Misery loves company. So with GE's surprise earnings miss and guide down on its growth rate for 2008 hammering the stock market on Friday, it's only appropriate to spotlight some economic misery that is starting to impact 1.3 billion other souls; namely, the beginning of the slowdown in China. (Recall that back in October GE's Jeffrey Immelt had told the Financial Times that strength in China and India would insulate GE from any US dowturn). Now, I know China is still supposed to see strong economic growth this year. Its economy is estimated to grow 9.4% in 2008 vs. 11.4% in 2007, according to The World Bank - down from their 9.6% estimate last month and 10.9% being talked about a few months ago. Economic growth can be like heroin, though, you keep needing more and more and it gets pretty ugly when you get less. Due to imbalances in the Chinese economy, the country has grown to rely on high rates of growth.
Why does China need this super fast economic growth? While the country has made huge progress from the 1970s, when they had 250 million people living in extreme poverty, they still have 29 million or so who are barely subsisting. Additionally, the Chinese had a baby boom in the early 1960s and an echo boom in the early 1980s, creating demand for 25 million jobs or so a year, while the economy is only creating about 10 million per year. The situation is summed up well in this quote from the Tehran Times (no that wasn't a typo):
China is facing a very severe unemployment problem, says Labour Minister Tian Chengping. He said 20 million new workers entered the labour market each year, chasing only 12 million jobs.
While I have sympathy for the Tibetan people, who have been in conflict with their Chinese occupiers for many years, the latest strife seems to be equally motivated by relative economic inequity between the Tibetans and the more recently arrived native Chinese Han, who have moved into the area due to the new rail links from the east and seem to be prospering more than the locals.
This overview of the situation from the UK's Guardian:
In the past two decades, new railways have economically integrated China's remote provinces of Qinghai and Xinjiang, making them available for large-scale resettlement by the surplus population.
Similar strife is erupting between the native Chinese Han and the Turkic Muslim Uighur (Wee-gur) in Xinjiang. Is it just chance that these issues are coming to the fore as China's economy downshifts? Certainly, increased public attention to China being generated by the Olympics and the torch procession are a catalyst for visible protests, but so too have the Olympics been a major catalyst to economic growth in China these last couple of years. Don't be surprised that a little post partum economic depression is arriving early.
According to the Associated Press, Chinese President Hu Jintao made these comments to Australian Prime Minister Kevin Rudd recently at an economic forum in Hainan:
Our conflict with the Dalai clique is not an ethnic problem, not a religious problem, nor a human rights problem," the official Xinhua News Agency quoted Hu as saying, referring to supporters of Tibet's exiled Buddhist leader, the Dalai Lama, whom Beijing blames for fomenting the unrest. "It is a problem either to safeguard national unification or to split the motherland.
The commentary belies a full understanding of the economic forces at work here.
Stock markets are the crucible wherein all economic, social and political inputs are synthesized, and the implications of the recent Chinese stock market performance are not encouraging. The Shanghai Index has already suffered a bear market decline of about 34% this year, and the outlook is overshadowed by a massive supply of shares still looking to come to market. According to Forbes, the Chinese stock market has a massive share overhang problem:
Currently, about 74.4% of the Chinese domestic A-share market, worth 24.6 trillion yuan ($3.5 trillion), is restricted from trading. These shares, mostly held by different government bodies, will be progressively released over the next five years. According to the timetable set by China's State-Owned Assets Supervision and Administration Commission, 1.6 trillion yuan ($225 billion) worth of shares could be sold in 2008. Including the unsold A-shares carried forward from 2007, Morgan Stanley predicted the total disposable overhang this year would add up to 2.7 trillion yuan ($380 billion), accounting for 32% of the market free float.
Besides the shares being successively unlocked by different government units, institutional investors that have participated in China's new listings in the past few years are also poised to dispose of their shares. Morgan Stanley said there were $64.5 billion worth of new shares floated in 2007, and 30.4% of those shares are locked up as IPO investments subscribed by institutions for as much as three years. Those shares will be flooding the market from 2009 onwards.
But it's not just the overabundance of shares looking to come to market weighing on the Chinese stock market, according to The Wall Street Journal:
The National Bureau of Statistics' survey of large industrial companies showed their profit growth slowing to 16.5% in the first two months of 2008 from 43.8% for the same period a year earlier. Dragging down the figures were industries hit by rising energy costs they were unable to recoup -- chemical fiber makers, electric utilities and oil refiners. Mining companies, by contrast, showed enormous gains. Stuck in the middle are ordinary manufacturers, where growth is continuing but at a somewhat slower pace.
The article quotes Citigroup as forecasting that growth in earnings per share for the all the Chinese companies they cover will be cut in half to 25% from 50%. Still healthy growth, but be mindful of the deceleration trauma. When a company grows 50% in a year it covers up a lot of warts - many caused by the unsustainable growth rate - and when the slowdown comes the warts break out with a vengeance.
China's inflation issues are one of those warts, and the government now appears to be pursuing a strategy of a stronger currency coupled with the increasing interest rate regime that has been in place for some time, to try to bring inflation under control. These policies are starting to have visible impacts, as reported in this piece on the blog of the Socialist Party Australia.org
The renminbi’s accelerating rise against the US currency - by 4.1% in the last quarter alone - has led to some of the features of a recession in southern China’s export powerhouse, the Pearl River Delta (PRD), a region that accounts for one-eighth of China’s GDP. Based on some estimates, 1,000 shoe factories have closed down in this region in the last year, most of them moving to cheaper, less regulated inland provinces, or to Vietnam and other lower-wage economies. The local government in Dongguan, an industrial city in the PRD, recently announced a new fund to help foreign companies there upgrade technologically, to shift out of labour-intensive lines such as footwear and textiles, which have faced the brunt of the renminbi’s rise.
When the tide goes out you find out who is swimming naked. The tide in China has been rising for years. The ethnic strife that has lately come to a head in China may be the latest sign that the surf is no longer up. My bet is a lot of skinny dippers are about to be exposed - and it ain't gonna be pretty.
From The Internet & Blogosphere
Maybe Monks Hold the Clue to Future of the U.S. Dollar - really worth reading
China: Save the Stock Market Investor!
China's Economy The Sound of Bubbles Bursting - also really worth reading
Chinese Inflation: It's Money Not Pork
China Currency Stronger Than 7 to the US Dollar
Picture from the Deccan Herald
A: After almost four years in real estate sales now, I have gone through my fair share of both buy & sell side negotiations. One thing that seems consistent with almost ALL the deals I do, is that the seller's first response to your initial bid is a reliable indicator as to where you might have to go to get a deal done! Lets discuss the seller's first response to your initial probe bid and whether this information gathering strategy may be right for you. Originally Posted February, 26, 2007
Its the most challenging part of my buy-side consulting for clients since I attempt to get the lowest price possible for my buyer, I have to hope the seller agrees to that price range. In the end, buyer clients must understand that it is not my decision whether or not the seller will respond to our low-ball bidding strategy. And it's not my decision how low the seller is willing to go to do a deal with you! If there is one thing I learned after 3 1/2 years it is this: Every seller is unique and under a personal set of circumstances when selling their home. Just because a building's 1BR's are trading for $900/sft, doesn't mean the seller of the property you are interested in will sell it around that price point! If there is no time pressure to sell or the seller is just testing the market, then bidding $1,000/sft for the property still may not get the desired result.
In fact, a complimentary side effect of this principle is that assuming the seller is really looking to sell their property than there is a price range already pre-determined as to what the seller would like to move the property for. The question that remains is how big is this 'acceptable range' and how quickly the seller wants to move the property; the faster the need to sell the lower the price is likely to be.
Which brings me to this conclusion: Assuming the seller is not testing the market and is really looking to sell, it will be the FIRST RESPONSE to your initial bid that will give you the best look at the poker hand the seller is holding
I use a poker analogy because of the incredible strategy and observational skill needed to play a good hold em' tourney from beginning to end. A similar scenario could be argued for housing negotiations.
Probe Bet: A bet made primarily to gain information by gauging opponents' reactions, especially a small bet made in pot-limit or no-limit games.
In poker, I like to send out what are called 'probe bets' every once in a while to see if I can gather ANY information at all from my opponents as to the strength of their hand. Even if I am holding a weak hand and planning a bluff strategy, a probe bet can be very useful in either winning the hand right there or saving me from an eventual big loss.
In real estate, the initial bid could be considered a 'probe bid' to see where the seller stands as far as their need to sell. If you get a very quick and aggressive response, well then you know you have a seller who is looking to sell quickly and is taking your bid seriously; giving you a tactical advantage. If you get only a slight response two days after your initial bid, then you know the seller is looking for a certain price range and may not be as motivated to sell right now for a lower than expected price. If you get no response, then you know the seller is under no time pressure at all and is likely to be testing the market; or your bid was simply too far below the seller's intended 'acceptable range'.
In all situations, it was the first response to the initial bid that set the groundwork for what is to come next. Sometimes your strategy will fail, and you have to be prepared for that; especially if you are using a low-ball bidding strategy. Other times you will get a very desirable response and your only decision left is how to play the rest of the ping-pong game.
It's impossible to set up one formula or theory that applies to all situations, so I leave it up to you and your buyer broker to discover for yourself. However, if you have read all the way down to here and still don't get what I'm saying, maybe this chart can help you visualize the importance of the seller's first response.
APT X IS ASKING $500,000 (say $850/sft) AND IS PRICED RIGHT
Situation 1 - Low Ball: Your initial bid of $425,000 gets no response. Obviously the seller knows the property is priced right and has a tight range of 'acceptable price' that is needed to make a deal happen. In this case I would advise my buyer client that a bid of at least $475,000 or so is needed to get the property. Since the apartment is priced right from the get go, the seller is not interested in buyers who are playing bidding games or not-motivated to proceed to the next step.
Situation 2 - Fair Bid: Your initial bid of $450,000 (10% below ask) gets a response of $485,000. Again, the property is priced right and the seller is telling you that there isn't much more room for negotiations! While your bid of $450,000 is a bit low for a properly priced apartment, the seller acknowledges and respects your bid by providing you with a response. The response of $485,000 tells me that you will need to come up more than the seller will likely come down to get a deal done. I would probably advise my client to bid $470,000 next and expect a response of mid-way from the seller.
Situation 3 - Aggressive Bid: Your initial bid of $475,000 gets a response of $487,500 from the seller; halfway. While you may feel like you didn't leave yourself much room for negotiating and getting the lowest price possible, you did tell the seller that you are a serious buyer and that you understand the property was priced properly from the start. At this point you have 2 choices. Either you stand firm and tell the seller that your initial bid is your most aggressive bid that you are comfortable making with the hopes of them accepting it OR you move to $480,000 to get the deal done. I don't see how a seller who responds to your initial bid of $475,000 with a counter of $487,500 will say NO to your $480,000 2nd bid.
BIDDING UNDER ASK FOR NEW DEVELOPMENTS
A tough feat to accomplish, but not impossible. Most developers will not budge in their set asking prices for units, leaving the buyer with a decision to make. Either the buyer sucks it up and pays full ask + sponsor closing costs OR you try to negotiate an incentive on the passed down closing fees that the sponsor asks all buyers to pay.
This is not meant to discourage you from trying to bid below what a developer is asking for a particular property, only to tell you that in many situations you will not get the desired result. You are at a disadvantage in the sense that transparency comes in only one form; what is being told to you. The information regarding percentage sold, remaining units, future price amendments, previously negotiated deals, traffic activity of sales office, desperation of the developer, etc.. are all pieces of information that either you do not have or must trust what is told to you by sales representatives. This leaves you bidding blind, trying to get the best deal possible. I find that there is a better chance offering full ask, and working on an incentive with closing costs the better strategy. Of course, this assumes the price is OK with the buyer's comfort zone!
Like all negotiating situations, the only way you will know for sure if NO to your lower bid really means 'NO', is by backing out of the deal and leaving the seller with a few days of 'thinking about losing the deal' to see if they won't come back to you! You must be willing to play hard-ball and risk losing the deal as well, if you want to give your low bid any chance of succeeding after a 'NO' response was already given back to you. Hopefully the seller will cave first.
UrbanDigs Says: Use your initial bid as a probe bid to see what the seller's reaction will be. Many times you will be able to get a lot of good information from a solid probe bid that will give you an idea of where you might have to go to get a deal done. In the end, every deal ends up at one price that is suitable for both the buyer and seller. So the question is, are you comfortable with where the seller is looking to move the property at. Since it is no one's decision but the seller's to ultimately make that decision to move at a requested price, the buyer must do all they can to find out the range where that requested price falls into!
Obviously the stat that pops out to me is the rise in '60 Day Delinquency Rate or Worse' from January to March. This is real people. Mish then goes on to discuss how Moody's downgraded the ratings of 279 tranches of 27 Alt-A transactions issued by Lehman Brothers; with an additional 97 tranches placed on negative watch (story).
Add to Newsvine
If a contract was signed in 2007 for a new development that closes 12 months later in 2008, the price data reported will reflect the market conditions for when the original contract was signed! However, human nature will perceive the future report as current and in line with the market at the time of the reports publish date! No this is not an episode of LOST with Desmond jumping back and forth through time! Its a simple acknowledgment that: PRICING DATA THAT IS YET TO COME WILL REFLECT PRICES PAID FOR NEW DEV CONDO'S MANY MONTHS EARLIER!
With the flowers starting to bloom and the song birds all atwitter I decided to get a few brokers on the line for an update on the kickoff of spring selling season in Brooklyn. I was a little surprised by how much activity there seemed to be, but I got a strong sense that price concessions are helping rev up demand.
From one of my anonymous mortgage insiders that I know, trust, and works as a loan officer at a major bank: 
You know, I must apologize on behalf of my industry to any buyer that has been put through a difficult and awkward situation because an agent at a REBNY firm won't allow you or makes it very difficult for you to change brokers and bring in buy-side representation! With that said, let me clearly point out what the REBNY rule of conduct is for member firms and their agents: