Overhang

Sometimes it’s hard to truly comprehend the actual size and scale of China.

For me I find it interesting in the context of the United States:

Story 1:

An acquaintance of mine who is a golf course architect once told me of a trip he made to China years ago while working on a project there. When he arrived he asked his driver “What is the population here?” The driver responded “About 1.3 billion, but they believe that there are about 1.6 billion when you factor in the people who are not properly documented so cannot be included.”

My friend responded “so your margin of error is the size of the entire United States…”

Story 2:

Felix Zulaf is one of the brightest & most successful macro investors of our time. He rarely talks, but when he does, you should listen. He recently gave an interview discussing the problems with residential real estate in China. He states that they currently have an overhang (I.e. more houses produced than actual demand) of nearly 100,000,000 homes.

To put into context, that is equal to about 2/3rd of the total number of homes in the United States.

What’s more impressive is that the US has almost 4x China’s GDP per capita while only having ¼ the population.

Finally, here is what’s on my radar:

lending & credit

Anyone with an internet connection has read that the Commercial Office market in the US is facing significant headwinds. It’s now showing up in places like Canada and Shanghai. A good friend of mine named Ben with a very successful career in real estate once told me “banks will keep lending….until they all stop.”

real estate

While we’re on the topic.. the idea of converting all of these empty offices into residential seems overplayed. The sad reality is some real estate doesn’t survive, just ask that abandoned shopping mall in your city that was a beehive of activity 20 years ago.

On the flip side, residential remains hyper-local but otherwise resilient. Supply-constrained markets (like Charleston, SC where I reside) are holding up very well, while the West coast continues to hemorrhage.

Here are the top performing markets for house price appreciation

(courtesy of ResiClub)…

followed by the bottom performers.

Another variable facing nearly everyone I know is the rising (borderline unsustainable) cost of insurance, particularly in high growth markets like TX and FL. Some of this could ultimately shake loose additional inventory, but my concern on the longer term impact of housing prices lies in Fed policy..

I alluded to it back in November. If 30yr rates move sharply lower, and everyone who has been suffering through 6-8% mortgages for the last few years can finally refinance in the low 4’s….

Stock to Flow. That old chestnut…. It seems to be applicable here as well. Clearly Blackstone isn’t worried about the future of residential right now either, as they are stroking a huge check.

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, an investment firm located near Philadelphia, PA. He is based in Charleston, SC.

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