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If there were ever any doubt as to just how inextricably linked the world’s economies are, the events in China this summer – and their

repercussions – should put those doubts permanently to rest.

As of this writing, and beginning in June, years of enthusiastic investment that drove the Chinese stock market into textbook bubble territory

began to chill when the Shanghai Composite lost more than 30 percent of its value. By the end of August, when the Shanghai Composite lost

8.5 percent of its value in one day, the aftershocks were felt around the world. The Dow Jones Industrial Index fell 1,000 points in a single day,

and nearly 600 the next.

Over the coming days, the Dow rebounded to a great extent, but the reverberations of China’s stock market crash and overall economic

slowdown were still being felt, and will continue to do so. In particular, the seismic changes in the Chinese economy could have a

disproportionate effect on the U.S. real estate market in several ways.

Prime Movers in the Real Estate Market

The veracity of official Chinese government economic data has always been met with some doubt, not least among Chinese investors

themselves. Despite continued government claims of phenomenal growth, doubts persist, and had in fact long before margins came due

in June, sending the stock market into a tailspin.

In fact, the recent efforts of the Chinese government seem to justify those doubts more than ever. Surprise currency devaluations; propping

up the market through direct, bulk, governmental stock purchases; cutting interest rates to record lows – these are not the actions of a

nation that is growing at its self-purported 7 percent. That doubt, and the associated uncertainty, has driven many Chinese investors to

seek safe harbor for their money outside the country.

That’s why, according to the National Association of Realtors, Chinese investors are now the biggest foreign purchasers of U.S. real estate.

They’ve eclipsed the next largest group of foreign national real estate investors – the Canadians – by a two-to-one margin, and have poured

$28.6 billion into real estate transactions in just the past year.

This is not a recent development, though. For the past several years in the wake of America’s credit crisis (which also had global

implications), Chinese investors have seen the appeal of U.S. real estate as a long-term investment that produces good returns. In fact, in the

years since the bottom of the U.S. real estate market, we’ve seen growth averaging about 5 percent per year. For the Chinese, that’s a better

investment than U.S. treasury bonds, and a more tangible one as well -- one that college-age children can live in while attending school in the

United States.

While there were certainly other factors at play, an argument could be made that a good portion of the home price appreciation we’ve seen

over the past few years – and which was so attractive to Chinese investors – was actually driven by all cash sales by foreign buyers. That

activity certainly helped to keep home prices regain their footing after our own housing bubble popped.

Time to MoveOf course, recent efforts by the Chinese government have complicated the issue for Chinese investors in U.S. real estate. In August of this

year, the Chinese government stunned many economists and market-watchers by devaluing its currency against the U.S. dollar in the largest

single-day markdown in over 20 years. Ostensibly meant to curb capital outflows from China, the move also makes American real estate

more expensive for Chinese investors.

Yes, the devaluation of the yuan only increases the cost of that investment in U.S. real property by a few percentage points (not including the

rate of property appreciation here in the U.S.). However, when coupling properties priced in the millions of dollars with losses in domestic

stock market investments, it adds up.

THE IMPACT OF CHINA’S ECONOMIC TROUBLES ON THE U.S. HOUSING MARKET

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At the same time, the repeated cutting of interest rates by China’s

central bank (to encourage lending and provide some momentum

to the struggling economy) has also resulted in diminishing

returns on investments such as Chinese domestic bonds; and

Chinese investors looking for yield have increasingly looked

abroad. According to the Wall Street Journal, China saw net capital

outflows of $162 billion just through June of this year.

The point is, despite the increased costs, we’re more likely to

see an increase in Chinese investment in U.S. housing. In fact,

in light of the events of the last few months, Chinese investors

have stepped up their overseas investment even more, especially

since a weaker yuan makes purchases abroad that much more

expensive. The time to act, they seem to feel, is now.

Influence on Interest RatesWe would be remiss not to touch on the fact that China is the largest holder of U.S. debt, bar none, owning nearly $1.3 trillion in U.S. Treasuries

as of June. That said, the country is in need of liquidity right now, to support its efforts in stabilizing the Chinese economy. China’s foreign-

exchange reserves dropped by a record $94 billion in August, and most analysts believe a large portion of that decrease was due to a

reduction in U.S. Treasuries.

With our largest holder of debt backing away from the table, we cannot help but wonder if – and to what degree – this might impact borrowing

costs here at home. After all, China dumping its holdings of U.S. Treasuries could make Treasury yields rise more than they might otherwise.

Since Treasury rates are the benchmark used to set the cost of consumer borrowing, this is a concern. Couple that with the widely expected

rise in interest rates by the Fed sometime in Q4 2015, and the effects could be magnified. So far, we dodged the rate increase bullet at

September’s Fed meeting, but what happens in October remains to be seen.

Luckily, for the time being at least, the U.S. economy seems to be weathering the effects of China’s Treasuries fire sale quite well. Right now,

demand for U.S. debt remains healthy, benefiting from the extremely low, or even negative, rates on bonds in other perceived economic safe

havens such as Germany and Japan.

Of course, no one really knows with any certainty what the extent or price tag of China’s economic rescue plan might be. The more capital

the nation needs, the more we can expect its storehouse of U.S. Treasuries to hit the open market. If the flood of Treasuries from China is

large enough and rapid enough, the upward pressure on Treasury yields may translate into significantly higher borrowing costs for American

homebuyers. That is one of the key factors we monitor very closely to check the pulse of the U.S. housing market, and a sharp increase in

borrowing costs could result in diminished real estate transactions, halt the upward growth of home prices and ultimately bleed into the wider

U.S. economy at large.

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