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Keepin' It Real Estate: Chinese Investors Smell Blood in California

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Golden State homebuying tours all the rage.

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Speculators have been flocking to California for centuries. Gold, computers, absurd dot.com start-ups, real estate - if it's an asset, it's probably boomed and busted in the Golden State.

The bursting of the latest bubble -- real estate -- is still in progress, as foreclosures push up inventory and drag down prices. Nevertheless, for every speculator that got burned on the way down, reinforcements are flooding the state with new money, hoping they'll be lucky enough to pick the bottom.

In a trend that's just beginning to emerge from the smoldering ashes of California's housing market, the next wave of buyers could be armed with armloads of cash that's red, rather than green. The Chinese are coming.

The Los Angeles Times paints a colorful picture of "Caravans of cash-rich Chinese in Hummers and Lincoln Navigators weaving through American neighborhoods in recent months, looking for foreclosures and other bargain properties to buy."

What used to consist of small-scale, individual trips by wealthy Chinese buyers to scout for properties have turned into massive, safari-like operations. According to the Financial Times, SouFun.com, the biggest real estate website in China, received over 300 inquiries within days of announcing a home-prospecting trip to California.

For now, the groups are focusing on areas with existing Chinese populations, making San Francisco and Los Angeles prime targets. Almost 20% of San Franciscans hail from China; parts of LA, specifically the UC Riverside area and the San Gabriel Valley, boast large Chinese American communities.

And while not every potential Chinese investor is itching for a foreclosed tract house, a penchant for paying cash makes them desirable buyers in troubled markets. Big lenders like JPMorgan (JPM), Bank of America (BAC) (thanks, in part, to Countrywide) and Citigroup (C) have massive portfolios of foreclosed homes they're trying to unload. Countrywide has over 6200 in California alone, up from 3900 just a year ago.

With mortgages increasingly tough to come by, banks are typically willing to knock 10% or so off the asking price for a cash bid. Countless sales have been falling through because the buyer can't line up a loan, and cash is now king in the world of distressed home sales. This is no secret, and investors trying to snap up foreclosed properties at the courthouse steps tell stories of buyers showing up with millions of dollars in cashier's checks at the ready.

Experts in China, however, are urging caution. Home prices in California are down 40% by some measures, but few expect the declines to taper off any time soon.

One tour operator told the LA Times he aims to give visitors a better sense of what life is like in America before they take the plunge: "What we sell is the culture, American culture."

And what better souvenir to take home from a trip to the US than a shiny new...house.
No positions in stocks mentioned.

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