The West Coast Housing Bubble Bursts Even Without Tech Bust, which is still to come.
The biggest housing markets of the West Coast — the Seattle metro, the San Francisco Bay Area, and the Los Angeles and San Diego metros — went through phenomenal price inflation over the past few years, with prices having shot way past their highs of Housing Bubble 1, before it imploded. This multi-year surge culminated in a last-glory spike early this year. Since then, housing markets have turned south at different speeds. And unlike the prior two housing downturns, the inevitable Tech Bust hasn’t even started yet.
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Great report and hope your voice recovers. San Diego was one of the leaders in the last down turn. I have been watching it carefully.
A housing slow down outside of a strong job market. Perhaps this time is different. Different as in worse.
SD has been able to limit supply, a byproduct of the gogo market has been a surge in permit fees, and cost to develop. The challenge to fire safety has also been a limiting factor. The projects getting done are more modest, so hopefully they will have the right mix for a slower housing market, with more affordable units.
I am a San Diego resident and observing many many price reductions in my hood..which was unthinkable few months back .
This too in good economy and strong job market
We don’t have a strong economy or strong job market. We have a collapsing economy high on stimulus.
Worse indeed. And when the current exodus out of California really ramps up, things will get worse exponentially.
Ominous news with an ominous voice – very entertaining! :-)
The Great QE unwind + rising interest rates + the end of Chinese laundering money + DJT new tax laws + Mel Watt retiring = Housing Bubble Pop.
The FANG stocks crashing helped it greatly.
And it is not coming back anytime soon.
It is a good thing they all put down 20% to have some skin in the game…wait…what?
Uber IPO + Lyft IPO + AirBnB IPO + Pinterest IPO + Palantir IPO + millenial demand = SF Bay Area housing will hit all new highs in 2019 and beyond
Not to worry.
Uber IPO + Lyft IPO + AirBnB IPO + Pinterest IPO + Palantir IPO + Tech Bubble deflating = Layoffs —> Smillenialsa moving back into mommies basement.
So where do grocery store clerks, Starbucks baristas, etc in San Francisco live? Modesto, and just commute? Or Ghost Ship tenement homes?
Quite a lot of people that work in SillyValley live in Fresno/Clovis.
Los Banos…….
The Guardian has a story about that:
San Francisco’s foodie scene suffers as its workers flee high cost of living
…“It takes a lot to keep a place like this going, and lately we have found it hard to find great people to help us,” wrote the cafe’s owners on two sheets of printer paper taped to the door, reposted as a photo in the neighborhood news blog, Mission Local. “The type of folks who you have gotten to know over the years – students, artists, cooks – can no longer afford to live in San Francisco.”…
I asked a cab driver this once. He told me that he and his wife lived with two other families in a single family house. Like 10 people in a three bedroom. Don’t know if it’s common, but he seemed to think it was perfectly fine. Humans actually have an incredible capacity to adapt to situations. The Western lifestyle of large, well appointed housing is a relatively new invention in the history of humanity. I personally value my privacy too much, but to each his own.
we know of a couple of local establishments that had to close because they couldn’t find service staff anymore. one note posted on a darkened place actually said they closed for that reason as all the artists and people who used to work there have left the city.
and yes it is getting more common that regular working people are living in cars and on others’ sofas or in shelters or stacked up in apartments like cords of wood.
people used to speak of sleeping in cars in hushed voices but now it’s common knowledge (on the news every so often) that even many college students sleep in their cars and it’s not seen as creepy anymore but the way things are here.
Expensive areas such as San Francisco, Manhattan, and others have various incentives and rent control in place.
For example, a person who leased a flat in SF or Manhattan back in, say, 1995 could still pay prices that are well below current market rates because landlords are not permitted to raise rent more than a fixed percent per year and can’t evict without cause (now, though, some exceptions exist).
Often, these renters will subsequently rent out rooms/space in the flat to others and sometimes sub-let to others (several people crammed into an apartment/flat/house). In Manhattan, there are incentives for teachers, artists, students, and such that enable them to pay a fraction of market rates. This is a partial explanation.
Get well soon
Wolf,
Have enjoyed your recent interviews and find your opinions fresh and well researched. Agree that combination of tax changes, demographics, wage underperforming asset inflation, and trade tensions make it unlikely prices in West Coast areas will continue higher. Was expecting continuation of real estate rally into 2019, but after reading your blog and others, can’t see how this could be possible.
I read an article that said the Chinese have recently begun dumping large amounts of U.S. real estate. I don’t know whether they have large investments in residential property but I wonder if this could be a contributing factor to the bursting bubble?
In SF former blue collar neighborhood where I live I saw three open houses. Each open houses was flooded with Chinese. I dont think these were Chinese born in the US. I saw kids there as well.
Whether they take chances on this highly priced home because they have wll paying jobs in the US, or its over seas money putting the payments into the house. Regardless, every house was visited and bid on by Chinese.
Chinese about to dump bc realestate big time . .get ready
“Tech Bust hasn’t even started yet.”
Mm I don’t know…tech bubble looks like it’s starting to pop to me. Though I guess we’ll know better in a few weeks — if this is the start of a downward slide in techs or just a trough.
I’m betting it’s the former.
The slide in Facebook, Amazon, and Apple has to be making a lot of tech startups very nervous and the VCs frantic.
love this website,thankyou for the insight
Wolf,
Is this only available on YouTube? Or do you have in form of a podcast or another file I can download?
I like the capability of listening while doing other things.
Get with it Dan. Use the Youtube app on your phone.
For now, it’s just on YouTube.
How long before tech starts the layoffs? Auto industry and banking already started. Retail next. This should filter down to the technology industry pretty soon.
The tech stock prices have started dropping. Next come the layoffs. Start ups will have a much harder time getting funding in this declining environment.
We live in interesting times…..
Thx again for a great report, Mr. Richter!
Makes sense.
Agreed. Housing is weak all along the west coast.
I feel the Fed will do 1 more 25bp rate hike and then pause next year unless the S&P 500 climbs above 2800 again within 60 days.
Why ? Because the Goldman Sachs alumni and our fearless leader has telegraphed this through his top economist.
Even this final 25bp hike will be viewed as hawkish by people like Bullard, and of course DJT.
The Indian Central Bank Governor resigned very recently because he felt he was not allowed to remain independent.
Powell is no Volcker. Easy money is the most realistic choice. There is just far too much debt everywhere for an alternative course of action right now… And it’s also the holiday season.
I think the pace of the Fed’s Balance sheet wind down is the wild card right now
Australia has never had lower short term interest rates, and that has not stopped the massive house price plunges in Sydney and Melbourne.
How many single family housing units became rentals due to the downturn in 2008? The zip code that includes Apple HQ is 50% non owner occupied for single family homes. Swelling housing inventory will in part be driven by large number of investors wanting to cash out!
Adding more fuel to the fire is the US Treasury’s announcement in mid-November 2018 of regulation tightening on all-cash real estate deals.
For example, in San Francisco, previously a buyer using a shell company had to be identified if the purchase price was 2 million or greater. They’ve lowered the threshold to 300K, which covers most homes. Unfortunately, this rule only applies to these three counties: San Francisco, San Mateo and Santa Clara. I live in the North Berkeley/Albany area (in Alameda County), and the home prices in this highly-desirable neighbourhood aren’t much lower than the SF prices. Will this activity keep our home prices artificially inflated and will we be getting more purchases from drug dealers and criminals? (Hopefully, the other economic factors will counteract this effect.)
It’s maddening that one could buy a house at the top of the market when that inflated price is due to illegal activity.
http://fortune.com/2018/11/16/fincen-real-estate-llc-all-cash-purchases-disclosure/
https://www.pymnts.com/news/regulation/2018/fincen-real-estate-cash-purchase-report-financial-crime/
https://www.sfchronicle.com/business/networth/article/Feds-making-it-harder-to-launder-cash-through-Bay-13451150.php
Its easy to get permits in SD downtown has loads of cranes everywhere.
The supply for units is up.
I’ve posted the same here before so I will re-iterate – I am a stock incentives Director in a Fortune 250 consumer products company (apparel/footwear/equipment) where virtually everyone reading this post will have purchased or is currently wearing one of our products. I cannot even begin to dream of affording a home in the east bay where I work – so I cannot imagine how others making half or less of my salary can begin to make ends meet. The ‘bay’ is the definition of unsustainable.
I read recently that 75% of the venture capital in the US ends up in Silicon Valley, and I also read that 40% of tech startups budget goes to marketing spent with Amazon, Facebook, Apple or Google. So when the VC pipeline dollars dry up to the startups, one would naturally think that the knock-on effect will be a collapse, or at least a significant deflation of the entire tech ecosystem.
From a national competitiveness point of view, we, as a nation, need the skill sets that have been developed here in the Silicon Valley ecosystem to disperse into our 2nd and 3rd tier cities in order to bring the rest of our economy (e.g. manufacturing) firmly into the 21st century/ 4th Gen. Space.
I see flight from Silicon Valley as the next wave of economic development that will push the country forward and allow us to rapidly scale these technologies outside of food delivery apps and into manufactured IOT devices.
But I feel for those who stretched to buy an overpriced hovel here in the bay in the last 36 months or so.
What is IOT (or today’s Silicon Valley with everything “social”) actually good for? China 2025 also pushes IOT, which reinforces my suspicion that it’s just a scheme by authorities to usher in ubiquitous in-home surveillance. I don’t know why I would want a refrigerator that streams to the cloud how often I open it, or an espresso maker that reports what my waking hours are. It’s bad enough having phone apps constantly information-harvesting.
Admittedly, IOT in manufacturing processes makes sense, but robots are usually already networked so it’s basically just more sensors and reporting – not exactly rocket science or a fundamental paradigm shift that will have a transformative result.
its a coordinated DRAINING of liquidity. 16 of 20 central banks, have either stopped QE, or doing QT, and raising rates. People don’t really understand the opposite of QE. QE was massive injection of liquidity. The markets got used to and PROPPED by the always increasing rate of it. So its not like the QE has plateaued, which would still be QE, but its either stopped, and there is actual draining of liquidity, or there is taper in the rate, which is below any plateau. Given the amount of debt, which requires massive amounts of servicing, this current draining phase has a multiplying deleveraging factor. I dont think stock markets around the world, have truly recognized what this means. They are in denial. Yes markets are down, but none of them have priced in anything close to what ‘fair value’ might be with liquidity draining. Its such a long drop from here, its not even on their radar as to what is going to happen. Central banks mistakenly believe they can ‘slowly’ let the air out. Sorry but any amount of air ‘leakage’ and the bubble prick begins an immediately, and irreversible collapse. There wont be any going back, or re-propping, or any amount of ‘puts’ that can injected to reverse course. Right now it looks like ‘slow motion’ because we are all so focused on the indexes. Nothing goes down in a straight line, but i suspect the slope of the downdrafts will be far steeper than anyone is anticipating, and the depths far far deeper to whatever marks any sort of a ‘bottom’ than the worst possible fears. In fact, a lot of the would be bears are even ‘hedging’ their downside estimates, because they were burned so many times on the upside, due to so many continued instances of massive QE injections for a decade now. Therefore even their indicators are useless in this scenario. I think you have to literally look at stocks, as though they will end up in percentage drops along the lines of what crypto’s are now doing… 80 to more than 90% drops from their all time highs. Amazon will end up being one of the worst, and end up at price where it started the Last decade. The collective US stock market cap will drop at least 75% from where it stands today, and probably more since its 1.5 times GDP, and GDP is over-inflated itself. The Nazdaq will take the worst of it. I anticipated to be less than 10% of the value it is today. No need for a timetable. It’ll be here before you know it, because nobody is doing anywhere near an appropriate level of panicking. The fear indexes are warped, bc extreme fear today might only represent fear of a 20% drop, because psychologically, every single market participant has been conditioned for central bank QE and intervention, to ‘arrest’ anything serious. Problem is, all that intervention, merely added 10’s of trillion worth of debt. What we have today is all an illusion and totally fake.
Decentralized work is killing the SF Bay area. We realized you didn’t need to physically be there, so money and talent is finding way better places to live. Invest in the latest slack, telegram, skype, etc…as these will only get bigger.
For some of them who think how it all happened. Well then,the Forces that Cause the Bubble to Burst. The bubble bursts when excessive risk-taking becomes pervasive throughout the housing system. This happens while the supply of housing is still increasing. In other words, demand decreases while supply increases, resulting in a fall in prices.
Wolf, this Report was concise and informative. Seems to me that the one big change, over the last year or two, in your forecasts, is the lessening of optimism that the Fed might be able to sloooowwly withdraw their market-manipulation (VLIRPs and QE), and avoid a Big Crash. Now you seem to be expecting a Tech Crash, big.
re Ama on (tech crashes come often to me: my last letter of alphabet is gone !): they got the big gov. contract for web services, but for us humble consumers, more and more often we get the “your shipment has been delayed” message, and more and more often, at the website, the whirling ball prevents shopping/buying. I suspect overextension.
As for how far and how fast the market declines, don’t we have built-in emergency brakes which give us a slow crash (yes it’s like movie slow-mo). How far ? the Dow may be more or less cut in half, or roughly to where it was when the Fed began its brave new world of macro-economic experimentation. (Loan us (we the banks and credit unions) money for free, i.e., no interest will be paid; watch what happens to your retirement savings…..)
Just my tea leaves talking…the only question being whether the Central Banks reali e (missing letter, I blame Ama on) that Null interest rates are like nuclear bombs….
Thx again Wolf (thank God, I still have the X)
Null IRs are like nuclear bombs for the economy in the sense that they are both enormously destructive.
In the case of the nuclear bomb, fallout and radiation may take a very long time to dissipate. Will the economists and central bankers closely observe the longtime effects of Null Rates?
Bankers and economists will be tempted to overlook the destruction, and look at null rates as another great tool for them to wield as needed. Sense of power.
We all know that nuclear bombs are destructive: that is proven by empirical evidence. But have the central bankers learned any lesson wrt Null Rates ?