Chinese and New York Stocks Tumble; Whither Palo Alto Real Estate Prices?

February 27, 2007

The big financial news today is the sell-off on Wall Street, sparked apparently by an even larger plunge on the Chinese stock market (New York Times article; link won’t work forever.)

New York real estate blogger Douglas Heddings over at True Gotham believes it will have a positive effect on the New York real estate market.

What about here in the Bay Area, specifically the famous and pricey town of Palo Alto: What effect will the Chinese sell-off have on Palo Alto real estate prices?
Beyond the obvious fact that the Chinese economy is completely intertwined with the American one, there’s an even more important, and local, aspect to the question: Chinese buyers are a significant portion of the local real estate market — 25% or more – and that market has been booming of late, to the continued astonishment — perhaps even chagrin — of the perma-bears. Consider the following chart of Palo Alto’s 7-day rolling median prices. (Data courtesy of the good folks at Altos Research.)

Palo Alto Median Home Prices

Not by any means being an expert on the Chinese stock market, or, for that matter, on Chinese housing spending patterns, I’ll hedge my bets by using the old economists ‘ two-handed prediction trick:

On the one hand…If this drop continues, wealthy Chinese may find themselves with less income to buy properties here in Palo Alto, drying up some of the demand.
On the other hand…If this drop continues, wealthy Chinese may want to get their money out of China in a hurry, and perhaps some of that money will find its way here.

Having pinged some friends with far more insight into this than I, the going consensus so far is that it’s unlikely to have a negative effect, but for different reasons than above:

  • The smart Chinese money is already well-diversified out of the country
  • Not much of the downpayment that Chinese buyers use to buy homes in Palo Alto actually comes from their wealth in China

Any other thoughts?

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Written by Kevin · Filed Under Palo Alto, Real estate 

Comments

8 Responses to “Chinese and New York Stocks Tumble; Whither Palo Alto Real Estate Prices?”

  1. Kevin Boer, Realtor, 3 Oceans Real Estate on February 27th, 2007 6:27 pm

    From Mike Liu, husband of fellow Alain Pinel realtor and colleague
    Lisa Liu:

    If the drop is serious and sustained, there could be a bit of dip in interest from wealthy Mainland Chinese as they figure out how to better allocate their risks. He has to remember, however, that lots of these folks already have their assets outside of China anyway (the really shrewd people are not going to get stuck with their assets in the Shanghai market - it’s the little folks who are more recent investors who will get plastered and they’re not investing in Palo Alto real estate). So for many reasons, Palo Alto will continue to be a magnet for Mainland Chinese with money … And even with a major stock market correction, over the medium term there will be more and more of these people (the next trend in corporate Chinese investment is major investments abroad including US and Canada, and individual money will follow the corporate money since as we know it’s sometimes commingled if a state owned entity is involved.

  2. mike simonsen on February 27th, 2007 9:20 pm

    I was thinking about this too. The Palo Alto market has been so hot, following the stock market. We’ll see if the drop is sustained and if that scares the buyers.

  3. Douglas Heddings on February 28th, 2007 6:13 am

    Very interesting perspective Kevin. WOW…25% of your market comes from Chinese. I think your first commenter hit it on the head though by suggesting that mostly small investors will be hit by an event like this. Let’s also not forget that if this had happened over a few day period, people wouldn’t be talking so much about it.

    An lastly, to clarify, I myself am not exactly sure what will happen with our New York City housing market which is why I asked 2 of the most powerful financial people I know to comment about it on True Gotham. In my 15 years in the real estate industry, stock market movement like this is usually followed by very quiet phones in the office for a few days and then a return to normalcy. Let’s see.

    Kee up the great work!

  4. Kevin Boer, Realtor, 3 Oceans Real Estate on February 28th, 2007 8:50 am

    This just in from a local agent who does a lot of business with the Chinese community…

    In the late 80’s and 90’s, a lot of cash deals came here from Taiwan from people riding the rising equity values of Taiwanese real estate. After 2000, similar deals started coming here from mainland China, but mostly for high-end properties. Most of the Chinese buyers for properties in the $1M to $1.5M range tend to have been here for a while and use stock options for the down payment.

  5. Greg Coladonato on March 1st, 2007 11:46 am

    Kevin,

    I would like to dive deeper into the claim that money from China is a significant factor in the local real estate market. Could you point me to the source of the 25% claim?

    I would also like to know what percentage of local RE activity comes from Indian citizens and naturalized Indian immigrants.

    When you mentioned that ‘Most of the Chinese buyers for properties in the $1M to $1.5M range tend to have been here for a while and use stock options for the down payment’, it occurred to me that these are immigrants working for/founding companies, not wealthy investors diversifying their money around the world..

  6. Christian Sterner on March 1st, 2007 1:02 pm

    I guess my only question is how much can you relate the Chinese markets directly to Chinese people? In other words, people outside of China (although not as easy as it might seem) can toss their money into Chinese markets.

    What freaks me out, and I thought about this again just yesterday, is the potential that we are topped out in two financial markets (the stock market and in the real estate market). If this is the case-and I am not one of those guys that likes to toss my hat into the market prediction ring-then we just might be in for a hurting unlike any in my lifetime. Am I the only person thinking about this?

  7. Kevin Boer, Realtor, 3 Oceans Real Estate on March 1st, 2007 7:26 pm

    Christian — No, you’re certainly not the only person thinking along those lines. Your fellow commentor Greg is a kindred spirit.

    Greg — The source of the 25% figure is estimates from local title companies. I should double check that, and will do so over the next couple of days. At the same time, I’ll see if I can come up with an estimate of the number of buyers of Indian origin.

  8. Let’s Double Our Check our Numbers: What Percentage of Palo Alto Home Buyers Are Indeed Chinese? | 3 Oceans -- The San Francisco Bay Area Real Estate Blog on March 1st, 2007 8:18 pm

    [...] My previous post on what impact the recent stock market fall might have on the Palo Alto real estate market generated some interest and questions.  Friend and reader Greg asked about the (apparently) surprisingly high percentage — 25% — of Chinese buyers in the Palo Alto real estate market, a fair question considering the premise of my article, namely, that the Chinese stock market could have an effect on Palo Alto home prices.  He also asked about what the percentage of home owners might be of Indian descent. Mea culpa; in my previous life, I was taught better:  don’t just throw out numbers, but document their source.  The 25% is an estimate that’s been floating around our industry, provided by one of the title companies; I’m not sure which one. [...]

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