China $60 Trillion Real Estate Engine Slows . In 1994 China underwent a major tax overhaul that caused the central government to take more money at the expense of local governments. In response local governments used their zoning power to sell 70-year leases for residential development, sparking a housing boom. In this story we read of real estate moguls gifting $20,000 watches while claiming they are too trivial to be a bribe, gifting million-dollar rings, and flying 3 private jets (for three people) to go wine tasting in France. In a couple of decades China went from communal property to 90% of people owning their home (and many second and third homes as property taxes and insurance are insignificant holding costs) to full on build mode that resulted in a major surplus of supply. In 2017 Xi Jinping declares houses should be for living in, but it isn’t until 2020 when hard caps and lending restrictions are enforced on developers. Over the past two years housing prices have fallen in most Chinese cities, and many developers have defaulted on massive amounts of debt. It remains to be seen how widespread the damage will be to the greater Chinese and global economies.
Mortgage Rates improved this week as the price of Mortgaged Backed Securities (MBS) eclipsed the highs from last week. Mortgage rates are up 0.5% from this time last year.
New Construction – supply continues to lag behind demand. Housing Starts rose 2% in October to a 1.37M annualized pace, essentially flat from the previous month’s report. Housing Starts are down 4% year over year. Single Family Starts were flat at a 970k annualized pace and are up 13% year over year.
Inflation – the October Producer Price Index (PPI) report showed producer inflation decreased by 0.5%, the largest decline since April 2020. Year over year inflation fell from 2.2% to 1.3%. Producer inflation declines typically foreshadows consumer inflation declines, so this is a good indicator for Mortgage Rates. The Consumer Price Index (CPI) showed that overall consumer inflation remained flat for October, while year over year inflation has declined from 3.7% to 3.2%.
Mortgage Applications to purchase homes rose 3% for the second consecutive week but remain down 12% year over year. Refinances increased 2% and are down 7% over year.