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Global Markets, Local Reach – Chinese Markets and Global Real Estate Impact

Francesco Foggia of Guaranteed Rate Talks Global Markets.

The global financial ecosystem will always be a chess board – with pieces impacting each other as they move into – or out of – place. The real estate market is one of many moving pieces on that chess board, meaning that when pieces start to flummox into or out of control, the market is impacted in micro and macro ways.

Last week, Chinese stocks crashed and all Asian markets suffered major losses. European markets fell by about 5% and Wall Street was crushed at the open.

The losses tipped Germany into a bear market – Frankfurt’s DAX has now fallen more than 20% from its April peak, and its gains for 2015 have been wiped out.

Worries that China is stumbling also trashed commodities. Oil slumped more than 4% to a new six-year low below $39 a barrel.

China’s benchmark Shanghai Composite index declined 8.5%, wiping out all gains made this year. Many companies, including some large state-owned firms, fell by the maximum daily limit of 10%. The index is now down 38% since its June peak.

In Japan, the Nikkei closed down 4.6%. Stocks in India suffered their biggest fall in more than seven years.

The dollar weakened against other major world currencies such as the euro, British pound and yen, on speculation that the global market turmoil may push back a U.S. interest rate rise.

Many investors and economists had bet on a Fed rate hike in September, something it hasn’t done since 2006. But in the Fed’s minutes published last week, committee members sent the market mixed messages.

A rate hike would increase borrowing costs – interest on loans – for companies in emerging markets. It would also make American debt more attractive to investors, which means they could dump emerging market debt.

Oil is a lifeline of economic growth for many developing countries, which are also seeing their currencies lose value because of their economic exposure to China.

“What we’re seeing in the market is that with regards to mortgage rates, this market collision impacts our industry because investors have fled to safety in buying US Treasury bonds versus stocks, which drives down the yields offered on the treasuries since they’re in high demand. This, in turn, drives down mortgage rates,” said Francesco Foggia, Vice President of Mortgage Lending for Guaranteed Rate and trusted lender for Hilton & Hyland.

“When the stock market is improving, mortgage rates go up, with money leaving the safe haven of U.S. Treasury bonds and being pumped into stocks, raising the yields to keep investors attracted to Treasuries.  When the stock market does poorly, money flows back into the Treasury market, driving down the yield, thereby pushing mortgage rates down,” Foggia added.

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