Euro Pounded, Foreigners Purchasing Power Down
A: Only 3 weeks ago I discussed why it might be important to talk about the loss of purchasing power for foreign investors in the Manhattan real estate markets. A week before that was a discussion on Sovereign Debt concerns as CDS spreads widened for 5-YR government bonds of Greece, Portugal & Spain. By now, readers should see the interconnectedness of these forces.
So here we are today and I see plenty of craziness in the tradable markets across the globe:
Crazy. Crazy. Crazy.
The VIX is surging as volatility enters the markets with a vengeance and investors rush to buy downside protection rises; just months after reaching a 52-wk low suggesting complacency setting in.
I just want to put into perspective how dramatic these currency moves have been recently. Only 3 weeks ago a discussion on the loss of purchasing power for those investors with Euros to put to work, gets even juicier. At that time, E1,000,000.00 would purchase $1,357,100 worth of US real estate. That was just 3 weeks ago and was down from being able to buy $1,489,200 worth of US real estate in mid-November 2009. Right now, as I write this (see currency chart above right) the same E1,000,000.00 can buy $1,268,200 worth of US real estate - a loss of an additional $89,000 or so of dollar purchasing power from only 3 weeks ago. It's not that foreigners are fleeing our markets or refusing to submit bids; something that I certainly can't measure in any meaningful way. Rather, the volatile currency moves are resulting in a decline of purchasing power for those foreigners converting Euros to Dollars when closing their transaction. In short, these guys can't buy nearly as much for their Euros as they could have just 7 months ago. On the flip side, this could make previous Euro investor-owners holding Manhattan property more inclined to sell to take advantage of the currency rise in their dollar based asset - especially if they bought near peak and are expecting to take a loss. The loss in the trade of the asset might be offset by the recent gain in the dollar against their local currency. Interesting.
If the weak dollar made headlines everywhere for a supportive argument on rising Manhattan property prices, right now the reverse force is in play. That's all Im saying because I know other brokers won't as it fits into the negative press category that 'can't do any good' in a commission based industry. It is what it is! Still, I'm surprised the markets have not sold off more so these are things worth following over the coming weeks and months.
Posted by In Debt We Trust
Thu May 6th, 2010 01:19 PM
Sigh. I bought Vix puts too early. I thought shorting a 25-30% rise in volatility was a sure bet back to normalcy.
Anyway, the crazy thing here is not the Euro or the Greek bond yields. It's 30 year treasury yields
. . .back under 4.5%! (4.31% last time I checked).
What effect if any are these bond yields having on the mortgage markets?
Posted by Noah
Thu May 6th, 2010 01:29 PM
all bonds have been rising lately - risk aversion. not so much deleveraging as I would think gold would be selling off too if that was the case.
I think this is a good old fashioned flight to safety/risk aversion trade after a loooooong period of a SEARCH FOR HIGHER YIELD.
Posted by Noah
Thu May 6th, 2010 02:09 PM
IDWT - I wonder if this Greece triggered the start of a dollar carry trade unwind.
I recall back in NOV someone asked me what signs to look for if the dollar carry trade unwind was happening - comment 5 at 4:13pm which you actually replied to...
Danny - Noah, what are some of the initial signs that may indicate the positive carry trade unwind is upon us?
Noah - the main sign will be a sharp, fierce rally in the US dollar and likely a similar fall in commodities/stocks. I wonder how metals will react as they may disconnect a bit given the nature of the crisis and actions taken across the world to stem it.
In Debt We trust - The warning sign will be a jump in options volume for vix call futures.
http://www.urbandigs.com/2009/11/chinas_banking_regulator_dolla.html
well...:
1. Sharp/Fierce rally in US Dollar - check!
2. Sellof in Equities/Commodities - check
3. Disconnect in Metals/Gold - check!
4. Jump in options volume for VIX calls - check!
Interesting!!!
Posted by kevin
Thu May 6th, 2010 04:27 PM
idwt,
I would unload those vix puts ASAP!
Today was batshit insane. I could actually smell fear running through the floor.
-K
Posted by anonymous
Thu May 6th, 2010 10:23 PM
I'm sitting on a substantial loss on the vix puts. I foolishly went out and bought more vix puts at Vix 22 and Vix 25. Will hold and see what happens in the next few days.
I think Trichet will be forced to act very soon and pull a Bernanke by buying Greek and other PIIGS govt bonds to support the market. (after all, there are very few private investors willing to buy 20% yield Greek bonds). Many European banks and pension funds are already sitting on substantial losses on their so called "Safe haven " govt bonds. Additionally, if the ECB does not act in a firm manner, they face the risk of a bank run.
The ECB has already run unconventional measures - covered bond buying - that is similar to the UK's gilt and USA's treasury purchases. So it is not so far fetched from here that the ECB will buy Greek or Spanish or any other govt bond.
Disclosure - no holdings of EU zone govt bonds.
Posted by In Debt We Trust
Thu May 6th, 2010 10:24 PM
I'm sitting on a substantial loss on the vix puts. I foolishly went out and bought more vix puts at Vix 22 and Vix 25. Will hold and see what happens in the next few days.
I think Trichet will be forced to act very soon and pull a Bernanke by buying Greek and other PIIGS govt bonds to support the market. (after all, there are very few private investors willing to buy 20% yield Greek bonds). Many European banks and pension funds are already sitting on substantial losses on their so called "Safe haven " govt bonds. Additionally, if the ECB does not act in a firm manner, they face the risk of a bank run.
The ECB has already run unconventional measures - covered bond buying - that is similar to the UK's gilt and USA's treasury purchases. So it is not so far fetched from here that the ECB will buy Greek or Spanish or any other govt bond.
Disclosure - no holdings of EU zone govt bonds.
Posted by TomPier
Fri May 7th, 2010 02:07 PM
great post as usual!
Posted by Bear
Sat May 8th, 2010 11:30 AM
Noah,
I have been seeing the same thing. I know the European investor who must be about 20% of the condo market has both less purchasing power and more selling power. I also see credit spreads widening. I have been selling some investments that I think are sensitive to credit financing (REITs). So far we are only looking at a 3 day selloff. I don't know how long it would take to spread into NYC RE -- probably has to be sustained to have a meaningful effect. There is still a lot of shadow investor owned spec properties out there trying to sell for peak prices which is carrying negative if rented. Cap rates in the City are now down to 1.5 to 2% for many of these same properties, i.e. well below after tax financing cost. Further, the mean units are not affordable for people making the mean income in the area, so it must be spec bought to stay at this level. My thoughts are that RE takes closer to 3 years to move before repricing actually occurs. Your a broker, so what do you see.
P.S. -- I've been buying REO at >10% cap rates in other markets.
Bear
Posted by Home for sale
Tue May 18th, 2010 09:06 AM
Fantastic real estate blog. Keep it up.
Posted by Mbt
Wed Jun 2nd, 2010 10:44 PM
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.
Posted by Paul Salamanca
Fri Jun 4th, 2010 05:30 AM
I have used www.SkipBrokers.com to find all of my no fee apartments in NYC for the past 5 years...No fee apartments....
Posted by links of london
Wed Jul 7th, 2010 02:22 AM
good post.thanks for sharing.