This Will Crush the Insane San Francisco & Silicon Valley Housing Bubble

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Two treacherous forces, with impeccable timing.

In the city of San Francisco, the median condo price is $1.11 million and the median house price is $1.25 million, up 72% and 88% respectively from the first quarter 2012. Median means, 50% of the units cost more, and 50% cost less.

Which creates an absurd situation: only 11% of the households in San Francisco can afford to buy a median home, according to Paragon Real Estate’s report on “affordability.” In other Bay Area counties, it’s similar. In the Silicon Valley counties of San Mateo and Santa Clara, 14% and 20% of the households can afford a median home; in Marin (just north of the Golden Gate), 17%; in Napa 21%, Alameda (East Bay) 22%, Sonoma 26%. In the US overall, 58% can.

But the calculations assume that buyers are able to make a 20% down-payment, which on a median home in SF amounts to $240,000. And it also assumes the persistence of super-low interest rates and points for a 30-year mortgage.

Under these assumptions, households in SF wanting to buy that median home must have a minimum qualifying annual household income of $254,000, on top of the $240k in cash for the down-payment. And this is where the absurdity re-surfaces: the Census Bureau estimates that the median household income in San Francisco is $75,600 (it has gone up a little since that estimate).

The monthly costs – principal, interest, taxes, and insurance, but not including the benefits of income tax deductions – for this median home amount to $6,350. And this causes a little bit of a problem with “affordability”: If only 11% of the households can afford to buy a median home, who is going to buy the other homes?

Renting a median one-bedroom apartment will set you back $3,400 a month, parking not necessarily included. And a median two-bedroom will set you back $4,650 a month.

But kinks are already appearing. According to Zillow data, those rents are down 5.4% from the respective peaks in June and August last year. And just then, with impeccable timing, this housing market is now facing by two powerful forces.

1. The startup boom has run aground.

Startup valuations are plunging, sometimes by as much as 50% overnight when new money needs to be raised. And the exit doors for investors are closing or getting very awkward to wriggle through. It’s easy during the boom for a few people behind closed doors to decide that a company with no revenues has a $1 billion “valuation.” Turns out, it’s much harder – or impossible – to turn that “valuation” into money via an IPO or a sale to a big corporation.

Those startups that did make it through the IPO window over the past year or two are getting punished. While the S&P 500 is down only 5.6% so far this year, the Renaissance US IPO index is down 13.7% despite the rally over the past few days. It has plunged 29% from June last year. The 87 tech IPOs over the past two years have gotten hit hard: 80% are trading below their IPO price, and many of the stocks have essentially collapsed from their peaks.

Venture capital is getting nervous. And the flood of new money has become a trickle. As money dries up, startups have to tighten their belts and lower their burn rates in order to live another day. In the process, big hiring plans are shelved.

The formerly rosy scenario has turned grim. Companies like Twitter fell all over each other to lure tech gurus with blue-sky compensation packages that then allowed these folks to rent or buy whatever they wanted to, and drive up prices in the process. Now Twitter is laying off people.

Yahoo is laying off. Numerous other old and new companies in the area have started the same process. This makes laid-off tech workers available to companies that are still hiring. Those companies no longer have to bring as many new people into the area; they can hire more locally.

So the stream of new arrivals with big compensation packages slows down. As more companies are laying off, fewer of the tech workers can be absorbed locally. Down the road, given the expense of living in the area, some of these unemployed tech workers may well go back where they came from. That’s how it happened every time before.

2. Just then, a flood of new housing units hits the market.

San Francisco finds itself in one of its most phenomenal construction booms in history. High prices have lured the Big Money from all over the world. For example, Shenzhen-listed real estate company Oceanwide Holdings is planning to build a mega project with two million square feet of residential and commercial space in the center of the City. This project, its third in California, includes two towers, one of which will be the second tallest in the City.

The SF Planning Department’s new Pipeline Report lists 62,500 units at various stages in the pipeline, from “building permit filed” to “under construction.” Many will come on the market this year, on top of the thousands of units that hit the market in 2014 and 2015. Once they’re complete – if they ever get completed – they’ll increase the city’s existing housing stock of 382,000 units by over 16%.

Most of them are expensive units – because that’s where the money is. They need buyers and renters who can afford them. Homes in San Francisco are occupied on average by 2.2 people. At this ratio, the new supply would create expensive housing for 137,500 people, in a city with a population of 852,000!

Where are those people with big incomes going to come from? No one knows. Hence a vague sense of panic. Twitter and other companies better start re-hiring and offer big-fat compensation packages to lure tens of thousand of highly-paid workers to SF, and they better make sure their shares or “valuations” start re-skyrocketing for years to come, because that sort of miracle is required to make this math work. If not, that phenomenal boom, as it has always done before, will turn into a bust royale.

The US economy, at the worst possible time, is now facing a “significant risk” of “falling into contraction” with “worse to come.” Read…   Is This the Beginning of the Next Recession?

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  76 comments for “This Will Crush the Insane San Francisco & Silicon Valley Housing Bubble

  1. rich
    February 25, 2016 at 1:35 pm

    Thanks to the oil price crash, it’s already bust time for housing in Houston. Mansions in River Oaks have been hit especially hard:

    “In River Oaks, a neighborhood of palatial mansions and lush gardens, the average sales price of a home has tumbled to $1.3 million from $2 million in the middle of 2014 when oil began its more than 70 percent slide, according to data from the Houston Association of Realtors and Keller Williams. Median property prices in the area have already fallen further in this downturn, which is not yet over, than the 16 percent drop in the previous oil slump in 2008 and 2009.”

    • gadang
      February 25, 2016 at 3:43 pm

      Booo Whoo… a river of crocodile tears, we’ll weep for them

    • chris hauser
      February 25, 2016 at 10:24 pm

      think i’ll buy me a cheap house in odessa and grow me some dental floss. too bad nobody in texas has teeth.

      but seriously, real estate values do have something to do with incomes. incomes up, ah, never mind.

  2. Chicken
    February 25, 2016 at 1:51 pm

    Tech is the future, millenials have their absurd student loans coming due after-all! Soon (but not quite yet) we can all ride around in self-driving cars propelled by unicorn power! Buy SF tech and housing, sell dirty energy.

    • February 25, 2016 at 2:02 pm

      But wait… what is going to supply the power for tech, the smartphone you plug in and the car you charge up and the data centers that make the cloud possible?

      • polecat
        February 25, 2016 at 2:42 pm

        yeah…..STORM CLOUDS !

      • Toddy
        February 25, 2016 at 3:49 pm

        Yuan Incineration plants!

        • Álvaro
          February 25, 2016 at 3:56 pm


      • NotSoSure
        February 25, 2016 at 4:47 pm

        Eternal delusion.

        • February 25, 2016 at 7:32 pm

          Hilarious, and so true.

      • CrazyCooter
        February 25, 2016 at 7:43 pm

        Which is precisely why I live someplace that is 99% hydro power 99% of the time.

        If you actually do even topical analysis on where power generation comes from in the US (hint: nuclear, coal, and nat gas is the lions share) and then look upstream to WHERE the fuel comes from – it isn’t nearly as pretty as folks realize.

        I am not saying the world is ending tomorrow, but energy supplies could be much, much tighter than folks realize a few years or so down the road. Tons of coal production is being shut down which implies sources of continuing coal supply are consolidating. Natgas prices have been so low for so long, and many utilities have converted to natgas from coal, that eventually when natgas production finally goes offline (i.e. what is starting to happen now in the oil patch) prices are going to head up, up, and more up. Energy costs typically get passed through without rate changes (rates are primarily driven by the utilities capital base).

        Uranium is a different ball game but also has long term issues (10+ years out or more).

        Thorium MSRs are the only real long term solution I have found in all my years of reading on the subject (i.e. the tech and fuel availability can carry the current load for the entire globe for hundreds of years).



        • Dutch46
          February 26, 2016 at 12:44 am

          I worked in the power generation and bulk power distribution businesses for 37 years in various capacities. I also did a short stint in nuclear reactor operations but got laid off because our CEO made a seriously boneheaded PR gaffe in an election year. I have done a fair amount of research into the pros and cons of Thorium and I agree with you. Long term, it’s the only way to keep the nuclear industry going and nuclear is the only viable option for energy supply over the long haul.

        • Shawn
          February 26, 2016 at 1:44 pm

          For Thorium MSR, what about waste disposal? Nuclear can be a clean form of energy if we can just get over the waste disposal issue and I don’t mean burying the shit for 100,000 years.

      • Discgman
        February 26, 2016 at 10:55 am

        Google wireless blimps. I heard that somewhere.

  3. Julian the Apostate
    February 25, 2016 at 2:31 pm

    We need a new robot to fill up all these driverless cars with dirty energy. Venture capitalists take note!

  4. Vespa P200E
    February 25, 2016 at 2:36 pm

    I live in SF east bay suburb noted for the 2nd highest Republican party zip code per voter registration. My 9 yr old development’s prices have surged well beyond the peak of 2007 2 yrs ago and stalling which signal price decline as housing prices have simply outpaced the income.

    Add to this soon to be rather inevitable Web 2.0 crash with the start-ups and even the unicorns struggling (geesh just like 2008 – whatever happened to the liquidity fire hydrants with VCs fighting for piece of action with recent rounds priced below past rounds not to mention most unicorns are too scared to take IPO route). I foresee the end of yet another RE and soon stock market bubble popping like 2007.

    And lest we forget – there comes a time when greater fool theory is proven right again when there are fewer fools to bid up…

  5. February 25, 2016 at 2:44 pm

    Seattle can’t be far behind. I’ve been filming the changes just over the past 5 years and it is shocking.

    • Vespa P200E
      February 25, 2016 at 3:15 pm

      Lived in Bellevue WA for 10 yrs and was surprised to hear about the land development permit restrictions for new houses and new developments setting aside land for park or open spaces. I guess at least Bellevue didn’t want another Somerset neighborhood where the hillside facing 405 is nothing but houses as my development near Cougar Mtn had plenty of green spaces – unlike SF bay area…

        February 26, 2016 at 1:31 pm

        Do you want “affordable housing” or useless green space.

        Once you have your home, you want the “value” to go up and up and the best way is to stop all other developments. That drives up your value and to hell with the “useless eaters” that come after you.

        You can have one or the other. I am glad the development of homes is hard as hell where I live. Just about nobody can build. This has caused my home to be worth far, far more than it is worth, but what do I care about some other stupid fools who want “green space” and lie about “global warming”. I’m making a ton of money. !!!!

  6. Bobster
    February 25, 2016 at 2:53 pm

    Nobody who invests in a bubble can ever conceive of losing money, yet it happens. Many people nurse their wounds from the bursting of the last bubble, then rush out to get in on the next one.

    • Toddy
      February 25, 2016 at 3:52 pm

      It’s kind of like binge drinking.

      Huge hangover in Sunday. A week later, all forgotten.

      Bartender! Double shots for me and my friends! The cheap stuff!

      • CrazyCooter
        February 25, 2016 at 7:45 pm

        “The secret to avoiding hangovers is to never stop drinking!”

        – The Bernanke



  7. Kreditanstalt
    February 25, 2016 at 3:02 pm

    Strongly resembles Vancouver!

    If all these oh-so-wonderful Bay area asset price gains cannot be converted into actual funds, how can this be a real “boom”? Ordinary people, however, are actually getting poorer as their incomes fail to keep up while costs soar.

    And they’re building MORE housing?! This is, and has been all along, artificial cheap money-induced capital misallocation, pure and simple.

    And when the job market seizes up – soon -, everyone will know that.

    • memento mori
      February 25, 2016 at 6:36 pm

      You got it wrong my friend, nothing comes even close to Vancouver in real estate. Prices are way higher than SF, it has been going up up the last 15 years and there are no incomes in Vancouver that come even close to SF wages. You are lucky if you can make 50k a year in Wetcouver, yet 2million will buy you only a 33ft plot of land to build your dream home, and that is if you are getting a deal and manage to be the winner of the multi-bid frenzy that dominates the process.
      Vancouver is totally nuts, beyond comprehension, I wonder what the aftermath will be like for this city.

      • Thomas Malthus
        February 25, 2016 at 8:48 pm

        Hong Kong blows everywhere else away in terms of a housing bubble:

        • Jack
          February 27, 2016 at 12:39 am

          I read that in H.K. you get to stay in a cemetery hole only for a few years before they put someone else on top or kick you out altogether. Was that ever or still true?

        February 26, 2016 at 1:32 pm

        So, who is buying these homes? Illegal immigrants? Syrians? Haitians? Somalians? Who is buying?

        • Coaster Noster
          February 26, 2016 at 6:49 pm

          That’s rhetorical, right? I have multi-million-dollar-net cousins, and all they do is buy more and more properties. And then, my aunt left those two cousins THIRTY more multi-unit buildings, plus houses. They keep buying. Them, and the Chinese oligarchs shipping money out of the PRC. Look at Alhambra, CA.

          It’s the one-tenth of “One Percent” people in the USA who play the rising ppty value game. The rules are entrenched.

      • Shawn
        February 26, 2016 at 1:49 pm

        Boot out all the Chinese presto, no more bubble in Vancouver.

      • Conch life
        February 27, 2016 at 1:57 pm

        Sort of like Key West….a million will buy you a single car size garage house that when you open the window you can scratch your neighbors back…and he yours. Got 2 mill, well now you are talking, you might even have a yard with a pool. And windstorm insurance can be 20,000 a year on a 500sf house. The new Taiwan termite that has found this to be a nice place to settle down, and can eat a 12 x 12 wood floor in 6 months flat!!!!. These are the good points.
        The wealthy are buying up duplexes, etcetera, and making them into single homes which they MIGHT stay in 2 weeks a year ( forcing service workers to hunt for shelter).

        Rents have doubled in 12 months (2,500 plus for a 1 or 2 bedroom location dependent), there is no place for all the service people to live, so the talk is to bus them in and out each day from Homestead only 160 miles away on a stop and go crowded 45mph limit road. Service people are actually living in row boats off shore. Most here make between 18 and 30K a year…you do the math. Now the math deficient brains in Key West government want to float a bond to buy a property that the NAVY should have sold to the city but instead sold it to a UK developer that will make a kool 33 million for holding the property for about one year. The kicker is this is supposed to be “work force housing” but you have to have an income of between 94 and 115K to qualify to rent them from the City. Again, you do the math.

        And why can’t they build more homes…well, the State has mandated via Hurricane evacuation that only 1,500 more lots can be built on out of the 20,000 vested and taxed from Key West to Key Largo. Can’t go up, the limit is 35 feet.

        So, painted into a corner are the Florida Keys and Key West, and locals are saying enough and moving out. I suggest if you are wealth and buy here, you best learn how to wash your own windows, clean that pool, and fly in your groceries ( if anyone still works at the airport).

  8. michael
    February 25, 2016 at 3:48 pm

    I doubt many of us reading Wolf’s musings doubt the inevitability of a correction. However in my mind this nonsense has gone on way too long is well overdue. Wolf is writing around the cracks in the dam, while the flood remains to be seen.

    • NotSoSure
      February 25, 2016 at 4:50 pm

      Yeah, I would agree with this. It’s like the economy is actually more resilient than what’s depicted. We’ve seen:
      1. Oil price crash.
      2. Trucks not moving.
      3. Global shipping at a ridiculously low level.
      4. ……

      And yet no floods. Perhaps an article should be written on why this is so.

      • Shawn
        February 26, 2016 at 1:53 pm

        I don’t think the real economy has much to do with equities anymore. I now believe we could have a world wide recession along with US economic stagnation and the stock market will still go up regardless. Crazy as it sounds. Do not under estimate the power of printing money.

      • Oleaginous Outrager
        February 26, 2016 at 2:56 pm

        What counts as a flood? An abysmal labor participation rate? Record numbers on food stamps? Consumer credit at stratospheric levels, along with default levels?

        If you dig a little deeper, it’s obvious that a lot of folks are drowning. If you don’t, well, even a slow flood can eventually drown even the best swimmers.

    • Vespa P200E
      February 25, 2016 at 5:46 pm

      Cracks in the dam may result in explosive structure failure unleashing torrents of water to destroy the immediate vicinity and floods to outlying area.

      No wonder the Dutch admire the little boy and the dyke story who saved Holland…

  9. Uncle Frank
    February 25, 2016 at 3:50 pm

    They are in denial…

    From Palo Alto Online:

    Is the Bay Area Economy in a Bubble?
    By Steve Levy

    “Home prices and rents, like jobs, may see a decline in their growth. But in this case the price and rent increases ARE the direct result of a housing shortage, which is unlikely to be erased any time soon. We are not yet building enough housing to match even a slowing job growth rate.”

    • Billy
      February 25, 2016 at 3:57 pm

      That is some delusional thinking in that article for sure.

    • Vespa P200E
      February 25, 2016 at 4:19 pm

      It’s amusing when the pundits are gushing over RE and stock market bubble getting bigger possibly heralding the very top.

      From CBS Marketwatch headline today – talk about delusional and disbelief in gravity…

      Historical pattern says the risk of a 2016 bear market is zero
      Published: Feb 25, 2016 12:57 p.m. ET

    • chris hauser
      February 25, 2016 at 10:28 pm

      i agree. but the volume of expensive new housing may outstrip the incomes to pay for it. on the other hand, it’s cheaper than vancouver.

    • Shawn
      February 26, 2016 at 1:56 pm

      From SF Chronicle to SJ Mercury news, the press in the bay area is pathetic. That’s why I read websites like this.

  10. Toddy
    February 25, 2016 at 4:49 pm

    Read this article a second time, and wondered: you make the assumption that home purchases are financed in a traditional we by traditional buyers, i. e. Employees and through down payments and mortgages.

    But in other news, it’s been suggested that a large amount of Bay Area/Toronto, etc fixed asset purchases are being made for reasons other than living in them.

    Instead, they’re bought as a value container, since other more liquid asset classes don’t have a chance in hell to produce yield.

    And thus, the transactions supposedly are most often cash. FDI in the states/Canada enjoys tremendous upside due to the political stability in North America. It’s low risk.

    If the value drops by 50%, you’re still getting more yield if you bought in 2012 or before, so why stress out?

    Rents on the other hand are an interesting topic. Commercial RE is probably going to see the most significant upheaval as the financial models simply won’t hold up and investments have to be rejiggered to make it work out somehow.

    I bet the West Oakland Terminal development plan is being scrapped as we speak, and the SF City Center will become something like one of those European churches where the first 100 feet were built for a 500 foot bell tower and suddenly there is this dwarf of a 40 foot spire on it… Looking as awkward as a dr. Seuss hat.

    • CrazyCooter
      February 25, 2016 at 8:23 pm

      Anyone who buys RE in California, with their property tax voodoo, as an investment is an idiot.

      Well, unless their goal is to lose money, then I guess they are genius.

      Any asset directly linked to muni’s who are cash hungry black holes is not a good strategy (RE market collapse aside).



      • william
        February 26, 2016 at 1:45 pm

        I bought a CA condo in 2014. The rental income greatly exceeds the cost. And a neighboring identical condo sold for 15% more than what I paid.

        CA is a big place. RE is local. (granted, my most recent RE purchase is in Central Texas.)

  11. Paulo
    February 25, 2016 at 5:31 pm

    If I lived in the Bay Area I would sell out so fast your head would spin. Then, take my money and buy in a calmer more affordable place to live. One could pay cash and own outright, and work part-time to top off monthly needs.

    I did something similar 10 years ago, but certainly did not have so many zeros on the numbers. Nevertheless, my wife retired last year at 55, and today is spending the afternoon divvying up garden seeds from a bulk purchase. I just got back from town getting an estimate for a new paint job for my truck.

    If you pick an affordable place to live, you do not need as much money as the ‘experts’ say you do in order to retire. As JM Greer likes to say, “Collapse ahead of the rush”. Life is short, don’t spend your life in debt and commuting/working to pay off your debt.

    Take control and move forward. It is that simple.


    • Vespa P200E
      February 25, 2016 at 5:48 pm

      I’d live to sell and move but alas lack of jobs in my field… Thus stuck here till I retire or go into consulting and move to Colorado like some people I know.

    • Julie K.
      February 25, 2016 at 10:31 pm

      “Collapse ahead of the rush.” ~ Great tag line! And advice.

    • Achilles4756
      March 2, 2016 at 11:12 pm

      I did exactly what you just mentioned….

      I grew up in Marin—Larkspur— sold my business/commercial property for 8-fold of what I paid for it back in the late 80’s. I then moved to the WV/VA border and purchased a gorgeous 119 year-old Victorian thats had only 2 owners. The same place in Marin/Sonoma/Napa would be 1.3 to 1.8 and I paid 67k for it and my property taxes with the homestead exemption is 503-dollars per year. Life is absolutely fabulous without the traffic and pressures The Bay Area brings to the table….

      Both my siblings work in the city…..and while they are paid handsomely in their prospective careers, they are both out of the house by 6:45 am and back between 6:15 – 7:00 PM. No matter you look at it, they are essentially slaves to the Bay Area.

  12. Bigfoot
    February 25, 2016 at 7:25 pm

    Anybody know who the biggest players are in the developments/construction there ?

    • Shawn
      February 26, 2016 at 2:01 pm

      Mayor Ed Lee.

  13. Bryce
    February 25, 2016 at 10:42 pm

    Long time lurker here, first time poster. This site has some great discussion and I will finally add to it…reluctantly. I am quite the introvert and tend to steal ideas, so I might as finally add something to this discussion.

    The only 2 plays I know for REIT’s in California are KRC and ESS. KRC has already fallen from 80 to about 47 and has since rebounded to 55ish. KRC was the company I chose to short, but I have already covered it due to it falling off a cliff. I don’t know these companies well enough to get into the minutia though. I know ESS owns apartments and has exposure in LA, Orange County, and Seattle. KRC owns mostly office buildings with some apartments in Southern and Northern Cali, along with Seattle. Hope this helps.

    • Bigfoot
      February 26, 2016 at 1:00 am

      I don’t really trade any more per se due to the over the top manipulation, CB intervention buying programs, massive automated HFT systems, potential bail ins, & many other related negative factors. However, I still have a Roth IRA which I have pulled all my deposits from without taking a tax hit. Rather than watch the implied value of my hard earned FRN’s continuously decline I decided to convert them into the most usable items I could think of (small plot of ag land/wells/tractor/implements/tools & weapons of mass construction:) Anyhow,the earnings have to stay in the Roth or be heavily taxed so for the last 1 1/2 years or so I have exclusively traded TVIX which is a volatility based 2X- ETN. It’s been widely used as a shorting vehicle & doesn’t track the VIX spot on. I made 2 trades last year ( 1 short 1 long ) netting almost 300%. Largest drawdown was about 25%.

      This year I’ve had 1 trade so far (long) buying TVIX at 6.29 & getting out at 12.11 so I’m up about 100% so far early on. It closed in the low 8’s today. I’m getting close to pulling the trigger on another trade (long) & patiently waiting for the 7’s. Although I’ve only had to endure a 25% drawdown, I really could care less because I feel very comfortable that we will have more downside to come & TVIX will run up sooner or later (plus it’s almost just a form of entertainment for me at this point). Even if I bought at 8 & it went to 4 seeing a potential large loss if I exited, I’d just sit on it as I believe we have seen the top of the mountain & the valley is a long way down.

      Trading these interim TVIX spikes you have to be very quick as it generally spikes fast & falls back even faster. I believe even buying at 8-9 that another 100% trade will present itself in the next few months. At this point I’d most likely only consider a short if we get into a long hard downtrend & TVIX went to the moon. I wouldn’t guess at tops/bottoms, just put the trade on & ride the train. — I did entertain the idea of closing the account altogether & taking the tax hit but I’d rather risk what’s left than shell out a dime and if I’m wrong & things don’t get bad I could end up with some decent jingle. Every fiber in my body says I’m not wrong although I gave up ‘predicting’ time frames years ago, a fools game IMO. I don’t trade with stops. In the early years I started with tight stops. I’d get stopped out only to see my trade winning a week or two later. I’d use the typical support/resistance areas & got clipped a lot as well as lost a lot of $. Typical underfunded trader trying to trade with low risk & shooting himself in the foot. After a few years I had compiled a lot of data on the markets I traded (various commodities & index futures) & came up with some realistic ranges for a given trade. By risking more, I started having a high percentage of winning trades & eventually ran with only a mental stop & started making money on a regular basis. Luckily never got trapped in a limit up/down situation.

      I looked at ESS & KRC. At a cursory glance they both look like they are getting close a resistance area & a possible short. You can always paper trade it just for fun. I did this for years setting up various portfolio with different objectives. I learned a lot & it was a great mental exercise.

      • hidflect
        February 26, 2016 at 10:22 pm

        Thanks for the insights. I went a different direction and went long on contra stocks (as I call them). e.g. Ozzie gold miners. As industrial and tech equities crash, people flee to a steady revenue producer that has low debt and strong earnings. Most are up 70-100% since June last year. ASX: EVN, AX:RSM, ASX:SBM are three.

        • Bigfoot
          February 26, 2016 at 10:56 pm

          Are those junior miners? I don’t have time to check them out right now. I went ahead & pulled the trigger on TVIX today (long at 8.10). Timeframe -infinity :)

          Not sure how the miners are going to do down the road. Banks still control paper gold & I believe it will go lower.

          I would not be speculating at all if not for the captive money in the Roth. I believe we will see a massive devaluation in our currency value in the next 2-4 years. Plus I’d rather convert the $ into a tangible rather than watch it slowly erode.

          Good luck with your trades! Hope it works out for you.

        • Bigfoot
          March 3, 2016 at 8:51 pm

          hidflect >>>>3/3/ update re tvix 8.10 trade. I’m down about 20% right now -closed 6.61 today. All time low is 5.33. Been up 10% so far. Looks like it will get pushed to the basement under 6. I really don’t care about the daily gyrations. If they manage to keep the cat bouncing, it could stay under water for a good while. All it will take ( no matter where the markets are numerically) is a 3-5% decline & we’ll get a quick spike. I’m looking (holding out) for at least a double. I will update from time to time just for the halibut.

  14. Jeremy
    February 25, 2016 at 11:52 pm

    It would be useful if you could give us updates on LA real estate and Orange county (Irvine, etc). Yes, I ask for much.

    Just wondering how regionally contained the bubbles are.
    Is this an influx of Chinese wealth thing, or just a Fed cheap money thing, or a start up bubble thing? Perhaps it’s a Taylor Swift thing, you never know.

    LA might give us a broader perspective.


    • Petunia
      February 26, 2016 at 10:09 am

      I know somebody who was recently offered a 100K job in central CA and turned it down, even though it was a big increase over what they earn in FL. After the increase in taxes and housing they would actually be worse off than staying in FL. If this a standard problem for recruiters in CA, eventually, the real estate prices will reflect it everywhere in CA.

    • hidflect
      February 26, 2016 at 10:30 pm

      Read Dr. Housing Bubble. He covers that pretty in-depth.

  15. MD
    February 26, 2016 at 12:42 am

    I’m a slightly older millennial, in tech, in Silicon Valley. I know and work with startups and their founders. This is purely anecdotal, but it definitely has gotten much more difficult for these founders to raise money in recent weeks.

    I’m also familiar with many of their business models. To say the founders are concerned is an understatement. Many of the businesses don’t have viable business models at all. It’s bad when you don’t have a profit. But it’s inevitable failure when you don’t even have *revenues.*

    Finally, I anecdotally am familiar with some startup employees in SF. I know two employees of these soon-to-be-worthless startups who actually bought million dollar houses in SF!

    I don’t hope that bad circumstances befall good people. But mark my words, the startup bubble will pop later this year, and the real estate bubble will stall shortly thereafter.

  16. prepalaw
    February 26, 2016 at 2:09 am

    Wolf, my email exchange with my daughter yesterday is apropos to topic of new jobs for Silicon Valley/SF. She has a high level job with a big operator on Wall Street.

    She sent me the link to the following article on automation in the financial services industry:

    The robots are coming for Wall Street

    The thesis is that $350,000+ financial analyst jobs are being replace by machine systems. Could such systems be introduced at ORCL, INTL and/or leased to start-ups in SF – of course they can.

    This discussion is now old on Wolf Street – Can your job be “routinized” – if yes, then it will eventually be automated out of existence. The author of the article summarized the transformation of Wall Street, as follows:

    Within a decade, he said, between a third and a half of the current employees in finance will lose their jobs to Kensho and other automation software. It began with the lower-paid clerks, many of whom became unnecessary when stock tickers and trading tickets went electronic. It has moved on to research and analysis, as software like Kensho has become capable of parsing enormous data sets far more quickly and reliably than humans ever could. The next ‘‘tranche,’’ as Nadler puts it, will come from the employees who deal with clients: Soon, sophisticated interfaces will mean that clients no longer feel they need or even want to work through a human being.

    The author refers to an Oxford paper published 3 years ago, stating that 47% of existing jobs will be automated out of existence in the next decade. The Oxford writers did offer guidance for workers, seeking refuge from automation:

    Jobs requiring perception and manipulation, creative and social intelligence were identified as those least likely to be computerized. For instance, jobs that involve consulting other people, negotiating agreements, resolving problems and co-coordinating activities require a great deal of social intelligence, which computers are unlikely to take over.

    Wolf, if 3 new-hires in a start up are sharing a $3,000, 1-bedroom apartment, how are the remaining two roommates going to pay the rent when they can not find “The Third Man”.

    • February 26, 2016 at 9:09 am

      To the robots-on-Wall-Street topic: in the end, clients will also be replaced by robots, and than it’s just robots doing business with, and screwing, other robots. But there will always be a real human behind WOLF STREET, communicating with real humans around the world. So I’m not losing hope.

      To your last question: Depending on how the lease is structured, when someone moves out and a new “third man” cannot be found, the remaining two are responsible jointly and severally for the whole rent. That rent is suddenly getting 33% more expensive, and they can’t afford it. So they move out too. And the landlord has an empty unit on their hands – which then has to compete with all the other units on the market for renters.

      • Sdb
        February 26, 2016 at 11:38 am

        The rent will get 50pct more expensive then.

        • February 26, 2016 at 12:34 pm

          Um, yes. 51.5% actually. I should think more clearly before I spout off numbers….

    • Petunia
      February 26, 2016 at 9:57 am

      Wall St is a perception business. Most analysis is crap generated to keep the customers comfortable. Much of that can be automated by quants using the model du jour. But there are analysts, the good ones, that actually travel and walk the factory floors of the businesses they cover. If you want to know how good an analysts is ask them how many business they have visited in the past year. Get names, ask questions, don’t count the business conferences they attend, they are totally worthless. Those are the people that make money for the firm. They know what is really going on.

    • Oleaginous Outrager
      February 26, 2016 at 3:00 pm

      The robots are coming for everybody else, why should thievein’ Wall Street get any more breaks?

      By the way, one of my favorite historical tidbits: the wall on Wall Street was to keep the slaves from escaping from the local slave market.

  17. TCG
    February 26, 2016 at 10:57 am

    Like many people in San Francisco I’m not too happy about the big influx of money and the people who love and treasure it. The extra crowding and the general types of people money attracts has made it, imo, a much less pleasant place to live over the past 5 years or so.

    For those reasons, I’d be happy to see many of the new transplants go back to where they came from. On the other hand, I have some sympathy since I remember what the dot com bust was like on a personal level. It went from recruiters cold calling, trying to recruit even those with modest skills for huge salaries and feeling like the center of the world–to multiple rounds of layoffs and very little income for many people who had previously felt invincible. Expect to be unemployed or under employed for a while unless you’re truly doing something necessary and at a place that can still afford to pay you when the bottom falls out.

    As a 20-something could probably move back in with parents, or if wise maybe you saved some and your savings goes a lot further if you return to a place with a lower cost of living. It might be a bit harder for others who don’t have any place to fall back on and I feel worse for them, especially people who are older where it is harder to recover both because of age (Don’t have as many years before retirement to rebuild), ageism in tech jobs and added expenses for things such as health care and mortgages that are harder get rid of.

    • discgman
      February 26, 2016 at 11:17 am

      Hence why I work in the IT field for local government. Less pay but more stable and never have to worry about layoffs unless the economy crashes 2008 style. But I was able to survive that too. I’ve seen too many techs chase that dream of big money in the silicon valley only to end up working in a different industry after the crash.

  18. discgman
    February 26, 2016 at 11:12 am

    I am no finance wizard and an amateur regarding how wall street works. But I have lived in Norcal my whole life, so I have seen the many booms and busts in the economy which is usually lead by the bay area. Its like the canary in the coal mine. Once you see housing and rents start to flatten out and add job losses to that, that’s the cue for RE agents to push even harder and the beginning of the end to the cycle.

    If I lived and owned a home in the bay area I would think about selling now. Once the flood of homes for sale hits the market, that is were you will see the drop. With job cuts or people getting rehired at lower wages there will not be enough demand for housing. Rents will follow along and also drop significantly. Not necessarily a bust, but a slow leak to where everyone will look up and see 20 to 30 percent losses in value in a year or two. And as usual, this will work its way across the valley to Sacramento and down south. Home values will never take huge losses in the bay area, but a slow down is inevitable ever 8-10 years.

    February 26, 2016 at 1:08 pm

    I’m sorry, but I just did a Google real-estate home search for the areas you discuss.

    There are HUNDREDS of affordable housing units/home available.

    So, why don’t all those people looking for a home not buy them? They are affordable and there are affordable homes in EVERY SINGLE city/area.

    So, what’s the problem with these foolish people?

    • February 26, 2016 at 2:16 pm

      What’s the area you looked at? San Francisco? Or Manteca in the Central Valley?

  20. Shawn
    February 26, 2016 at 1:37 pm

    Awesome article, I shared this on my linkedin page. I still believe 30% of the bay area market is supported by the Chinese. The more money the PCoB throws money at the dead Chinese economy the more money flies out of the country.

  21. Oleaginous Outrager
    February 26, 2016 at 3:03 pm

    Someone please to be explaining: exactly what high-priced talent is really needed by the likes of the 140 character cesspool or Facepunch? They certainly aren’t forking out for anyone with any design sense.

  22. KFritz
    February 27, 2016 at 4:49 am

    I wonder if journalists from the PRC will visit San Francisco , take pictures and write smug articles about thousands of unoccupied condos?

  23. TCG
    February 28, 2016 at 12:13 pm

    I agree that there isn’t affordable housing in the SF bay area that is practical to live in, unless perhaps you are making so little that you qualify for subsidized or low income housing.

    Maybe you can buy somewhere out beyond Livermore and have a 90 minute commute to work each way, but then have terrible quality of life and are living in your car.

    Some parts of the east bay are a bit less expensive but then you’re dealing with extra crime and safety problems in many neighborhoods. Silicon Valley and the peninsula seem to be as expensive as San Francisco and most cities there have added less housing to meet demand compared to their populations than San Francisco.

    Remember that commutes are affected by natural barriers and many people cross bottlenecks such as bridges to get to work. 20 or 30 miles isn’t a comparable commute time as the same distance many places in the country.

    Go look at some of the houses that cost less than 600k these days in the bay area. Most likely something is very wrong with them such as being nearly condemned, major work needed (foundation problems, etc), in a terrible (unsafe) neighborhood or other gotchas.

    Also keep in mind that asking prices are not the sale prices. The common practice is to ask probably 20% or more under what you expect the sale price to be here. Multiple people then put in competitive bids that are much higher than asking. Then the seller chooses one of the highest bids that will close quickly. That usually means no buyer inspections, no contingencies, and quite often an all cash offer.

    Nearly everything sells after 2 weekends of open houses with multiple competing offers. If it doesn’t sell after 2 weekends it’s usually a sign that something was very wrong with the house or the seller was excessively greedy in their pricing and is insanely delusional about the worth of their home (even more delusional than the market).

    Condos are not cheaper than most houses since the majority of condos are high end and priced as such.

    These $1 million plus houses are really often very modest such as 1940s and 1950s starter homes with 1,200 square feet, 2 or 3 bedrooms and one bath. Sometimes they have unpermitted work to turn part of a garage into extra living space, but they are nothing fancy.

    If you think you can buy a cheap house and flip it for double the price in the bay area after some remodels, join the hoard of speculators trying that game. However I think it’s now too late for a quick turnaround on your money. The successful flippers got in last time between 2009 and 2013 and are all trying to get out now before the prices get more depressed over the next few years.

  24. TCG
    February 28, 2016 at 12:36 pm

    I’ll also add that if you’re judging prices based on dots on the Zillow map, there are a couple of problems.

    1) they show “pre-foreclosures” by showing a starting bid price for an auction that has not happened yet. It will sell for much more than the starting bid and often requires expensive work on the house.

    2) They frequently make homes that sold years back reappear on their map at their old listing price which is much lower than current prices. This “accident” happens fairly frequently. It probably suckers people in for a while, but eventually they realize that many of these mirage listings aren’t real and they usually appear and disappear within a few hours. Always check the listing date on Zillow since some things on their map are not real/current listings.

  25. Ken
    February 29, 2016 at 5:07 pm

    Two other pressures on the current bubble.

    1. Reduced foreign buyer demand due to federal investigations (centered in NYC and Miami, initially), Chinese government crackdown on cash outflow, and steep devaluation of foreign currencies. I’m not sure what the numbers are in SF, but in NY about 40% of new luxury development is going to foreign buyers. (Luxury dev advertising materials are printed in Chinese before English these days.) Foreign buyers – who are usually stashing cash in property that will remain empty most of the year – tend to buy around SF’s median prices. Loosing this demand will alleviate the upward price pressure on everything below the median as developers scramble to do deals on the remaining units.

    2. This one probably is already happening: declining demand for investment property. If you figure your bill is $6K – 7K a month for mortgage and upkeep on the median, you’ll require 2x – 4x on current median rent to balance the investment. Basically, no one with half a brain and calculator is going to acquire investment property, since you’ll only loose money.

  26. Marco
    March 1, 2016 at 3:33 pm

    And if you loose money, you’ll eventually have to tighten it.

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