the same slowdown in other Chinese dominated markets like Vancouver? That would help distinguish whether this results from a Silicon Valley economic slowdown or due more to the Chinese authorities now restricting capital flight in a way they had not before.
I would love for someone in Vancouver with some first-hand data to chime in.
You will not find hard data on this, since every level of government staunchly refuses to do so. So it comes down to what people can see with their own lying eyes.
As to the Chinese authorities restricting capital flight: these are the “investors” who know their way around the system. I do not blame them, I blame the governments in the west who facilitate this scheme.
Perhaps buyers are waiting to see if interest rates go up. I imagine there is a snapback in prices and availability when a rate raise is threatened as the total cost of a home is greatly dependent on the interest rate. Perhaps you know the rule of thumb Wolf? Something like a half percent is 50,000$ over the life of the mortgage???(for houses in the mid million range?)
Most likely the big five stay big and gobble up all the little startups and other companies. Same thing happened with banking and oil. The trickle down will now commence. Time to sell or lose value in those assets!
Hi Wolf:
Do you believe Chinese investors really only made up 5 to 7 percent of the overall Bay Area housing market?
That number seems very low…
5-7% was for SF. I don’t have a number for the Bay Area.
No one knows for sure. Chinese investors can buy through front companies, etc.
That 5-7% for SF is the range the industry produces in its various reports and estimates, and it was confirmed by brokers who deal with this daily. To me, in SF, it seems about right. In other places in the Bay Area, it may be low.
I am still do not know how an average person can afford to live in these area. If I do not have the job to pay for these properties in 30 years… I would pick my ass up and move to other states. My friend sold his home for a decent profit and moved to Texas.