What’ll Happen to Home Prices in Silicon Valley & San Francisco after the Mega-IPOs? Last Two Times, We Got a Housing Bust

Here’s how it works. Meanwhile, the media is busy publishing real-estate industry hype.

This is a shorter, less angry version of my podcast last Sunday (as many have found out, I’m freer when I talk than when I write).

It’s now a standard theme in San Francisco and Silicon Valley conversations, and it’s everywhere in the media: The wave of mega IPOs – including Lyft’s IPO last month and the forthcoming IPOs of Uber, AirBnb, Palantir, etc. – will cause the Bay Area to drown in millionaires that are all going to move out of their rinky-dink apartments and buy homes and cause the housing market that has been sinking since spring last year to make a violent U-turn and inflate a whole lot more. The entire real-estate industry is salivating and pushing this theme. But wait…

First, there’s history. The last two mega waves of IPOs were followed by, well, not further home price increases but housing busts.

The IPO boom in 1999 and early 2000 led to the same kinds of speculations that these newly minted millionaires in Silicon Valley and San Francisco would push up home prices. But then came the bust, and these startups cratered and people lost their jobs and couldn’t afford to live in the Bay Area without a job, and they packed up and left. Some dumped their homes. Others defaulted on the mortgage and walked away because they could: California is one of only 12 “non-recourse” states. Housing units began to empty out. Home prices, instead of being further inflated by this mega-wave of IPOs, fell.

Similar hype about IPO moola further inflating an already inflated housing market, with the entire real estate industry salivating, occurred in 2006. In 2007, the local housing market started to crash.

And there are reasons for this – as counter-intuitive as this may seem to folks who have never been through these boom-and-bust cycles.

Much of this hype is based on the assumption that these IPOs will suddenly generate billions of dollars of real wealth out of the hypothetical and unreal wealth of non-publicly traded shares, convertible notes, or stock options.

But that’s not how it works. This hypothetical money is not hypothetical. It’s real, it has been real for years, and it has grown over the years – in Uber’s case, in 10 years from a few million dollars to tens of billions of dollars. The equity of these companies has been worth many billions of dollars for years. People and entities that own this equity have gotten immensely wealthy by owning it.

The IPO, which is in essence a round of funding, might inflate the equity value a little further from the last round of funding and shift ownership a little. That’s about all it does.

If Uber’s IPO values the company at $90+ billion, as is being rumored, it doesn’t suddenly create $90 billion. At the last round of funding, Uber was already valued at $76 billion. And that has been real wealth – not hypothetical wealth. Here’s why:

One, during fund raising rounds, employees can often sell their shares or convertible notes to new investors. For example, in January 2018, a consortium led by Softbank bought $9.3 billion of Uber shares both from existing shareholders and from Uber itself. In this deal, former Uber CEO and co-founder Travis Kalanick reportedly sold $1.4 billion of his shares to Softbank. Other Uber employees sold too.

Two, some of these startup companies have programs in place where they buy back shares from employees to allow them to cash out some of their wealth.

Three, in tech centers such as San Francisco and Silicon Valley, some banks have departments dedicated to converting pre-IPO equity into cash by lending money to those people, with the equity being used as collateral.

Four, many employees have been able to sell their shares in the secondary market that exists for the shares of startup companies.

All these methods allow employees to cash out some of their wealth. And they went ahead and used this moola to buy expensive homes years ago.

This money has been circulating in San Francisco and Silicon Valley for years and was a big driver of the blistering housing bubble that peaked last year!

Are Uber billionaires somehow not billionaires just because the IPO hasn’t taken place yet? Nope. They have been billionaires for years. And their multi-millionaire underlings have been multi-millionaires for years as well. And they have already bought expensive homes based on their wealth.

But wait… that’s not all.

The biggest winners in an IPO are the institutional investors, such as venture capital funds; or for late-stage investments, private equity funds, pension funds, even mutual funds. Their money comes from around the globe. When they sell their Uber shares to the public during and after the IPO, they will make huge gains. But this is not San Francisco money. This is global money, and it goes back where it came from.

It took Uber 10 years to become what it is today. During this time, its “value” as determined by investors has skyrocketed. Uber employees that have worked there for years, and that are multi-millionaires based on their stock compensation plans, have been multi-millionaires for years. And they generally don’t live in some dumpy apartment with three other roommates. They cashed out some of their wealth years ago and bought a nice place years ago.

This home-buying by wealthy startup employees has been in part responsible for the surge in home prices in San Francisco. They’re not going to do this in the future. They already did. And that’s one of the reasons home prices are already so high.

But even if they’re suddenly buying an even more expensive home, they’d have to sell the home they’re in now. They’re not creating new demand. First-time buyers or new arrivals create new demand. But people selling their home and buying another home don’t create new demand. They’re just churning the market.

Certainly, there are some recently hired employees whose shares or convertible notes are going to be worth $100,000 or $300,000 dollars, assuming that the post IPO-shares don’t crash. And some of them – after the lockup period expires and they can sell the shares – can use this money for a down-payment on a ludicrously overpriced home.

They’ll buy a median apartment that may run them over a million bucks. And they’ll make huge monthly mortgage payments, and they pay home-owner association fees, and they pay property taxes on that inflated home price. And they have a good chance of losing money on their home because this is precisely how it happened after the last two big IPO waves.

Both those times – in 1999/2000 and 2006/2007 – institutional investors cashed out, and the global money went to global investors, not to San Francisco. And founders and early employees had gotten rich years before the IPO and had bought homes before the IPO, which contributed to the inflation in the housing market long before the IPO wave. When the startup boom crashed, as it always does, home prices sank with it.

What these mega-IPO waves tell us is this: It’s the peak of the cycle, or past the peak of the cycle. It’s when global money – VCs, PE funds, and other institutional investors – are trying to cash out by selling their shares at hugely hyped-up valuations to the public.

Uber’s 330-page IPO filing disclosed all kinds of goodies, including huge losses from operations, big tax benefits, large gains from the sale of some operations, stagnating rideshare revenues, growing revenues from Uber Eats, and an enormous list of bone-chilling “Risk Factors.” Read…  Uber Discloses 3-Yr $10-Billion Loss from Operations, Stalling Rideshare Revenue & 50 Pages of “Risk Factors” that Are Not for the Squeamish

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

 

  84 comments for “What’ll Happen to Home Prices in Silicon Valley & San Francisco after the Mega-IPOs? Last Two Times, We Got a Housing Bust

  1. andy
    Apr 14, 2019 at 11:26 am

    It’s nice that everyone can now afford a personal driver. Everywhere, at all times, with one click. No bus for me thank you very much.

    • W. S.
      Apr 14, 2019 at 2:16 pm

      Not me, baby! I ain’t got dime one to spend on Uber. Good thing I have a bicycle.

    • Dale
      Apr 14, 2019 at 8:13 pm

      Now that Uber and Lyft are no longer VC-subsidized, we will likely see their prices increase. And maybe soon the Fed will simply buy their stocks, just to keep us happy. Under MMT, anything if possible.

      But until then, I agree!

    • David
      Apr 15, 2019 at 9:15 am

      Andy, I appreciate your comment. Everyone talks about the overpriced valuation, billions in losses and mistreatment of employees which is all true but without Uber and Lyft we will still be in dirty, smelly overpriced taxis waiting in the rain.

    • c1ue
      Apr 17, 2019 at 11:16 am

      Except it isn’t really affordable – those rides are being subsidized from 30%-40% by venture capital.
      Post-IPO, future venture subsidies will disappear.
      Funny enough, the “ride share” affordability is about 20% under taxis…

  2. Franklin
    Apr 14, 2019 at 11:35 am

    OMG, you mean the people who are hyping the real estate market may not be telling the truth? It is a truly amazing concept that in a country so founded on honor and honesty such as America. Hard to imagine that in a land where personal honesty is such a huge determinate of a person’s status that a real estate professional might be saying something misleading to make money for themselves. I am shocked.

    • 2banana
      Apr 14, 2019 at 12:02 pm

      Real estate agents work for the seller.

      On commission.

      The higher the price, the more they make.

      Nothing dishonest about it. What behavior would you expect? What behavior would you expect from a used car salesmen?

      • Arizona Slim
        Apr 14, 2019 at 1:06 pm

        Call them used house salesmen. Because that’s what they really are.

      • HMG
        Apr 14, 2019 at 1:54 pm

        The average slick Used Car Salesman may rip you off a few hundred dollars.

        The expert Real Estate Agent could have you for several thousand; or even more if you believe his/her hype !

      • David
        Apr 15, 2019 at 9:12 am

        Real Estate agents work for themselves period!

      • Ed
        Apr 15, 2019 at 12:13 pm

        2banana – The real estate agent benefits much more by selling quickly at any price then by maximizing sale price.

        The difference in commission between getting maximum sale price and selling 5% below market value is very little to the agent. They don’t care as long as the house sells.

        Agents are scumbags and they will cost you thousands if you listen to their advice. The strategies I’ve encountered are to price low for a quick sale or price too high to “buy the listing”. Both strategies cost the seller big bucks but the agent gets paid the same.

        It’s wise to do your homework, price the property yourself, and find whatever bozo agent will work for a 4%-5% commission.

        • Gian
          Apr 15, 2019 at 1:20 pm

          I know several RE brokers and agents, forthright individuals whose adherence to ethical and honest transactions are SOP. Unfortunate that the losers posting herein are so green with envy that it has apparently relegated them to a life of self-pity and abject poverty.

  3. John G.
    Apr 14, 2019 at 12:12 pm

    Thanks for the clear, logical read, Wolf. Makes perfect sense.

    • arcadia
      Apr 14, 2019 at 1:36 pm

      I second John’s comment: I appreciate the clarity of the explanation! But I expect that any SF RE “bust,” or “correction” would lead only to less-than-ludicrously-priced homes, still out of range of those of us who make “median” income in the city, but well within the range of speculators, who would snap everything up.

  4. SocalJim
    Apr 14, 2019 at 12:51 pm

    The problem with the bay area is a high concentration of jobs in a single industry. The sagging bay area real estate is mainly being caused by the slowdown of venture capital into so many firms that just lose money. Investors are starting to realize many of these money losing firms will never make money. The recent situation where investors pour money into money losing business ventures was fueled by central banks and may be a pattern not seen again for decades.

    In Los Angeles, New York, and Boston, the economies are much more diversified. There is no single industry that dominates such a large percentage of the economy. Therefore real estate investments tend to be a better investment.

    • Lemko
      Apr 14, 2019 at 1:12 pm

      The problem with the bay area is a high concentration of jobs in a pit of money losing companies… Silicon Valley, where Pension Funds go to die!

      I wonder once the Pension Crisis explodes, say 3-5 years… Will PF Manager’s be so willing to lose tax payer money in order to create themselves commission ? San Fran RE is gonna get hurt if Pension Funds are forced to make money on investments once debacle unfolds shortly

      • HMG
        Apr 14, 2019 at 1:56 pm

        The link to Pension Funds could indeed become significant in a few years time.

    • JZ
      Apr 14, 2019 at 2:00 pm

      Silicon Valley sucks because their money losing business if sponsored by central banks? LOL, let me know any economy that is NOT sponsored by central banks? All everybody do is to borrow money and speculate where to front run other people that will receive more ventral bank money or dare to borrow more central bank money. If I borrow 2 million and I will have to make decision to front run other IPO folks in Silicon Valley or other traders in NY or film makers in LA, I do NOT know how to judge where is he “best” in terms of value rise or rent collect. What I do know is all are propped by Central Bank. Bubble’s definition is “sustainability”. If Central Bank printing is “sustainable” for ever, then there is in deed no bubble. Companies can lose money for ever and interest can be negative for ever.

    • polecat
      Apr 14, 2019 at 2:30 pm

      The difference between SF and LA is that one has a higher burn rate, while the other has a higher rate of burn !

    • Mean Chicken
      Apr 14, 2019 at 4:14 pm

      I’m confident they can make money providing services to each other for at least a few more weeks.

    • Jon
      Apr 14, 2019 at 4:29 pm

      But but we saw in 2008 2009 the home prices bursted 40 percent or more in these areas
      During economic downturn no area is safe

    • Mike G
      Apr 14, 2019 at 4:34 pm

      It’s like these investors were born yesterday. Were none of them around for the tech bust of 2000? Or are they just paid to pretend it never happened?

      • Lemko
        Apr 14, 2019 at 6:36 pm

        You would be surprised what one does when it’s not his money… Commission baby commission!

    • Ed
      Apr 15, 2019 at 12:19 pm

      SocalJim – One of the primary drivers of appreciation in Bay Area real estate were international speculators, specifically Chinese. The Chinese economy has tanked and new controls have been implemented to stop the outflow of capital. New York was riding the same wave of Chinese investors. In fact, I think New York real estate is in much worse shape than the Bay Area.

      All of the cities you mentioned were the benefactors of foreign money laundering/speculation and all seem to be tanking at the same time. The local economy doesn’t support prices in any of those cities IMO.

      • jon
        Apr 15, 2019 at 2:49 pm

        In san Diego, Currently, the median income for a family of four in San Diego is $63,400. The median home price is ~$600K.
        I guess same thing for LA.

        But we’d never see any crash here as we are different

  5. Frugal By the Bay
    Apr 14, 2019 at 1:47 pm

    The housing market here just does not make sense.

    Rent in Silicon Valley is 1/2-1/3 the price of buying a house. This cannot be sustainable.

    To buy a 1200 sq ft house in a good school district is Minimum 1.6 million. With 20% down at current interest rates that is 8k a month not including maintaince. Add in interest on your down payment and even after mortgage interest. Your probably still looking at 100k a year in house expense post-tax.

    You have to be out of your mind to pay this month. Or have no financial sense, who is buying I have no idea. How they can sustain this in a recession, again no idea. Or over 30 years.

    • JZ
      Apr 14, 2019 at 2:28 pm

      People I know with double income at 400K to 600K per household working for the usual suspects are buying.

      • Frugal by the Bay
        Apr 14, 2019 at 6:36 pm

        But, why buy when you can rent that same house for $3500-4000.

        That’s what doesn’t make send to me. It’s more than twice as expensive to buy than rent. Not accounting for moving costs, inability to move, etc.

        • Ed
          Apr 15, 2019 at 12:31 pm

          Frugal by the Bay – I agree with you. We are seeing the same thing in DC and surrounding burbs. All in housing costs to buy are $6K-$8K per month and rentals are $3K-$4K.

          We’ve also noticed that the down payment and closing costs on a house within 10 miles of downtown is equal to the cost of an entire home 20 miles from the downtown. Shortening your commute is worth something, but paying off your mortgage is much more important in the long run. You won’t have to put up with a long commute if you don’t have a mortgage.

          My guess is that the 2020 census will start to show a mass exodus of millennials from major cities and buying houses in 2nd tier markets.

        • JZ
          Apr 15, 2019 at 3:05 pm

          because in the NOT too far future, “they believe” the rent will rise. They also “believe” that holding cash will hurt them. They want to go all debt because government encourages debtors and punish savers. They also believe that they may NOT hold their jobs when they grow old so they have to rent squeeze high price suck in the next gen workers who earns much more and transfer income into their hands. They also believe there will be a day silicon valley will be like Taiwan or Hong Kong where everybody can only be rent slaves to land lords.
          As a summary, while you are thinking about what’s the best way to afford your life in the near future, they are thinking about how to squeeze folks like you in the far future.

    • RoseN
      Apr 14, 2019 at 3:09 pm

      Some of these people are coming in with a significant amount of cash, either from their personal savings or from Mom and Dad. The actual mortgage they’re taking on may be reasonable, even with a downturn. I guess you could say it’s part of the great transfer of wealth between the older generations to the younger ones.

    • NotMe
      Apr 14, 2019 at 3:58 pm

      I can tell you who can afford 1.5 M$ houses: Firemen and police. That is what is moving into those neighborhoods. They are recession proof and their pensions are worth millions. $13M for a 38 year old fireman retiring.

      The last one that I saw move in, tore out the freshly landscape lawn and new kitchen. Nice to have that kind of walking around money.

      • Javert Chip
        Apr 14, 2019 at 4:19 pm

        Firemen do get pretty good pensions, but I’d bet $13M (translates into about $550,000/year) is pretty rare.

        • Paulo
          Apr 14, 2019 at 5:37 pm

          Quick search:

          Calpers in general:
          “CalPERS was about 55 percent funded in the early 1980s, following another severe recession. As the economy rebounded, so did CalPERS funding status. By 2000, the system was 130 percent funded. During the great recession, CalPERS dropped to about 60% funded, then rebounded to 73% (in 2014) and continues to rise. ”

          “Marin firefighters (like most other Marin public employees) are not eligible to receive Social Security. Their retirement system is their only source of retirement income. Their employers – the cities and counties – do not pay the 6.25% payroll tax for Social Security, and this payroll cost savings is instead invested in a traditional defined-benefit retirement plan. These plans provide post-retirement income comparable to a 401K savings type plan PLUS Social Security, for a retiree who planned and saved appropriately. The lack of Social Security benefits and the associated payroll savings to local government is rarely mentioned in discussions about public employee benefits. Because firefighters can’t collect social security, they have negotiated over decades to pay for increased traditional retirement benefits instead. ”

          And: 65% of benefits are paid from interest and dividends on investments

          The remaining 35% is paid by a combination of the employee’s contribution through payroll deduction (14%-18% of salary), and the employer’s direct contributions. The employer’s contribution fluctuates between 0% and 30%. When groups like Citizens for Sustainable Pensions shout “we pay your pension!” to firefighters, they are simply wrong. CalPERS shows that for every dollar paid to retirees, 65¢ comes from Investment earnings, 22¢ comes from employers, and 13¢ comes from member contributions.

          “In Marin, the average fire engineer with 15 years of experience earns $33 per hour (salaries did not increase in the six years from 2008-2014). A comparable earner in the private sector makes 40% more per hour than a firefighter. Marin firefighters are paid fairly and don’t complain about their wages, but the hourly wage distinction is important when countering claims that firefighters are overpaid.”

          Personal note:
          I have a modest pension in BC Canada for 17 years service. (33% of my salary). Plus, investments. My pension is funded at 105% and contributions are adjusted yearly so that current employees paying into the pension are actually funding their future retirement benefits. If returns drop (as they have this last 10 years) then contributions are increased. Pension maxes out at 70% based on 2% per year. So, if one were to retire at full rate it requires 35 years service. As a rule, public sector wages are lower than private. For example, my son works about the same hours I did, but earns 2.5X what I earned. He is paid an additional $7.00 per hour for his pension contribution.

          I’m pretty sure a Calif. firefighter will not receice 13M in pension benefits. Remember, public sector pensions are maxed out at 70% of their peak pay, usually a best five year period. I have yet to meet a firefighter earning $700K per year. $150K with overtime, but the hourly rate is still $33.00.

          The mentioned firefighter probably had private investments and/or family money. Maybe both.

        • NotMe
          Apr 14, 2019 at 6:32 pm

          Not uncommon for CA FFers to retire on pensions of $500k/year. Not rare, uncommon. Many chiefs in the Bay Area make that, and some departments have many chiefs.

          So at age 38, expect to live 50 years nowadays. Ten years $5M. That adds up to $25M.

          These pensions are also adjusted upward for inflation, so over 50 year, don’t expect the pension to remain the same.

          There was one chief in an East Bay town that retired at $450K and took a contract/consulting chief in Los Gatos for almost $500K/year. There is no cap on pay after retirement.

          Then there is the “viagra effect”, a new nightmare for actuaries. Many are taking new wives at the age of 50 or so who may be in their 20s, extending their pensions another 30 years!

          All of us are in the wrong business. Health. Fitness. Plenty of time for a second job. Early retirement. Guaranteed by law. My advice to budding mathematicians and scientists is to become a fireman and do the research that no one would pay you for in your time off. Much better than being burdened with teaching and committee duties.

        • NotMe
          Apr 14, 2019 at 6:46 pm

          If you will let me post a website, here is a reference.
          https://www.cbsnews.com/news/san-ramon-california-firefighters-making-up-to-400k/

      • frisco lens
        Apr 14, 2019 at 9:24 pm

        Im a High School teacher in SF BAy Area. The turn over rate for teachers s about 2-5 years. Pay is a big issue but not the biggest. The burnout rate from the high level emotional and mental work that goes into teaching, especially teachers in schools where poverty, violence and hopelessness most exsist, keeps schools for ever unstable. Teachers deal with the front line ills of our society, it trickles through our children. We recieve no overtime, never thanked at parades and are constantly working hard. Police and fireman on the other hand, retire after 20 years with full pay. 90 percent of firemen and police never leave thier jobs once they get in. Its a golden ticket from the public. Many firemen have other jobs. 90 percent of all calls for firemen are not fire related. Poilce rack up 20-30 K of ovetime a year. This is why they can buy homes.

      • Ed
        Apr 15, 2019 at 12:34 pm

        NotMe – Firemen are not purchasing $1.5M houses on $100K salaries. 4 firemen couldn’t even afford a $1.5M shack.

        • NotMe
          Apr 15, 2019 at 6:19 pm

          Read the web pointer that I posted.

    • Just Some Random Guy
      Apr 14, 2019 at 4:22 pm

      Who is buying? Easy. A couple each working in a mid level job at one of the big tech company in SV easily makes $300K a year. Move up the ladder to middle management and that increases to $400K a year.

      For a $300-400K a year household, $8K/mo for a mortgage is very doable. That’s around 25-30% of gross income.

      And you know who else can buy that house? Janitors in the Bay Area who work for the city and pull in $276K a year. Google the story.

      • Frugal in the Bay
        Apr 14, 2019 at 9:44 pm

        I’m a female engineer in SV and there are so few of those.

        Not sure where these two income 600k couples are coming from that have not already bought at lower prices.

        Most female engineers that I know and granted I actually don’t know any married female software engineers, because there are just so few, only make 130-180k a year. There absolutely is sexism and lots of it in STEM in the Silicon Valley.

        My husband works in middle management at an engineering company and only makes around 300-320k and that’s with bonus/equity.

        Yes, there are some people in very particular areas, lucky that make this much, but it’s not run of the mill by any means. Probably only the top 5-10% or less of my husband and my graduate school class. We’re in our early 30s and went to a top graduate program in STEM.

        A couple anecdotes don’t make it real. Maybe in changes in your 40s.

        Even with an income of 400-500k, we’d be stupid to buy a 1.6 million dollar home we could rent for 3.5k a month.

        My theory is that most of the purchases are money laundering. Yes, there are a few millennial couples that buy, but not enough to sustain the current levels of demand.

        Two-income couples with sustainable 500k incomes are rare, don’t kid yourself.

        • Frugal in the Bay
          Apr 14, 2019 at 10:33 pm

          I should add I’m currently not working because it would cost us about 5k a month in daycare plus commuting/work costs plus higher taxes on a second income.

          Our break even is $140k, i.e. we don’t make any money under that amount – it all goes to our daycare provider, government, etc.

          It’s actually hard to find a 200k job with limited commute to a daycare providers since most close at 6 pm.

          Maybe DINKs can make this work, but definitely don’t know any families like this in our age group.

        • RagnarD
          Apr 15, 2019 at 2:59 am

          And buying in Silicon Valley on the assumption that both people will be making two to $300,000 for the next 30 years, is not wise.

          Women have babies.
          In SV many companies have short lives, or at least reduce staff during tough times. Who are the favorite targets during those moments? High salaried middle mgmt.

        • Prairies
          Apr 15, 2019 at 11:57 am

          There are layoffs in low times and now even during high times they are laying off staff in this upside down world. The one that stood out to me was seeing ATVI – Activision Blizzard – report a record setting revenue year for 2018 and open up Q1 of 2019 with hundreds of layoffs to staff across the board.

          If these tech companies see a slight hiccup the axe to jobs will be swift.

        • Ed
          Apr 15, 2019 at 12:53 pm

          Frugal by the Bay – Again, I agree with you. It’s not only the sale price that is totally illogical, but the pace at which they go under contract. Hard to believe a $400K-$600K couple is getting into a bidding war on a marginal $1.5M house. Much more likely that money launderers are purchasing properties sight unseen at unreasonable prices.

  6. Old dog
    Apr 14, 2019 at 1:53 pm

    In the 80’s I used to live in San Jose and commute to work to Cupertino. A pleasant 10 minute ride to a company run by people focused on creating customer value. Today, the same ride may take 90 minutes and the companies most people work for are pressure cookers ran by people focused on creating “shareholder value”. The burnout from all that stress, aggravated by outlandish mortgage payments (those lucky enough to own a place) can only end in tears.

  7. Gorbachev
    Apr 14, 2019 at 2:07 pm

    I don’t understand why your clear and well put information is no where else to be found. Your logic is perfect.

    • Javert Chip
      Apr 14, 2019 at 4:12 pm

      Gorbachev

      “…I don’t understand…”

      It’s not like this has never happened before, or will never happen again.

      20-something year-old “reporters” (we’ll pretend to call them that) with flimsy educations, rooms full of participation medals, and little real-world experience are, to put it mildly, disinclined to listen to their more experience elders (eg: guys like Wolf).

      Does that help explain?

      • Gorbachev
        Apr 14, 2019 at 5:07 pm

        yup

    • illumined
      Apr 14, 2019 at 6:19 pm

      Probably because for the most part mainstream media outlets don’t do journalism anymore. It’s a rare thing these day unfortunately.

  8. Terry
    Apr 14, 2019 at 2:58 pm

    And to compound the issue even further , in the not so distant future there will be a surge of high rise development aimed at providing tiny studio/1bedroom units for around $2-3k/month aimed at the 20-30 year old crowd making less than $150k/year. This will put a lot of downward pressure on home prices if the younger crowd has alternative and affordable living options.

    Then add in the fact that lots of tech companies are realizing that most of their physical operations (servers, data centers, networking) can be outsourced to other cheaper locations as telecommuting and telepresence technology improves. H1-Bs are likely to be redirected to lower cost cities where basic tasks such as server and Datacenter maintenance and QA can be delivered easily over-the-internet. And in fact the need for H1Bs stateside might vanish entirely with the rise of cloud computing since most of the redundant and time consuming tasks are going away due to automation and total elimination of company owned infrastructure. H1Bs will likely prefer to stay in their home countries as their tech pay will yield a much better lifestyle at home.

    Economics 101 busy at work!

    • Mean Chicken
      Apr 14, 2019 at 4:28 pm

      In Asia, the production equipment is run by youngsters living in corporate dormitories.

      • Terry
        Apr 14, 2019 at 7:44 pm

        I believe it. Datacenter jobs are the new sweatshops of 21st century. The skills required are becoming heavily commoditized and the pay is decreasing at a steady pace.

        The value is shitting towards Machine Learning and AI. Managing the underlying hardware and operating systems is grunt work – which can be delivered from AWS , GCP, AZURE etc.

        So my forecast is for many of these labor intensive jobs to disappear from the Bay Area entirely as there’s simply no economic reason to have those functions performed locally. This will be s turning point for Bay Area housing as the the bottom feeder house buyers and renters vanish and head to Mountain west or southeast.

        H1Bs will likely head home to be closer to family and where cost of living is cheaper.

        • Auld Kodjer
          Apr 14, 2019 at 8:45 pm

          “The value is shitting …”, needs no correction.

        • Apr 15, 2019 at 4:05 pm

          So, the Bay Area will become the Detroit of the future? It cannot come soon enough!!!

          All humor aside, I cannot imagine how big SV companies can continue to attract top talent if no one wants to move here (commute, living costs etc.) It makes much greater sense for their employee’s quality of life to move their HQ’s, or least spread their offices and workforce, out to Salt Lake City, Boise, Austin etc (which some companies are already starting to do) than simply have ALL tech workers crunched like sardines in the Bay slaving away for overpriced apartments.

          The technology is already exists to have a remote workforce, it just hasn’t been implemented on a massive scale… yet (My wife works for a Top 5 tech Co. in the Bay and is already transitioning to home office, as does her boss in the exurbs, and their big boss is remote out of Canada!)

    • Dale
      Apr 14, 2019 at 7:15 pm

      In my area, I have been tracking two apartment developments. They were both completed 1-2 years ago, and both are targeted toward high-end renters. Neither has more than 20% occupancy, and they do not seem to be in any hurry to change that (they originally advertised their rentals via Zillow, for example, but now do not).

      From what I can tell, this is true throughout the country. Whoever owns these complexes doesn’t seem to care about making profits vs losses. And whoever is loaning them money doesn’t seem to care about getting paid back. What they seem to want is to maintain real estate values.

      Under these conditions, the bubble could last a long time indeed.

      • Matt F
        Apr 15, 2019 at 3:31 pm

        Hey Dale, I’ve made the same observation. And I kept wondering who was going to be left holding the bag. After reading Capital Without Borders, it all makes sense: the investors/owners are from countries where their vast wealth can get confiscated without recourse at any time. They’d rather park their money here where it’s relatively safe even if they are losing a small portion of it in the short-term rather than keeping it in their home country where they risk losing it all.

    • Ethan in Northern VA
      Apr 15, 2019 at 3:49 pm

      Hello, I work a bit in the data center space. Prior job was 100% in the data center for large US music streaming company, I left right before they sold.

      They already are highly remote. Most of the assets are remotely managed and automation is heavy. No different than the cloud thing. The sheer amount of work output of a tech worker now versus when I started (NASA supercomputing facility in the late 90s) is night and day.

      The big companies like Facebook just roll in rows of pre-built racks of servers, boot them and I’m sure they auto-provision. AWS is likely the same. They fill buildings one after the other. Maintenance is contracted out to lower paid positions. Buildings are mostly ghost towns.

  9. Just Some Random Guy
    Apr 14, 2019 at 4:15 pm

    IPOs of today are yuugely more bigly big than the ones in the .com era. Lyft’s valuation is $20B. For comparison, Yahoo’s valuation the day of their IPO, in 1996, was $850 million. In 1999 Linux went public, their market cap was $9B.

    $9B is still nothing to sneeze at, but compared to $20B….

  10. clay
    Apr 14, 2019 at 4:57 pm

    Wolf, What happens to all the banks or non-bank lenders who made gave large mortgages to Tech Employees with Stock Options based on the value of the options if the IPO’s tank and the value of said options becomes a small fraction of the value of the mortgages they are pledged against? Could this cause another localized bank solvency crisis?

    • Apr 14, 2019 at 8:44 pm

      Yeah, it’s a risky business. But this tends to be a specialized small part of their overall business, so they can eat the losses.

      • Daniel r Gallardo
        Apr 14, 2019 at 9:20 pm

        No.remember if we have a devaluation of stocks and housing in San Jose area that ll be too much for banks to digest.

  11. Cyclops
    Apr 14, 2019 at 6:31 pm

    Gigantic air bubble in Bay Area, CA real estates.

    It will fall further than 10% to 20% YOY as with rest of country in Real Estate!

  12. frisco lens
    Apr 14, 2019 at 9:43 pm

    On the tip of Lyft and Uber. Before the went or do go public, they have taken more money out of the checks of the drivers and eliminated many perks for drivers. ITs sick that companies are worth more, the more they exploit their workers. I was out side SF City Hall the past week hearing testimony from drivers how many hours they work for the amount of pay the receive. I always ask drivers about their pay and they all say both LYFT/UBER take 30-40 percent of all their fares.

    I ask another driver what I could do so he gets the check he told me. “Call the driver and asked him to cancel the ride, then tell him to just pay him cash” This way the driver gets all of the fee. As we have read before the future plans of LYFT and UBER is to have driverless cars this is what the market is waiting for. At some point we have to support workers rights, and support the drivers right to be recognized as an employee rather than a contract worker. There are no benefits or health care despite driving between 50-70 hours a week. The stock is based upon exploitation.

    • Michael Fiorillo
      Apr 14, 2019 at 10:06 pm

      Thank you for that.

      Also baked into the “value” of the company is the presumed destruction of local mass transit, upon which their intended monopoly depends.

      • Dale
        Apr 15, 2019 at 7:26 pm

        They will also press to outlaw private vehicular traffic, at least within certain metropolitan areas. That is basically their only chance of success. Watch for it.

        Will they be successful? IDK, but I suspect not. And then they will have nothing at all.

    • IdahoPotato
      Apr 15, 2019 at 10:30 am

      If you take a Uber in India, the driver will offer you a good discount if you cancel and then pay in cash.

  13. Rcohn
    Apr 14, 2019 at 11:49 pm

    Some stats
    Median housing prices and median family income
    Marin county- 1,157800. 113,900
    Santa Clara county-1,256450. 119,035
    San Mateo county-1,347500. 116653
    HUD low income number for each of these counties was about nearly or even exceeded these income levels.
    If a couple put down %25 or 300,000 on a 1.2m house ,that would result in a 900,000 mortgage. Monthly payments on a 30 year 900,000 mortgage at 4% are 4292.Add in about %1.1 real estate tax at 1,100/month plus home insurance of 125 /month means a monthly payment of 5,617 per month . If a buyer devoted 1/3 of their income to these payment , that would require an income of 16851 or over $201,000 . And this number does not include annual maintenance , which probably runs another 500-800/ month.

    • RoseN
      Apr 15, 2019 at 12:42 am

      But aren’t plenty of Bay Area couples pulling in at least 200K per year between the two of them? That’s not that much for a professional couple.

      • Rcohn
        Apr 15, 2019 at 1:25 am

        The numbers that I cited are median HOUSEHOLD income.
        Unless the income data does not follow the normal curve , I would guess that $200,000 is around the % 80 level. That means that only % 20 of people would qualify to buy a house. Note that it also assumes that the buyer has $300,000 in a NON retirement account to put down as a down payment.
        If the price of houses continue to increase faster than household incomes , then the percentage of buyers who qualify for a mortgage will continue to decrease. You must also understand that most of those whose incomes qualify them to be a buyer at this high price level already own a house or have a great deal in a rent controlled apartment.
        The question becomes at what price level are there so few buyers that prices will collapse of their own rate .

      • Just Some Random Guy
        Apr 15, 2019 at 8:48 am

        A teacher with a few years experience makes $80K a year in the Bay Area. A firefighter with some overtime is well into 6 figures. Then you get to the tech workers where $100K is pretty much entry level pay and middle management is $200-250K. And all this without the stock options that have made thousands of millionaires every year in the area.

        A lot of you vastly under appreciate the mount of money earned in the area.

        • Apr 15, 2019 at 9:47 am

          Median household income (all earners combined, all sources of income combined, except capital gains) in San Mateo County (norther half of Silicon Valley) = $108,000. If your household earns $300,000, you’re at the top of scale.

          Median means half earn more, and half earn less. So half of the households earn less than $108K. This anecdotal stuff — such as the household of two highly paid tech employees — is fun, but useless.

        • Just Some Random Guy
          Apr 15, 2019 at 8:57 pm

          Yes I know where San Mateo Co is, I spent a solid % of my 30s there. Never officially lived there, but spent a lot of time working there.

          The median income earner is not buying houses. The median income of home buyers is the $300K household.

          And you point out that the numbers don’t include capitals gains. In other words don’t include stock options. Which leaves out a lot of money. 1500 Juul employees on average got $1.3M when Altria bought a stake in them last year. Not a dime of that will be in the “median income” data you’re referring to.

          Then Lyft stock options. And coming up Uber.

          And all the thousands of Google, FB, Salesforce, etc employees who vest a little every month. They won’t all be gazilionaires, but every month they vest enough to make that $2M house mortgage payment.

    • Rcohn
      Apr 15, 2019 at 3:41 pm

      Let’s expand upon this further
      After taxes $200,000 in the Bay Area= $150,000
      From this subtract $67,200(12*5,600) + annual maintenance of $8,000 for a total of $75,200
      So $200,000 after taxes and direct housing costs of $75,200 leaves $ $74,800
      Utilities can easily total $2,000 or more so now they have $72,000
      Internet and tv and cell can easily another $2,000
      The San Francisco Area is the most expensive are in the country with sales taxes at 8% and gasoline over $4 .
      Aaa has estimated that car costs for an averaged price car = almost $10,000/ year.
      If the couple has children , then child care costs can easily exceed $15,000/year
      If the have no children then they probably eat out a lot. Unless they eat fast food frequently they can easily spend over $20,000 on food.
      If they join a country club costs could easily run north of $15,000 annually.
      There are many more costs that they might incur , but I think that you get my gist.
      Buying a house at these prices will deplete any after tax income that all but the highest income earners make.
      Something gas got to give . Either median household incomes need to soar from already high levels or housing prices need to signify fly decline from current levels.

  14. Boatwright
    Apr 15, 2019 at 7:38 am

    MMT aside there is the macro fact of the debt cycle.

    I knew an old time banker who had a book in his office — nice leather binding, gold leaf title: “How to Borrow Your Way Out of Debt”. Blank pages on the inside.

  15. MF
    Apr 15, 2019 at 10:29 am

    I prefer to hear your anger. It makes me feel less alone in mine.

  16. Antonio
    Apr 15, 2019 at 12:02 pm

    Wolf and this comments have been howling about “Housing Bubble 2” for many, many years.. Hopefully you guys are right.

    I’m sick of paying rent and ready to buy a reasonably priced home.

    • Apr 15, 2019 at 6:25 pm

      What people need to understand is what a “bubble” means. A bubble is BULLISH because prices go up. When the bubble bursts, it’s BEARISH because price go down. But once it has burst enough, it’s a buying opportunity. In housing, there is a whole generation that would benefit from the deflation of the bubble. There are always two sides to everything.

      • frisco lens
        Apr 16, 2019 at 8:28 pm

        One question I also have for those who work in tech and understand the economics of tech is how much of the valuation of the company is based upon advertisements? Are Facebook, Google Twitter and all the other “free” websites value based upon companies putting ads up? According to many “yes”. I still don’t get how they could be worth Billions if there only value is ad space and selling data. If that is correct and there is an economic slowdown, and companies that once advertised with them pull ads, does this mean the company’s worth will also deflate? How much of their worth is nationally connected to the economy of the US? Its still mind boggling that these companies could on paper be worth hundreds of billions when its free.

        • c1ue
          Apr 17, 2019 at 11:35 am

          The issue is more complex than just revenue.
          I heard this from a VC last week, and it makes sense to me:
          Every “new” industry which achieves scale enjoys a huge multiplier of valuation vs revenue. However, once that story breaks, so does the multiplier.
          Cisco in 1999 was supposed to be the first trillion dollar company because of the Internet and Cisco’s stranglehold on the backplane switches enabling the Internet. Fast forward to today: Cisco makes multiples of both revenue and profit vs. 1999, yet they’re worth a fraction of what they used to despite a literal decade long stock market pump.
          The reason is that their multiplier got crushed.
          There are many other examples: Zynga first rose on the idea that they were a platform – but it was revealed post-IPO that they were really just a gaming company, and gaming companies are only as good as their last hit. Zynga’s fall took down the multipliers for the entire gaming industry.
          Groupon – online coupons. The list goes on and on.
          The same is going to happen for Lyft/Uber and most of the IPOs coming up – irregardless of whether they are profitable, growing etc, multiple compression is a bitch.
          Slowing growth rates or falling industry growth, unprofitability, etc certainly doesn’t help though.

    • fajensen
      Apr 17, 2019 at 4:55 pm

      Trouble is: When house prices goes down, the banks are restricting lending to people wanting to buy a house even if they could actually afford the mortgage.

      Usually, in the bubbly, happy times, banks will gladly also finance the down payment, but once the market is down they will only finance the remaining 70-80%.

      In the meantime, most people needing a reasonable mortgage will be paying an unreasonable high rent and won’t be able to save enough, fast enough, to make the down payment.

      People need to save at least 20% of their income right from the start of the first job to get anywhere; few has the discipline, stability and disposable income to pull this off, especially in today’s job market and with all the things one is supposed to buy impressed onto one through every orifice.

      For those who want to give it a go, then in my experience, Budgeting is a life changing experience! I used something called YNAB.

  17. Stan the Man with the SHTF Plan
    Apr 18, 2019 at 12:40 pm

    The numerous bubbles floating by all around us are just a precursor to hyperinflation and the collapse of the dollar.

  18. MoreMoneyPlease
    Apr 19, 2019 at 10:26 am

    I wonder if there are any unintended consequences of a housing bubble in San Francisco for the less fortunate humans who did not win the housing lotto? Forbes states the city pays $189,000 to public workers to remove human waste from the streets and sidewalks. The human feces chart in the article is telling:

    Mapping San Francisco’s Human Waste Challenge – 132,562 Cases Reported In The Public Way Since 2008

    https://www.forbes.com/sites/adamandrzejewski/2019/04/15/mapping-san-franciscos-human-waste-challenge-132562-case-reports-since-2008/#37cab1b15ea5

    • Apr 19, 2019 at 11:21 am

      I love these “feces and needles” stories. I live in SF, and every year more people move here, and it’s getting more and more congested, even on weekends, and all these reports that say that people are fleeing this horrible mess give me hope that someday they will flee, but instead the congestion keeps getting worse and worse.

      So to keep people from moving here, we need a flood of these articles about “feces and needles” and all the other gruesome stuff such as piles of “dead bodies” on the sidewalk and all the other horrible things that purportedly happen in thick clusters everywhere right in front of us. People need to know this and stop moving here :-]

Comments are closed.