Chinese Affects on the American Real Estate Market

Supply shortages, inflation, instability in the Middle East, 2021 continues to promote uncertainty around the globe and the most certain thing today, the real estate market stands to fall victim of the same uncertainty that has taken other industries by storm. As a real estate agent in one of the hottest markets in the county, North Carolina, the things I’ve seen are astounding. Home prices are increasing quicker year over year than the years leading up to the financial crisis. Today when a home or any sort of real estate hits the market, instead of taking the usual time to sell, properties are going under contract within days and in many cases much over asking price. The growth related to real estate has been said to be following the trend of inflation, which is impacting the United States heavily. Once the Fed dropped the rates, buyers and sellers created one of history’s strongest markets, but the cracks in the real estate market are beginning to show and the crash has already started half way across the globe.

Years ago the United States economy dictated the status of the global economy, but those days have come and gone, just as the prescedence the Coronavirus outbreak set in China, the U.S. would soon follow. As China has become one of the leading economy in today’s world, it would seem the next economic crisis may trickle down from China just as COVID-19 did. Chinese company Evergrande is one of the biggest real estate developers on the globe, and they recently defaulted on an amount comparable to the debt of a small country. Evergrande has been riding the insane Chinese real estate market in recent years, which believe it or not is more competative than the United States market. Chinese citizens have found that home buying is a way to invest in their future and buy an “asset” as real estate prices had been increasing in recent years; as a result they would spend their life savings on properties. Just as the American citizens would find in the economic meltdown of 2008, personal properties are not assets, especially when markets begin to shift. Evergrande had financed many of their projects from downpayments on prebuilt apartments, but as the real estate market began to change, the wheels of their operation began to fall off.

The collapse of Chinese Developer Evergrande has been compared to the demise of American investment Bank Lehman Brothers in 2008. Similarly to the ensuring collapse of Evergrande, Lehman took years to fail. The financial crisis of 2008 began a few years prior, it was not until Wall Street Giants such as Lehman began to default that the effects of the crisis reached all ends of the economy. According to CNN Article “Lehman Brothers: When the financial crisis spun out of control,” the United States government had no option but to allow Lehman to fail after the controversial bailouts of companies Fannie May and Freddie Mac. According to numerous media outlets, the Chinese government finds itself in a similar position; bailing out Evergrande would set the precedent that unwise business practices and large amounts of debt spending go unpunished as some organizations are simply too large to fail. Even as China’s economy has begun to resemble its American counterpart in recent years, the governments of the two countries could not be more different. The United States are run by a republic that operates on popular opinion and the votes of its’ citizens, after the events of the Tieneman Square, it is apparent the communist regime of China cares less about public opinion and more about holding on to power. Differences in goverment between the United States and China, leave many to believe China has less incentive to bail out a company that could collapse its economy, as well as many others.

Unlike years past, the United States economy is not the sole dictator of the global market. Urbanization in countries such as China has caused them to be intertwined with economies like the U.S. more so now than ever. Instead of obtaining loans from local banks, large companies such as Evergrande borrows funds from American or European lenders. Once a company as large as Evergrande defaults on a loan, it not only puts local workers out of business, it puts stress on lenders in other countries who’s economic woes trickle down to their local economies. Following the crash of the American economy in 2008, a global recession ensued that left many in tough economic situations. Historically low interest rates are the driving force behind the American Real Estate market, lenders providing these low rates are the same companies lending money to large investors like Evergrande. Once a company of such a large magnitude defaults, it causes lenders to lend more strictly as their confidence in the market wains. Evergrande’s collapse and overall uncertainty in the market will likely lead to rate hikes in today’s rates. Lenders are already raising rates slightly; in the fall of 2020, rates were well below 3%, in fall of 2021, rates are at 3% and rising.

Unsteadiness in the real estate market continues to deter potential buyers; this exodus from the market combined with the ensuing collapse of Chinese monster Evergrande, is producing a more bleak forecast for the market than at the beginning stages of the COVID-19 outbreak. North Carolina, as well as much of the southern United States remains a seller’s market, but indicators of a crash increase day by day. As a realtor in this region, I am seeing buyers hold off on purchases until prices fall. There are too many factors pushing against the market to promote stability and confidence moving forward. For two years homeowners have heard it is time to sell, but now is really The Time to Sell! Increasing interest rates and stricter lending practices will lead to the next financial collapse as the reckless spending habits of real estate conglomerates on the other side of the world act as the catalyst for disaster.

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