I hope you’re having a great Sunday! If you’ve been checking the financial headlines, you’ve been seeing Evergrande in the news a lot. This issue aims to break it down and hope to provide you with any next steps on this situation.
Background
In 2008, I was starting high school with a fresh mind and a willingness to learn. The housing market collapsed in the U.S. and it wasn’t until I watched The Big Short many years later that I began to understand what I lived through. This collapse was my first experience on how an entire sector could fail the public. With the EverGrande situation happening in China, we could be seeing China experiencing the fate of Lehman Brothers in 2008.
EverGrande is China’s second top real estate company by sales and ranked 122nd in Forbes’ Fortune 500. They handle the development and management of office buildings, apartments, homes, and just about anything with four walls.
Bubbles Bursting
Real estate has always been a tricky sector and that’s why we see bubbles here more than any other sector. What happens with real estate is that companies will seek money to build properties, however, it can take a long time for those properties to pay off considering the development and sale of the property. You’re left in the red and changing your current real estate prices brings in more investors at lower profit levels to keep the operation functioning.
Let’s say I’m an expert at growing orchids. You pay me $100 upfront for me to plant the seeds and nurture the plant to maturity. If I want to make a living off this, I have to stagger out my customers so I don’t get too overwhelmed and can manage the consistent income flow.
This week, Evergrande needs to pay back what they borrowed for these properties and they’re having difficulty doing so.
How This Impacts the U.S.
If you’ve checked your investments this week, you’ll see everything in the red most likely. This entire situation has sparked fear on Wall Street as many Americans see this as another housing market crisis that could impact the world. Here’s what I’m seeing so far:
Americans are scared at the ramifications of a bubble bursting, selling off assets now
Everything is tied to each other so if one economy fails, we are tied to it all
The good news? Hong Kong is a bit more isolated from the world. We aren’t as easily invested in the market. However, this pans out this week could have an impact on the economy for years to come.
My advice? I think this is temporary and you should be buying this dip in prices. Good luck.
Have a great week!
Jordan