Euro Pounded, Foreigners Purchasing Power Down

Posted by urbandigs

Thu May 6th, 2010 12:23 PM

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:

  • China markets plunge to 8-month low

  • Greece is in shambles

  • Talk is now of a Euro contagion, starting with Greece and spreading to Italy, Spain & Portugal

  • The US Dollar is surging against other major currencies - 14-month high vs Euro

  • Euro is plunging; France blames the speculators

  • European gov't bond CDS and corporate CDS are blowing out

  • Talk of solvency crisis becoming a shorter maturity liquidity crisis, as debt funding/rollover fears rise

  • 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.

    euro-manhattan.jpgI 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.

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