THE HS DENT FORECAST

August 2022

China Leads the Second, Final Global Real Estate Bust,

Greater Than the Previous Crash
I have covered the global real estate bubble many times in the past, and
there’s no contest: China has the greatest real estate bubble in the world. Its
valuations vs. income are the highest, followed by those in Australia, New Zealand,
and Canada. The U.S. got hit hard in the 2008 financial crisis; hence, we are a bit
less overvalued now but still at the highest valuations in history.

So, I’ll start here with China and then follow with a look at the U.S. and Canada.
This first chart shows sales of homes in China spiking up the most into late 2021,
to far higher than the peaks into 2013 and 2016, and then starting to crash into
2022; sales there are already at lower levels of decline than reached in past slumps
over the last decade. Year-over-year sales recently were down near 60% at worst. By Harry Dent
That is shocking, and otherwise only COVID has come anywhere near causing that
kind of issue, for obvious reasons. Since 2012, the only other slowdown in home sales has been
20% down at worst.

The 2020 problem for

China was only a short-
term, outside shock. This
time, the crash will be
longer term and much
deeper and will reflect
the inner workings of how
the Chinese government
pumped up its economy by
encouraging home building
and speculation. If sales
are already crashing this
much, imagine how deep
this crash could go. And

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on top of that, China’s Spending Wave already peaked long term in 2011 and will decline forever. Only
continued urbanization ahead from 60% to 80% will provide growth, but China has already overbuilt
housing (22% of homes are vacant) and infrastructure, which largely should accommodate the future
gains of urbanization for decades forward. In other words, China could accommodate the rest of its
urbanization cycle by simply having their migrants move into the 22% of homes now sitting empty.

I am estimating a 60%–80% real estate crash in China. That is unheard of. Real estate went down only
34% in the 2006–2011 crash and only 26% in the Great Depression in the U.S., as it did not bubble
that much compared with stocks back then, given that mortgage loans were 50% down and of 5-year
duration. The coming real estate crash in China, the largest emerging country in the world and the
biggest single driver of global growth, will be more than devasting.

The chart shows that home prices dropped only around 20% in the GFC (Global Financial Crisis) in
2008 and around 7% in 2014. No one will be expecting what I am forecasting. The Chinese often
have one or two extra
homes for speculation,
and they typically don’t
even rent them out.
This is another shot
back at the forecasters
who say that China
will soon overtake the
U.S. economy on a
PPP (purchasing power
parity) adjusted basis. I
don’t see that coming
for many years after
this crash, as China will
crash and slow more
than the U.S.

Real estate crashes

affect the economy
much more than stock
crashes, because they
hit household net
worth and the banks
the worst, and China
will have the worst real
estate bust. The chart
shows that 2008 was
the worst year for home
price declines, down
around 20%, and 2014
was the only other year
with a drop, around

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7% down. Imagine a 60%–80% crash, when the worst crash you’ve seen in many years was 20%!
There could be no greater economic shock to a country’s people than this, even including that of the
Great Depression in the U.S. Chinese have 75% of their net worth in real estate and it is much more
overvalued. Losing most
of your net worth is far
worse than losing your
job for a year or two.

And, of course, you

would expect real
estate development to
slow rapidly, and it has.
The top chart shows the
steep fall in investment
in development projects
since February 2021,
another good leading
indicator of the great
reset to come.

New project growth went negative in May 2021, and total property investment growth went negative
in September 2021. The much lower trend in new projects ensures that property investment will
continue to decline even more on its approximately 4-month lag.

But here’s the big

news and bugaboo in
China now. Buyers are
protesting! In China,
developers often have
buyers start paying
on their mortgages
during construction.
Along with letting
builders know that the
Chinese government
will backstop them,
so they should go
ahead and build, build,
build; payment during
construction is yet
another way China
encourages home buying and development, as it helps finance builders. And it’s yet another reason
China has the greatest real estate bubble in history. COVID has caused delays in construction, as it did
in many other things, and consumers are now protesting by not paying those pre-payments. The chart
shows that many cities are experiencing significant delays, with 8% of those cities now having delays
over 10%.

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Zhengzhou leads, with near 30% delays. The top 10 includes, notably, Changsha, Chongqing, and
Shanghai. Beijing surprisingly comes in on the low side, around 2.5%. Maybe the developers are careful
not to be late there where the government is most likely to see it.

Chinese are considered to be more loyal followers and citizens. What this shows is that they will
protest when real estate projects are late, which means that they will consider walking on their
mortgaged homes when home equity goes negative.

Needless to say, I wouldn’t want to be a Chinese bank now. The good thing is that the Chinese have
fewer mortgages and put more money down. The bad thing is that 75% of their net worth is in real
estate, which is owned much, much more widely than stocks there and is much slower to come back
after a crash. In the U.S. crash of 2008, stocks bottomed in 17 months. Real estate took 5.5 years to
bottom. For comparison, even after the greatest real estate bubble in history, real estate still makes up
only about 35% of our net worth in the U.S.
Another bad sign for
home development and
prices is that Chinese
workers are getting
more pessimistic about
future employment
opportunities. That
sentiment is now at its
worst level since 2009,
at the bottom of the
downturn, not closer
to the top, like now.
That view is not quite
as low as in the depths
of the last recession in
2009, but it is getting
there fast and surely
will go much lower.
These readings should
get exponentially worse
as China undergoes
the greatest real estate
crash and downturn of
the leading countries in
the world while having
the highest net-worth
exposure to the real
estate crash.

You can see the larger

and imminent risk of
a downturn in the

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Chinese economy by looking at the fall in their junk bonds. In the chart on the previous page, focus on
the top green section of each bar. Also, you have to read this chart “backward” by date and percentage,
from right to left. The junk bonds trading below 20% of original capital value have climbed since
December 31 from about 5% then to approximately 25% now. But, more importantly, the biggest drop
occurred just in the last
month. That means the
drop is very likely to
be accelerating rapidly
now!

And, of course, the

banks can’t be looking
good, with real estate
finally starting to tank.
Chinese stocks have
gone through three
successive drops since
peaking in May 2021,
and the third wave
down does not look
finished yet, down 27%
thus far. The index should end up being down well over 90% before this is over. To make it worse for
the banks, a recent credit stress chart I saw showed an increase from level 2 in June to level 5 in May
and level 6 in June.

Summary

China is leading the world economy down now, as I have been forecasting. It’s simply the biggest
bubble economy in the world, just as the up-and-coming U.S. economy was into the Roaring ‘20s and
1929 stock market top. But the present real estate bubble is way more exaggerated than the one back
then and is more central to the crash and depression ahead. And again, no other country’s real estate is
more overvalued than that of China.

The U.S. Is Following China Fast

I’ll start here with existing home sales, as they are 90% of the U.S. real estate market. New home sales
tend to be a bit higher in price and aren’t as representative of the real market. Existing sales most
affect those of us who already own homes.

The chart on the next page shows that growth in existing home sales generally has been weak since
September 2020, following a spurt of buying when people anticipated staying at home more due to
COVID. There was a 5% growth spurt in September 2020, followed by marked on-and-off weakness
throughout 2021, including a 7.2% plunge in February and minor 2% and 3% upward bursts in
September and November; sales ended down again in December. January 2022 started off with a bang,
at 6.5%, but that was it! Sales then fell for five months. I see that falling trend accelerating again soon.

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The next chart shows the major crash from late 2007 into 2009 for single-family home starts, down
80%! Once builders see signs of weakening, they pull back quickly, as most are used to going under
or nearly under about once a decade. The fall in the Housing Market Index looks less extreme on the
chart, but it fell more like 87%, just from lower levels.

So, imagine what the declines will be this time, with a greater downturn coming. The housing starts
tend to be a leading index, but they have not done that as much since COVID, again showing how
conservative builders get when they smell trouble… and stop building fast. And, of course, as a sign of
weakening, you would expect to see housing inventories rising in the most overvalued cities, as the
chart on the next page shows.

This great scattergram shows how higher overvaluations (on the right scale) are generating greater rises
in inventory when things slow down. So, the scatter tends to flow upward at about a 45-degree angle
to the right. The cities in the chart rising the most in inventory are, in order from highest to lowest,

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San Francisco, Denver, Colorado Springs, Sacramento, Nashville, Phoenix, and Fresno. These are a lot
of the most desirable places; hence, the greater overvaluations.

That always brings me back to the greatest misconception I see people having about real estate,
especially in a bubble… and we are in a super bubble. They always come to me and say, “My house is
really special, and it’s in a really special place where they can’t build more,” and so on. “That’s why I
can’t see it going down, or not much.” But here’s my point:

Contrary to most people’s beliefs, it’s the really special places that bubble the most… and, hence,
burst the most. And the valuations all tend to come back down roughly to where the bubble started.

The real proof in the

pudding here in the
housing slowdown
is that mortgage
applications are
declining the fastest,
down 40% since
February 2021. That
obviously leads home
sales a bit. Mortgage
applications are now
down the most among
the housing indicators
we are looking at!

These next two charts

look at net outflows
and inflows into key states. In the first chart, on inflows, we can see that Miami is No. 1, with second
quarter (Q2) inflows of 12,614, much higher than Q2 2021 inflows a year ago, at 9,830, so that

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city seems to be gaining momentum. That amounts to about 45,000+ people moving in per year on
average. Miami is the southernmost city on the East Coast and is on the beach. The eastern side of the
U.S. has a lot more people than the western one, and that’s not just right on the coasts. About twice
the U.S. population lives east of the Mississippi vs. west of it. No. 2 is also in Florida: Tampa, which had
an inflow of 9,841 in Q2. Tampa was the last place I lived until I moved to Puerto Rico in 2016. It has
gotten hipper and has grown faster since I left.

Phoenix comes in at No. 3, at 9,730, similar to Tampa, lower than its Q2 2021 inflow level, at 11,464.
Is Phoenix losing momentum here? The numbers drift down to Dallas, at 4,964 in Q2, much lower than
the inflow of 7,458 in Q1. Dallas has always been one of the larger, more affordable southern cities. It
did not bubble as much in the first bubble, much like Phoenix and Atlanta—and, hence, these cities did
not burst as badly into 2011. This time is different. Even these cities have become unaffordable.

The cities losing momentum from Q2 2021 to Q2 2022 are Phoenix, Sacramento (which stayed flatter),
Las Vegas, and Dallas. Those cities are likely to be the first to fall.

But most interesting is from which cities these migrants tend to come. Miami’s top source for in-
migration is New York (no surprise). Migrants to Tampa come from Orlando in state and from New York
out of state. New Yorkers have always liked Florida. San Diego, Phoenix, Las Vegas, and Dallas all have
L.A. as their top origin of inflows. It’s the same warm, dry climate and latitude, so why not?

The west coast of Florida has always attracted migrants from the Midwest. I think the trend of New
Yorkers into Tampa is more recent. When I lived there, most of the people moving in were from the
Midwest… and they were nice people. For Cape Coral, Florida, the number one source for in-migration
is Chicago, and that is true for North Port, Florida, as well. Migrants to San Antonio most often are
from Austin; again, this is not surprising. San Antonio is a little over an hour south of hip Austin and has
substantially lower prices. Why not live there and commute to Austin for fun? The biggest out-of-state
in-migration source for San Antonio is L.A. For San Diego and Sacramento, Seattle is the top out-of-
state origin of migrants.

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Now, let’s look at it from the opposite side. This chart shows which states have the most outflows and
where those people tend to go. This angle rounds out the picture. San Francisco, with limited space
for expansion and super-high prices, is No. 1 for outflows, with 48,718 people leaving in Q2 2022 vs.
45,703 in Q2 2021. That’s almost 200,000 per year. It is amazing that housing prices can stay that
high, given the level of outmigration. I was one of those who left that area, in 2002. And given the
much smaller population of San Francisco vs. L.A., it is even more dramatic. The No. 1 destination of
those who leave San Fran is Sacramento (an hour away), and the No. 2 destination is Seattle.

L.A. is second for outflows, at 40,632 (no surprise); but again, this is a way lower outflow as a
percentage of population than San Francisco. The outflow for L.A. is much higher in Q2 2022 than for
Q2 2021, which was 33,712. And New York (again, no surprise) is No. 3, with an outflow of 35,165,
down a lot from 48,731 in Q2 2021. Maybe people who moved previously started missing New York,
moved back, and then told their friends not to leave. Washington, D.C., is fourth at 24,492, vs. 18,179
in 2021. The numbers fall off more dramatically as you go down the list. The top three total 124,515
for Q2 2022, and the bottom three have a total combined outflow of only 13,199.

Where do they go? San Franciscans go to Sacramento and Seattle, Angelenos go to San Diego and
Phoenix, and New Yorkers go to Philadelphia, next door. That doesn’t show in the inflow chart, as
Philadelphia isn’t high enough in outflows to be in on it… maybe Philadelphians are happier where they
are. Those from D.C. go most often to Salisbury, Maryland, which obviously is an attractive suburb.

Those from Seattle go to Phoenix… Now, that’s a play in opposites: from cool and wet to hot and
dry! Bostonians go to Portland, Maine, just north of them and with lower taxes. Detroiters move to
Cleveland, the largest city nearby. Denverites mostly move to Chicago… I would have thought they’d
go to Phoenix. And Chicagoans mostly move to the Cape Coral, FL, area, including Ft. Myers.

And, finally, let’s look at Canada. Home sales there have fallen more than in the U.S., down from a peak
just over 65,000 to about 40,000 recently. That’s a 39% drop, already rivaling the 2007 to 2008 drop
of 42%. Since Canadian home prices did not get hit nearly as hard as those in the U.S. last time, I have
been expecting a bigger crash there. Vancouver and Toronto are the two bubbliest cities and have

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 higher valuations than
most large cities in the
U.S.

The 2007–2008 crash

started slow for Canada
and then accelerated
rapidly into 2008. It
didn’t linger into late
2011, as the crash did
in the U.S. Canada
also had an off-cycle
minicrash in 2017 that
the U.S. didn’t get. But
the present crash in
Canadian real estate,
only four months in,
starting from a top
in February through
June, is the sharpest
one yet… and it has a
long way to go. If the
U.S. goes down by 50%
on average, as I most
expect, Canada should
go down by that much
or a bit more.

The chart on the next

page is the scariest one
for Canada. It shows
what you would expect,
that higher prices
incentivize more owners to put their homes up for sale and that more buyers are balking at the prices. I
am happy with the home I bought in Puerto Rico, not only because I like it, but also because I bought it
at an outrageously low price. I don’t worry about losing money on it even in this crash, and
Puerto Rico is being propped up by tax incentives for rich gringos, especially in areas like mine. But
someone is making us a very high offer in line with the market now, and we are a bit tempted to take it!

The truth is that this is the most global and the greatest real estate bubble in history. There is virtually
no place to hide. Higher-priced luxury homes will fall more, as will higher valuations. Home valuations
in outer suburban and exurban areas will drop less. The middle of North America will fare better than
the coasts. I expect this to become more painful and clearer by year-end, even though the bottom
is not likely to come until 2024 or a bit later. This is my last warning not to dally if you are looking at
selling your home or real estate.

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 Real estate in general
(including housing)
takes longer to fall and
falls less than stocks.
But it hurts the owners
and the lenders more,
because it is leveraged
by mortgages. If you
have a more-recent
80% mortgage and
your house value falls
50%, you are 30%
underwater.

Stocks Have Likely Completed the First Wave Down: TLT Marching Toward 196

The Nasdaq is the stock index I am focusing on, as it is the lead indicator and has been falling a little
faster than the S&P 500. The S&P 500 will catch up over the longer crash cycle. The first wave looks
to have bottomed on June 14 at 10,565; thus far, it has bounced as high as 12,102, and it now seems
to be backing off a little. The key resistance is the past rebound high at 12,408. That may be a signal to
short again for those who are shorting stocks. I will give an update if that happens.

TLT continues its

upward march from
the 108 bottom and
buy signal at the
bottom channel line
toward an ultimate
target of around 196.
It advanced to as high
as 119 and then pulled
back a bit. If TLT gets
as low as 112–112.50,
it would be a great buy
again for those who
missed out or want to
add it, but it may not
fall that much. Another
good buy point would
be 114. Refer to the simple TLT megaphone pattern chart in the June issue of the HS Dent Forecast for
more information.

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Summary

It is clear that we topped long term in stocks on January 4 and that the crash of our lifetimes has
begun; my best estimate is an 86% crash by early 2024. Economist Larry Summers is saying that this is
a correction and that the crash is over. I hope to prove him very wrong. Mainstream economists always
try to cushion forecasts in downturns, and it is a disservice to investors. I was expecting the first stock
wave to bottom in mid-July, but it bottomed a bit early, in mid-June. We should get a 1- to 2-month
bounce, with a Nasdaq target range of 12,400-13,000, and then head into the next wave down, which
should be at least as strong as this one. That will prove we are in a major long-term crash in the never-
ending bubble of all time and not just going through another correction. That will be your last chance
to get out or to short if you haven’t yet. I will keep you updated.

Got a question or comment? Reach us at info@hsdent.com.

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