Property Grunt

Thursday, August 25, 2005

The Chinese Connection

No. I am talking about the Bruce Lee classic, which was originally titled Fists of Fury. I am talking about the role China and the rest of Asia plays in this housing bubble/bomb.

The bottom line is this folks China and parts of Asia are buying our debt. Those mortgages you signed up for have now been bundled up and sold to investors in Asia courtesy of our banks and mortgage brokers.

Ok. Well what is the problem? Well according to Robert Reich, Secretary of Labor under President Clinton and now faculty member at UC Berkeley's Goldman School of Public Policy, there is a huge problem.

Here's where the Chinese connection comes in. A major reason mortgage rates have stayed low is there's a lot of money around. And much of that money has been coming from abroad. China and the rest of Asia have been putting their spare cash into America, in order to prop up the dollar and make it easier for them to export to us.
But that's about to change. We've been pressuring them to let their currency rise, and they're getting the message.

Paul Krugman of the New York Times Op-ed page also throws in his two cents about getting funds from abroad.

Now, any economics textbook will tell you that it's fine to borrow from abroad if the money is used to expand the economy's productive capacity. When 19th-century America borrowed from Europe to build railroads, it was also enhancing its ability to repay its debts later. But we aren't borrowing to build productive capacity. As a share of G.D.P., investment other than housing construction is below its average between 1980 and 2000, and way below its level at the end of the 1990's.
In other words, a fuller answer to my former neighbor would be that these days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn't seem like a sustainable lifestyle.

So besides the hanky panky going on with the market and ginnie mae this is another monkey wrench that could be thrown in the housing works.

Recently it was reported that the July housing market still maintained a strong standing. But it is all going to catch up with us sooner or later. There are too many balls up in the air and there is a point when it all comes crashing down.

Let's not forget the oil prices. AAAAAARGH!