Signs of concern with economy?

‘When taxi cab drivers and school teachers start speculating in real estate, that’s when you know it’s an overheated market,” said a colleague of mine about a year before the 2008 real estate market crash.

He moved his positions over to apartments in anticipation of what was coming.

While it was a purely an anecdotal observation, his remarks seem almost prophetic as I sat down with him over lunch again recently to talk about the current market conditions. The back drop of that conversation is the structural problems with that U.S. economy.

U.S. households still have more debt than their annual incomes, with debt now at 103 percent of disposable income.

While that’s down from the 2007 high, it’s still above the 100 percent mark of 2002, which was a high mark and well above norms decades earlier.

Fueled by cheap credit, corporations have been borrowing more money in recent years adding debt at a 9.5 percent annualized rate since the third quarter of 2010 compared to 7.5 percent pre-crash.

Then there’s this pesky federal debt of ours.

Outside of debt held by the Social Security Trust Fund, federal debt has risen by roughly $7.3 trillion over the past six years, an increase of 140 percent over where it was then. The only sector that actually de-leveraged was the financial sector because it had to in order to survive.

Meanwhile, Chinese capital flowing into the Puget Sound region is a curious thing if not a signal of some kind. Could it be an indicator of what’s coming in the Chinese economy?

China has been propping up our economy to keep us consuming their products by buying our treasuries, which has the effect of keeping interest rates low for us. If that stops or slows, interest rates and inflation could go up here and that would trigger another contraction. My colleague is concerned.

“When wealthy Chinese start buying houses and condos here sight unseen, their run is probably coming to an end,” he said.

If he’s right, then affordably priced apartments and discount retail remain appealing places to invest even though they’ve been on a strong run the past six years. Investors in the office sector and higher-end retail, with some exceptions, should play their hands cautiously even though the temptation with cheap debt and corporate liquidity is to expand.

Whether he’s right about the behavior of Chinese investors signaling a market adjustment is hard to say.

He has my attention this time, though.

Tom Hoban is CEO of The Coast Group of Companies. Contact him at 425-339-3638 or tomhoban@coastmgt.com or visit www.coastmgt.com. Twitter: @Tom_P_Hoban.