THE WOLF STREET REPORT: Why the Wave of Mega-IPOs Won’t Bail Out the San Francisco & Silicon Valley Housing Bubbles

Despite the deafening hype in the media.

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  48 comments for “THE WOLF STREET REPORT: Why the Wave of Mega-IPOs Won’t Bail Out the San Francisco & Silicon Valley Housing Bubbles

  1. michael says:


    Amazingly good segment. Peoples memories appear to be much shorter than 10 years. Much to their detriment.

    • Javert Chip says:

      It’s not necessarily that memories are “shorter”, it’s that there are always newer & different people, especially over a period of 10 years.

      You may have noticed this, but the newer crowd always thinks “it’ll be different this time”, and has absolutely no desire to listen to the older crowd.

      ps: it’s been like this for a couple hundred thousand years.

      • Jack says:

        You mean when one group of our ancestors where reluctant to believe the smaller group who warned them that there was a sabertooth in the cave they intended to stay the night?

        Well, the warned group found out the hard way , didn’t they? :)

    • Rcohn says:

      As I have previously mentioned I moved to San Francisco last summer to be closer to our daughter . We moved from Morris County NJ , which was ranked as the 24th wealthiest county in the county in the country by the 2015 census. I sold my house for what I thought was an overpriced number. But the prices of houses in San Francisco make those in NJ look like extreme bargains, so I have a few questions to ask of Wolf and those who comment on this blog.
      What are the estimated property taxes( as a% of the selling price) for new home sales in Marin County, San Francisco and those in Silicon Valley?
      How do banks who lend to those who own stock in unicorns hedge their risk?

      Let’s assume that the ratios of housing prices compared to median family incomes continue to rise. That can only mean a few things
      A. Median family incomes are not related to median family wealth
      B. Houses are being bought for cash – mainly by foreigners
      C. Younger people will be locked out of the housing market in SF area forever , unless they inherit a house, inherit substantial monies , earn FAR , FAR above median incomes or earn a windfall bonus.
      D. Few houses of those who die in SF ever come up for sale.

      • Petunia says:

        Those in SV who borrow against stock almost always pay cash for the property. The house is the hedge against the loan. The bankers know the real estate market and lend accordingly. They expect the property to increase in value as well as the stock.

      • Harrold says:

        Trick question, there are no new houses in any of those cities.

  2. Wolf Richter says:


    An individual commercial bank cannot “create” the money it lends out.” That a bank can “‘create’ the money it loans out” is one of the biggest nonsense rumors that refuses to die. A bank must fund the loans it extends. The bank mostly gets the money from its clients (deposits) or by selling bonds or by borrowing in the wholesale market. The “cost of funding” is one of the most closely watched metrics in banking. And the “interest margin,” even more closely watched, is the difference between its “cost of funding” and the interest it earns from the loans it extends.

    A bank that runs out of funds, and cannot borrow enough to meet its needs, collapses.

  3. petete says:

    Bungee. Ask the bank for a loan to invest in their stock. They Will say N.O.

  4. Rowen says:

    Really, the only thing left for the Fed to do is to buy houses and stocks to maintain asset valuations absent “organic” demand.

    This drumbeat for full Japanification is getting louder.

    • Bankers says:

      They could do an IPO on the federal reserve, that would really get people going… same story though, just a pile of debt that they were liable for one way or another…wouldn’t stop everyone voting to chip their outstandings onto the balance sheet as well though.

      Would be the American way?

      • Jack says:

        What do you think are the long term and short & medium term bonds are?

        These are all mini IPOs that Peter out your wealth over the short, long term.
        No Value at all.

        When the CPI runs at 2-3%.
        and you get paid 1.7-2.5% interest

        What do you think you’re doing to your money?

        • Bankers says:

          Bonds are investing in the money, not owning it. The money created by the fed is backed by (government) bonds, which are future taxation. It is a circular process where investors play a lesser role and pick up crumbs, the heavy use of the money (reserves or power money) created is given to banks. As citizens we have access to it directly only as cash, which actually devalues in mathematical terms due to monetary expansion ( both M1 and M2, M2 is the “weaker” money we invest in those bonds with). If we want to get anywhere beyond holding a diminishing reserve we have to invest the cash (integrate it as part of that financial system), or cash out into something more worthwhile (physical assets).

          If the public owned the federal reserve they would govern its policy, and I expect as a whole they would vote themselves rich by exchanging their own debt (not just future taxation) for money. They would be “rich” because not only could they take their (say mortgage debt) off of commercial banks and place it with their own (the new fed) , but they could restructure the terms to non payment, or even go for direct monetisation, negative rates even.

          Obviously this would bring on a meltdown of the whole financial system and the meaning of money , but when private debt is so high, a lot of people would come out better off … except they would have to rebuild the financial structure and economy, but maybe that is what many want anyway .

          As a majority get pushed down the income or net worth scale then more so. This is really what QE is about, government managed but where the population are also bailed out to a lesser degree than finance, at the greater expense of those starting off who are a minority waiting to be welcomed by enticement into the world of debt.

          So everyone is going to hold their own view on this depending where they feel they are in the hierarchy, and the possibilities or stability it seems, or seems not, to offer.

          Which is why people argue over it all so much also, but the actual mechanics of the system are available for anyone to study if they want to inform themselves fully.

    • Nick says:

      Japanification….are you referencing the Japanese asset price bubble of the90s? If you are thank you! I’ve been making the comparison with our current economy for years and yet NO ONE has seen the correlation.

  5. victor says:

    Love your website and your insights..

  6. Stephan in NY says:

    “millionaire underlings”…what a great phrase!

  7. P.H. says:

    Long time reader, first time commenter. Thanks for the insight! A lot of what I suspect or intuitively feel is going on is reflected and confirmed in your blog, especially this entry. Keep up the good work!

  8. DR DOOM says:

    Wolf is sunshine in the doctors world. I also agree with DJT on the failing NYT.

  9. Ron says:

    Having lived and worked in SV and SF since the late 60’s it always amazed me how much money is driving the IPO’s. While I agree with you Wolf that the impact on the local RE market is hyped up by the Times article there will be many articles coming in the SF Chronicle showing very young software engineers cashing in their stock and buying upscale homes throughout the Bay Area to prove the point. Nobody in the media wants to create any negative RE articles it always good and going to be better.

  10. Bobber says:

    I think the rule of thumb is that employees, including executives, own only about 10% of the typical corporation. If Uber is worth $100B, then only about $10B belongs to the employees in San Francisco.

    And as Wolf points out, the $10B worth of employee stock has existed and been monetized already.

    Start up employees must be worried about how poorly the recent Lyft IPO went for initial purchasers, even after all the hype that was thrown at it. This experience does not bode well for other IPOs this year.

    The people that purchased Lyft’s stock and got burned are the same speculators that would ordinarily buy the Uber and AirBNB IPO’s.

    My bet is that Lyft continues a downward path, like SNAP.

  11. JZ says:

    I am NOT sure whether Wolf is right or NOT AFTER Uber IPO. What I am sure is that people in Silicon Valley will try to front run Uber employees BEFORE they IPO. So the hype works. Remember “buy the rumor and sell the news?” This is the same. Uber, please IPO, as fast as you can and be done with it and let’s see what the silicon valley house prices will do.
    I do believe the market has peaked, other wise they won’t all come out and IPO.

    • Trojanman says:

      I agree. There’s a bunch of people I know running around ready to buy a house in SF. I also believe more sellers are holding their properties off the market or floating high prices in anticipation of the IPOs. For a while Trulia has a bunch of listings at slightly less offensive prices, but everything I like sold in two weeks and I see other stuff closing in the market after sitting for a while. I Think the disappointment of the reality following the hype will hit hard, but in the near term the hype is having its effect.

  12. California Bob says:

    OK, obviously Wolf has an issue with the NYT. I got the message; no more links from me (it was an innocuous post about Aussies’ natural skepticism perhaps saving them from economic busts, for a couple decades). I’ve listened to the last half-dozen TWSRs, and I’ve never detected such outright irritation if not anger.

    We all know an asset value implosion is coming but, the ‘markets’ are irrational (was it JKG who said ‘The markets can remain irrational longer than than you can remain solvent’?). I panicked–in hindsight–and unloaded a profitable stock position in December when it looked like the bust was coming; I sold at $68–I’d bought at $27–and the stock went back up to $110 within a couple months. LYFT is indeed worthless, but has come back up a couple bucks after falling the day after the IPO. ‘Fundamental’ market analysis is out the window when there’s a tulip mania and the Fed is inflating assets no matter the long term cost to the economy. Wolf’s now on record–and I think he’s right–that there will be no housing ‘boom’ in SF/SV, but I think reason and rationality have left the building in a country that has elected a failed ‘businessman’ and pathological liar to the most important office in the country (Note: I cashed out and left the SV not because of housing costs–I had a sweetheart deal on a decent bungalow in SJ–for family reasons and because my area became unlivable for a number of reasons).

    In this environment, with this Fed, you can be ‘right’ about the fundamentals, but monkeys throwing darts at the stock price sheets can make more money than you. I think a lot of us are starting to feel like the child who knew ‘the emperor has no clothes,’ but until more people realize that the game will go on.

    • Jack says:

      Excellent Lamentation Bob!

      We’re in the eye of the storm, where everything seams strangely calm!!

      Don’t despair though, very few live to see the wreckage, and its NOT a good feeling either.

    • Bankers says:

      It’s a shame about the NYT and various other papers. For myself all I know is that when you start seeing some other agendas mixed in to what was quite down to earth reporting, even if they are a small percentage or just background suggestion, it really makes you question the paper, you feel like you are being messed with or phished, and at a certain point people just draw the line. So many papers this has happened to, some of which were flagship. I’ll go conspiracy and say that it is a purposeful decimation, not just a shift from providing news that people had to go out of their way to pay for into one of attracting as many views that might pay some. The only way not to be crowded out is to not compete with the crowd but keep to own ethic, even if it means downscaling.

      • Petunia says:

        The decline of the NYT goes back to the 1980’s. As the conservative movement grew, the NYT went further left. I read it every Sunday for the book reviews, but gave up in the 1990’s when they would not review books that were best sellers because they were conservative. As the NYT censored their paper, the readers censored them.

        • Bankers says:

          For me it was a bit later that I went off it. I would read it mostly for international (usually conflict) reporting and so it tended to provided some depth and fact outside of the narrative of the day. Then later it just seemed to get wrapped into the progressive version of new conflicts and that was that. Same with the Guardian in the UK, it used to provide some very factual hard reporting and had a history of that, but now I refuse to visit it because it is close to some kind of establishment sponsored indoctrination site. The FT as well, still has some good articles but there is an underlying tone present often.The list is endless really , so if an article appears in a specific search and it seems soundly written ( and it does not usually take long to figure out roughly what style is behind an article) I might read it from any source, but otherwise I just stay to the most factual sites I can find, and away from those that I know are too biased or are not consistent due to whatever agenda.

      • Setarcos says:

        The old gray “lady” has been a destitute prostitute for quite a while. Almost all media outlets sell little beyond confirmation bias.

        The time spent consuming their product is better substituted for time spent on this blog … and thinking independently.

        Thousands of years of economies devoted to monarchies and dictatorships and only a couple centuries with sporadic examples of self-rule. Well it was worth a shot.

    • Wolf Richter says:

      California Bob,

      The issue with the link the other day was that you posted a few words and a link on an unrelated topic. I always delete those links. This comment section is not a link dump. However, if you write a couple of paragraphs and link the NYT as the source, then no problem.

      Normally, I delete the whole comment that dumps a link in this manner. But in the case of your link-dump comment, I responded with some more detail but deleted just the link. You can go back to that section and read my responses.

      See commenting guideline #2 (link dumping):

      • California Bob says:

        Noted. The ‘link dump’ was more appropriate to a few days’ prior post on the Aussie market.

    • Petunia says:

      The death knell for SV was sounded by Jeff Bezos when he moved his HQ2 to the Washington, DC area. The epicenter of tech will now be political, not technical, or financial. You can expect the rest to follow in the future.

      • Rown says:

        BigTech is really unelected autocratic rule by Silicon Valley billionaires.

  13. kyle patrick myers says:

    Nellie Bowles wrote the NYT article “When Uber and Airbnb Go Public, San Francisco Will Drown in Millionaires.” She covers tech and internet culture, not global finance. Reporting about how global finance works is probably too boring for her readership. Her job is not to be reasonably informative. Her job is to drive subscriptions, website traffic and advertising revenue. Maybe she understands that low interest rates create the mountains of cash that VCs use to throw at these unicorn companies, but it doesn’t sound like it from her editorial piece.

    In her article, she interviews Real Estate agents. These are the last people to understand how this all really works. For most Real Estate agents, it’s always a good time to buy Real Estate and the market will always go up and most of these agents probably didn’t see a slow down in late 2018.

    Unless they’re in fintech, most techies don’t understand the game of finance so it makes sense that Bowles’ article is lacking some “out of the Silicon Valley Bubble” analysis that Wolf, Mish and other Economic/Business/Financial bloggers bring to these types of silly articles.

  14. fozzie says:

    With Uber, wasn’t there an issue where employees were trapped in their job because, unlike other tech unicorns, there wasn’t a secondary market to sell their shares until very recently?

  15. Ed says:

    The Bay Area has become too expensive for first time buyers. Why would anyone in their late 20’s/early 30’s plunk down $300K-$600K as a down payment on a modest shack when you can buy a nice house all cash for the same amount as the down payment in many nice areas across the country?

    My wife and I are in the same position in Washington, DC. Drop $300K on a down payment and take on a monthly $6K in housing expenses or just move to anywhere else in the country 10+ miles from the city and purchase a home all cash. We both demanded work remote schedules with this leverage, which were approved.

    Hard to imagine big city real estate all across the country isn’t going to implode over the next 10 years

    • Clete says:

      Ed – We did the same thing a while back and are living in the cheap sunshine. Remote work is going to be the death of a lot of business core areas, since you don’t go to lunch there if you don’t go there in the morning. With no commuting, we’re also living with one car, much less gas, etc.

  16. A series of successful IPO leads more startups to come in and the process continues. Why isn’t this happening in Alabama? There are reasons of course, once you have a highly tech educated population to draw the talent from, and suitable government policy toward these new businesses, these things can continue indefinitely. There is also a lot of land on the pennisula that isn’t developed, but buying up old homes in Palo Alto is easier. In the broad context the NYT is probably right but for the immediate wealth effects of these IPOs, Wolf has it.

    • Lance Manly says:

      >Why isn’t this happening in Alabama?

      Because the highly talented workforce they need does not want to live in Alabama.

      • Suzie Alcatrez says:

        You do realize that there’s are rocket scientist that build rockets in Alabama?

  17. Rcohn says:

    Let’s look into the future and see what can possibly go wrong
    1. Stock market turns into a bear market . This is a % 100 certainty, the only question is when
    2. The Nasdaq which has led the current bull market corrects badly
    Again another sure thing
    3. The realization that many companies which are currently not making money will never make money. Stocks of those companies crash going down at least % 75 and some to zero
    4 . After devaluing their currency , China becomes much more strict on capital controls , vastly reducing cash leaving the country . At the same time the Chinese government demands repatriation of cash sent overseas during the last two years, threatening criminal sentences for those relatives still left in Chiba
    5. Capital gain taxes are raised . A sure thing under a Democratic administration
    6. As boomers age more and more people die . Heirs sell a good % of these houses to raise money.Others who have held back on selling their houses start throwing in the towel and start a stampede . The problem is exacerbated by demand problems since demand has collapsed from Silicon Valley and January first time buyers have moved out of the area.
    7 .Schools continue to deteriorate in most Bay Area schools because of Prop13 and because of pensions . This results in less money to pay for younger teachers
    8. The homeless situation continues to deteriorate as NIMBY is becomes the dominant policy and most large corporations are able to defeat a corporate tax for the homeless . The good news is that SF avoids some of the Middle Age diseases that will become common in LA
    9. There are naval military confrontations between the US and the Chinese in the South China Sea

    I may be called a pessimist , but Zi consider all of these points and many more to inevitable in the next 5 years.
    Many of these points are just extrapolations of what has already happened

    • GSW says:

      Good list. Off the top of my head:

      #1 and #2 depends on how long Trump keeps a gun to the Feds head; he will keep stamping his feet until Election Day and not let them raise rates if he can.

      #4 is already underway, and is the yang to the “IPOs eating the City” yin….whichever is more powerful will sway the direction of RE prices over the next few years. There has been a plateauing and slight weakening of prices because the China money isn’t there in droves. We shall see what wins out.

      #6; beware Prop 13….the Boomer dies, but he/she gets to pass the property and the cushy tax rate down to the heirs. This will continue to keep schools deteriorating (#7)

      #8 really can’t get much worse around here; the level of NIMBYism and limousine liberalism is astounding. Everyone is progressive until they want to build a homeless navigation center in your neighborhood. I have always said that until they can figure out the high speed train and Caltrain electrification boondoggle, that train shed they built under the Transbay terminal should be used as a massive homeless center until it is actually put to use; bring counselors, have the food banks and Lava Mae showers, reroute St. Anthony’s and Glide food services down there, and have social services in there to start getting people the help they need. It’s a four block long prime real estate location sitting empty.
      Also, while SF has a ton of blame here, #8 is driven a lot by State policies that SF has no control over; instead of voting about sugary beverages and EMT lunch hours, let’s get a meaningful proposition on the ballot to revisit Lanterman Petris Short and other legislation from a generation ago that ties everyone hands when it comes to getting mentally ill people off the street and into care. Nothing short of a tragedy that this occurs in a first world country.

    • TrojanMan says:

      All fair and good observations. The counter argument is that both parties want to crush the dollar for their own political ends. Trump will put as much pressure on the Fed as possible to keep rates low and the balance sheet high. On the other hand, we have folks like AOC arguing for Venezuela style “modern monetary theory” in which we can print our way to prosperity. Of course if real inflation gets out of control with consumer products and food, then maybe we’ll see the Fed increase rates which would crush the housing market.

      The problem is that we keep changing monetary policy to suit short term needs. It’s hard to plan anything since they can change up whatever they want to do on a whim.

    • California Bob says:

      “9. There are naval military confrontations between the US and the Chinese in the South China Sea”

      I hope with all my being that doesn’t happen; my son is being deployed on a Navy cruiser patrolling the SCS. Surface ships are sitting ducks for the thousands of missiles the Chinese have manufactured.

  18. Laughing Eagle says:

    Wolf, this was an outstanding analysis.
    The Fed continues to inflate house prices by their cheap interest policies. Booms and busts continue to occur. But people think they are acquiring wealth at these inflated prices.
    And if you gain a big payday you may buy a bigger house. But bigger houses require bigger costs- heating or cooling energy costs, higher insurance costs, higher maintenance costs, higher mortgage interest costs, higher closing costs, higher real estate taxes, so when you sell that home you do not realize you have not made as much as you think you did, subtracting these costs over the years. And with the new tax code that higher mortgage interest is no longer a benefit. And then let’s not forget about moving costs from one house to another, as corporate America today is not covering this cost like they once did.
    Using that “gained” wealth, we buy a bigger house or a more luxurious car all to show everyone how well we are doing. It is not about gaining wealth as much as it about showing others how wealthy you “look”. That luxurious car is depreciating rapidly, but the repairs costs are not.
    In America we have the freedom to choose, but with those choices one must avoiding choosing the predators who want to sell you illusions of grandeur or an “easy” fix for your financial problems. The other issue is knowing the true value of what you choose to buy. Reminds me of a book I read where the author said “Americans know the prices of everything, but the value of nothing”.

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