Housing Bubble 2 in San Francisco & Silicon Valley Has Lost its Mojo. Why?

Even as the Fed floods the market with $400 billion in four months, with stocks at record highs, and reality pooh-pooed as irrelevant. What’s different this time?

By Wolf Richter. This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

The stock market is at all-time highs. The Nasdaq has skyrocketed even more than the S&P 500, and housing in San Francisco and Silicon Valley, historically, has been closely tied to the fortunes of the Nasdaq. When the Nasdaq surges, home prices surge. And when the Nasdaq plunges, home prices head lower. That’s how it usually works.

And San Francisco now has more billionaires per capita than any other major city in the world, according to the “Billionaires Census.” According to this illustrious report, which came out last year, San Francisco has one billionaire per 11,600 residents.

At the same time, about 1% of the population in San Francisco is homeless – so that would be one homeless person per 100 residents.

And early last year, the real estate industry was able to get the media to publish a lot of hype about how the startup millionaires that were shacked up with six other people in some apartment would all head out after their glorious IPOs and buy a house or condo, and splurge recklessly, and that this wild buying pressure would send already sky-high prices even higher.

It’s true, prices were sky-high, but instead of heading even higher since that hype emerged, prices have dropped.

And how they’ve dropped is interesting. They have not plunged. In San Francisco and in Silicon Valley, they’ve zigzagged lower, in a very volatile manner, after having bumped twice into a ceiling, the first time in early 2018, and the second time in early to mid-2019. And they have since dropped 16-18%.

In San Francisco, prices have bumped into this same ceiling in early 2018 and then again in early to mid-2019, with the median price of single-family houses hitting about $1.75 million each time.

“Median price” means that half of the houses were sold at a higher price, and the other half of the houses were sold at a lower price. So this is the middle, not the average. This median price in San Francisco buys a small-ish so-so affair in a decent neighborhood, but not some kind of palace on top of Pacific Heights, where a house can cost over ten times as much.

In San Francisco, the median price has now dropped from those price spikes in 2018 and 2019 by nearly 18%, to $1.45 million in December. In dollar terms, the median price has dropped by over $300,000.

Where are those startup millionaires when you need them?

Similar scenario in San Mateo County, the northern part of Silicon Valley: House prices also hit the ceiling twice, first in April 2018, then again in May 2019. That ceiling both times was at around $1.77 million. And the median price has since plunged nearly 17%. In dollar terms that drop was close to $300,000.

And in Santa Clara County, the southern part of Silicon Valley that includes the city of San Jose, Palo Alto and others, the median price of single-family houses has dropped 16% in December from their peak in March 2018, to $1.2 million. That’s a $230,000 drop.

There was also a double-peak in Santa Clara County, but it was not nearly as pronounced as in San Francisco and San Mateo. They happened in May 2018 and in June 2019, but with June 2019 already being way lower than the prior peak.

But prices are not going to heck in a straight line. They’ve been unusually volatile, trying to go higher, and so they hit that ceiling, and in San Francisco and San Mateo County, they hit that ceiling twice, only to get beaten down again, and brutally so.

So what happened?

A year ago, it was part of the standard theme in the media and in conversations in San Francisco and Silicon Valley that the wave of mega-IPOs in 2019 – including the mangled IPOs of Lyft and Uber, and the now many scuttled IPOs, would cause the Bay Area to suddenly be awash in IPO millionaires that would then suddenly move out of their shared apartments and buy homes, and they would splurge and throw this IPO money around, and they would cause the housing market to suddenly inflate by a whole lot more.

But pros in the real estate business here who have been through these cycles shook their heads. They remembered what happened toward the end of the last two waves of IPOs that had come with the same hype of huge home price inflation: they were followed not by further home price inflation but by housing busts.

Those two events were the IPO boom that lasted into early 2000, and the IPO boom that lasted into 2007. Both ended in housing busts.

But this time it’s different. Well, not in essence. In essence, it’s never different. But it’s different in the timing.

There has been no sudden event. Nothing has collapsed or crashed. Stocks are still at record highs, with ridiculous valuations. Startups are still getting funded, though some are starting to lay off people because they’re running out of funds. Corporate America is still buying startups for huge super-inflated multi-billion-dollar valuations, paying for them with their super-inflated shares.

Money is about as easy as it ever was. IPOs are still getting pushed out the IPO window, though with mitigated results. Companies are still encouraged to lose tons of money and are richly rewarded for it. Unemployment in San Francisco and Silicon Valley is minuscule. These are still the good times. Reality still doesn’t matter. In fact, reality is widely being pooh-poohed as irrelevant.

And yet home prices in San Francisco and Silicon Valley are sagging. In the canon of real-estate hype, this isn’t how it was supposed to work.

The hype was based on the assumption that an equity event, such as an IPO or a corporate buyout, such as by Apple or Microsoft, will “suddenly” create billions of dollars of real wealth out of nothing.

But that’s not how it works. Before their IPO or buyout, these companies already have huge valuations, and people who own equity are already immensely wealthy before the IPO, and they benefit from their equity-ownership long before the IPO. They can go out and use the value of this equity to buy homes. In other words, they already bought their homes long before the IPO.

These employees can monetize their not-publicly-traded equity in several ways:

One, some startups have programs under which they buy back shares from employees who want to cash out some of their equity wealth.

Two, during fund raising rounds, employees can often sell their shares or convertible notes to the new investors.

Three, in San Francisco and Silicon Valley and other tech centers, some banks have entire departments that specialize in lending to wealthy startup employees whose equity ownership is still illiquid.

Four, there is a secondary market for non-publicly traded startup shares, and many employees have been able to sell some of their shares that way and cash out some of their equity.

In other words, startup billionaires and millionaires have been billionaires and millionaires for years. And this startup money has been circulating for years. It doesn’t have to wait for the IPO. And many of these folks have already bought their dream-home years ago. And this was responsible for the gigantic run-up in home prices in San Francisco and Silicon Valley in the past few years.

And then there is another issue: Home prices in San Francisco and Silicon Valley are so ludicrously high and out of whack with reality that potential buyers with plenty of money to buy, ask themselves, if they even want to blow one-and-a-half million bucks on a median so-so home whose value may drop and take hundreds of thousands of dollars with it.

There just isn’t a whole lot of incentive to do that.

So what’s different this time is that the housing market in San Francisco and Silicon Valley has hit a ceiling, and has done so twice, and has zigzagged lower in a highly volatile manner even as the loosey-goosey money persists, and even as the Fed has flooded the market with $400 billion in liquidity in four months, and even as stocks are at record highs, and even as reality is still irrelevant, and even as nothing around here has crashed to tear into the housing market.

And that’s what’s different this time. And the factors that took down prior housing markets in San Francisco and Silicon Valley, including a nasty startup crash, a stock market down turn, large-scale layoffs in the startup and tech sectors, and what not… those things are still out there in the future.

You can listen to and subscribe to my podcast on YouTube.

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  71 comments for “Housing Bubble 2 in San Francisco & Silicon Valley Has Lost its Mojo. Why?

  1. 2banana
    Jan 22, 2020 at 2:37 pm

    “Companies are still encouraged to lose tons of money and are richly rewarded for it.”

    :-) :-) :-)

    • DM
      Jan 22, 2020 at 3:18 pm

      How many new millionaires did Tesla mint this week?

    • Harrold
      Jan 22, 2020 at 4:47 pm

      All that money sloshing around has to go somewhere. Uber is doing the Lord’s work.

    • Reality
      Jan 22, 2020 at 5:00 pm

      House price increases are a good surrogate for loss of purchasing power. It’s an inverse relationship. The higher your home price goes up, the less your dollar can buy.

      For your average one home family: home prices increases are only a good thing if all the rest of the houses stay the same price. Otherwise what would be the benefit of selling? The replacement cost would be similar to what you sold for, so no gain there. And when you subtract the commissions and other costs associated with a sale, you are a net loser.

  2. gorbachev
    Jan 22, 2020 at 2:45 pm

    People like to buy houses on the way up.If

    that is not happening then they wait for a bottom that most will

    miss which is why markets overshoot. Doesn’t sound like a long term

    problem.Buying opportunity in my view.

    • qt
      Jan 22, 2020 at 3:33 pm

      Looks like a commission check opportunity in my view.

      Fixed it for ya

  3. bcsjc
    Jan 22, 2020 at 3:08 pm

    I live in San Jose and am very thankfully now out of the high tech world. My sense is that prices are only going lower and may not hit those double peaks again for many years. A lot of would-be homeowners are content to pay rent rather than jump into transactions for crazy prices. Also, the mainland China money is no longer flowing into the market. Finally, everything about US demographics points to a big supply/less demand issue.

    • AlamedaRenter
      Jan 22, 2020 at 6:31 pm

      It might ignorance on my part, or semantics.

      But aren’t most the of the wealthy Chinese really from Hong Kong and Taiwan? Most of my “Chinese” coworkers are from those two.

      • Iamafan
        Jan 22, 2020 at 6:38 pm

        Most of the time their parents are the ones paying for them. There are many “kinds” of Chinese from Asia. HKG and TPE are just two places. I think many speculators are from the mainland. The are not necessarily tech jockeys.

        • Sammy Iyer
          Jan 23, 2020 at 12:36 am

          Hong Kong/ Singapore/Taipei/ Malaysia Han/Cantonese chinese have not made “moolah “from corruption. Mostly They made money in high salaries /Import Export business/local real estate speculation/local stock market specualtion etc & possibly diversifying assets as property in London/Australia /NZ/USA etc.(also a base for their children going to overseas Graduate studies in UK/USA/NZ/Australia ).
          But the big speculative money in toUS west coast real estate is from China mainlanders. They are eiether entrprenuers billionaire /multi millioinaires who are afraid of the state & being sent to Gulag any time & taking out their hard earned money . More so are the “corrupt” city/municipality / local govt heads/local party cheifs taking out the money before they are confiscated. (it has come to trickle now ). Any New personal SWIFT transfer out of the CHINA above $10k is not automatic & being summoned by the Income tax/anti corruption bureau. ! Lord & Master Xi is having a anti corruption drive for the last 2 years but only against the party chief’s /bureacrats who are not closely attached to his family/business empire. They are putting a mortal fear in all billionaires & party heads,bureaucrats . If you are not loyal & pay your dues to the His Majestitiy’s family empire, your carpet under your feet can be pulled any time.Building Re education gulags are under expansion drive.
          Singapore /HK Govt higher grade bureaucrat salary above 120k$/ year (in a big contrast to private sector income/wages)

  4. Cas127
    Jan 22, 2020 at 3:12 pm

    Wolf,

    “Stock mkt…all time high…”

    The SP 500 went from 111 in 1980 to 1425 in 2000 (14x gain)…

    ….and to 3300 now (less than 2.5x gain)…with a few “hiccups” along the way…

    Incredibly crappy DC policies have done a lot of harm to the growth of the US for the last 20 yrs and the vast majority of Americans know it…because they live with it every day.

    Outlier idiocies like the SF RE mkt sooner or later get re-introduced to economic reality.

    The ten year “boom” is really the US crawling out of the impact crater from the Fed’s baloney boom of 2003 to 2006.

    • interesting
      Jan 22, 2020 at 7:18 pm

      “the US crawling out of the impact crater from the Fed’s baloney boom of 2003 to 2006”

      You think this boom is any different? This one is much much worse IMHO. This has all the earmarks of the .com mania AND the RE mania plus a sprinkling of bond insanity with $17,000,000,000,000 having negative yields….none of this makes any economic sense IMHO.

      This next crater is going to be a doozy and the only question is will the FED be able to do this a 4th time.

      • Cas127
        Jan 24, 2020 at 11:23 am

        No, I don’t think this one is any different – and I agree it is worse.

        I don’t know how I gave any other impression

  5. Boomer
    Jan 22, 2020 at 3:27 pm

    Santa Clara Valley housing and office space boom bust history goes back much further than 2000. Mid 70’s, early 80’s, mid 90’s. Mass emigration to other states like Oregon is nothing new. I shudder to think what happens as this current cycle goes into serious decline and The Fed loses control of interest rates. Life is already untenable in the Bay Area and California with the sold out freeways continually getting worse. Article in the WSJ about the Californication of the Boise, ID area.

  6. Jan 22, 2020 at 4:01 pm

    The high end market is always dicey. Phil M, pro golfer built a home in RSFE, for 22M, put it on the market for 6M a few years ago. He might have to play an extra tourney this year to make up the loss.

    • Ambrose Bierce Fan
      Jan 22, 2020 at 7:51 pm

      Ambrose Bierce, your comments are always informative, and I enjoy them, but you often use unexplained abbreviations that aren’t always easy to decipher. I am guessing RSFE is Rancho Santa Fe?

  7. Curious
    Jan 22, 2020 at 4:05 pm

    While I, like everyone else, is concerned with real estate prices and their changes, one of the least relevant places to watch as a predictor is S.F. and the stretch to Silicon Valley. S.F. does not represent middle America. It’s effectively an island of creativity and technical advancement, and has been a magnet for those with its closeness to Stanford and Berkeley, and the center of VC investors. What Malibu is to movies is what S.F. and the valley are to high tech. Housing prices should rely more on average areas, not extreme examples, IMO.

    • Cas127
      Jan 22, 2020 at 6:38 pm

      Agreed – to fixate on the SF RE mkt is just…goofy.

      Housing is already a significantly leveraged asset class (just 4 pct to 20 down) – therefore the booms and busts are heavily amplified.

      SF is also much, much more supply restricted than your average MSA – between the ocean and CA gvt historical housing restrictions…SF is again an outlier.

      Next, it is the (increasingly irrational) center of tech development – an industry whose PEs – like politicians promises – are currently judged only by alleged objectives rather than infinitely inferior actual accomplishments.

    • tom
      Jan 23, 2020 at 7:51 am

      It makes for interesting reading. Listening to the top 5% fret about trying to find a place to live amongst the top 1%, while have having to carry a pooper scooper for the bottom 1%.

  8. Trying
    Jan 22, 2020 at 4:30 pm

    Wolf,
    The only mojo lost is that of steep upward price trajectory. Since late Dec 2019 things have started to pick up again.

    Look at Fremont where houses took 2 months to sell between June – Nov 2019. And now going in a week or less with multiple offers and sometimes 100k over asking.

    How do I know? Because I am trying to get one and lost a few bids.

    Hoping it is the tempest before the storm!

    • sc7
      Jan 22, 2020 at 8:58 pm

      If you buy now, and follow Wolf and all the other intelligent sources pointing out this obvious bubble, you deserve all the misery that comes with being 30%+ underwater in a few years.

      *WAIT*

      • JZ
        Jan 22, 2020 at 10:36 pm

        If you think you have crystal balls, think again. Nobody knows where this is going. What to do? Asset allocation wisely and don’t take on directional bet.

        • sc7
          Jan 23, 2020 at 7:48 am

          Except a house is the largest individual purchase on person makes. If I recall, you’re one of the housing permabulls along with socaljames and timbers, who both twist themselves into a pretzel every time there’s a housing article, explaining how JPow won’t let their precious property value fall by a single cent. The signs of the housing market being at a peak fueled by hysteria and plentiful and obvious. This bubble is unsustainable.

          Then socaljim would give an anecdote about raising his tennant’s rent, while timbers will tell us the same 2 year old stories about his neighbor’s bidding war with 10 bids and his boss bidding $100k over asking (who tells their employee this?). Of course, the Redfin data center says that none of this is accurate, since Boston area bidding wars are down to 13% and continuing to drop month over month, down dramatically over the last year.

    • blowout_bob
      Jan 23, 2020 at 4:13 am

      Anecdotal: The house across the street that sat on the market for the last nine months at 1.5m just sold. Thought for sure they would take 1.4, sold for asking.

      Focusing on SF and San Mateo is like focusing on outliers. Most “normal”, working class folks of the Bay Area live in Alameda and Contra Costa Counties. Lets see a closer look at those median counties.

    • TonyT
      Jan 23, 2020 at 6:17 pm

      I’ve been following the Fremont market, too, and I call B.S. on this claim. Show us the data. A quick perusal of Redfin does show a couple sales with less than a week on the market, but most are longer, often much longer.

      There are plenty of houses for sale that have been on the market for more than a week. And I noticed contingent offers are making a comeback – not a sign of a hot “seller’s market”.

  9. Island Teal
    Jan 22, 2020 at 4:30 pm

    Silly Valley has gone beyond reality. Lived there for 33 years.Prices lost touch in the late 80’s and were driven over the edge by the dotcom era. Look at Tessssla and Nutflakes today. Valuations and cash burn defy all common financial sense.

    • Cas127
      Jan 22, 2020 at 6:47 pm

      The Nutflakes of the world tend to be the highest profile consumer-facing companies – sucking in the dumbest money, people who don’t know a PE from a pig in a poke, revenue from income, or product penetration relative to population.

  10. lenert
    Jan 22, 2020 at 4:53 pm

    How does inventory correlate with past slumps?

    • Cas127
      Jan 22, 2020 at 6:54 pm

      It is a lot more informative just to watch what interest rate rises quickly do to inventory, then slightly more slowly to sales prices.

      The small one pct hike in 2017-18 dropped CA home sales by 15 pct and the stock mkt by 20 pct.

      DC accordingly sh*t itself and the Fed reversed itself completely.

      20 yrs of Fed ZIRP has driven the country into the Dead Zone.

  11. Phoenix_Ikki
    Jan 22, 2020 at 5:31 pm

    I know housing market is highly regional and SF and Bay area might be slumping but with headline like this, one has to wonder perhaps this insanity will just go on for a very long time….

  12. Paulo
    Jan 22, 2020 at 6:49 pm

    “At the same time, about 1% of the population in San Francisco is homeless – so that would be one homeless person per 100 residents.”

    There is something else going on with this stat. Vancouver BC is just as unaffordable, yet there is a 1/3 of 1% homeless rate, or 1/3 that of SF. Furthermore, there are way more warm weather areas in the USA than in Canada, which many poor and homeless drift to as a matter of straight survival. In Victoria BC, the homeless rate is 1/4 of 1%. These stats include folks who also live in shelters and recovery/treatment centres.

    My conclusion is that the SF stats on homeless is either inflated, or distorted from other factors.

    The stat for LA County is .435 of 1%, or 1/2 of the SF homeless rate.

    Perhaps the data is wrong? If the data is correct, why is the rate for SF twice that of LA? It isn’t the weather.

    respectfully Paul S

    • Cas127
      Jan 22, 2020 at 7:02 pm

      Fair guess – LA stats are BS – the homeless population is actually much higher.

      LA is not far off from Chicago in being a one party, political machine city – with all the implications for truthful gvt that entails.

      It is impossible to overstate just how much of the Dem ntl vote comes from a very small number of metros with huge populations – accordingly the Dems have a stranglehold on all politically related processes in these locations.

      • Green Hornet
        Jan 23, 2020 at 12:18 am

        Funny, I don’t live in one of those areas. Yet, I’ve got Dem St. Reps and St. Sens. We do have a right-winger who constantly says he wants me to die as US Congress. But we have one Dem US Senator and will have a 2nd by the end of the year. We have a Dem governor and we will give all our electoral votes to a Dem candidate this year, even it is a jerk like the former Senator from Mastercard.

        Don’t kid yourself. I know its an internet myth that the Republicans won’t lose because of this theory. Yet, the Republicans have managed to turn more state leggies Dem across the country, they’ve managed to turn the US House Dem. Analysis has shown that surburban voters across the country have been fleeing the Republicans and that’s what’s been fueling these shifts. The big joke is that as the state leggies flip to Dem, they do so just in time to redistrict the states and take away all the congressional seats that the Republicans rigged towards them the next time around, which means this trend hits the accelerator in 2022. We might even get rid of the guy who says he wants me dead in every franking email.

    • Jan 23, 2020 at 12:56 am

      I don’t know if they counted wrong… a homeless census is hard to do because the homeless have no address, and you have to figure out where they are, from parks to shelters to cars. So if you don’t try very hard, you’re going to UNDERCOUNT.

      The thing about the homeless here is that they’re truly everywhere. They’re in camps, they’re in cars, they’re in the back of our building and I have ask them to leave, they’re in every nook and cranny. SF weather is never really cold and rarely really hot, so it’s easier to survive, and the city also offers services for the homeless that add to the appeal.

      • Lisa_Hooker
        Jan 24, 2020 at 12:06 pm

        “… the city also offers services for the homeless that add to the appeal.”

        Based on experiences in Illinois and Chicago, and to paraphrase – “if you provide it they will come.”

        D’s seem to provide more services “because you deserve it” than the Rs.

        Reminds me of my Bernie Sanders rally poster “Free Stuff for Everybody All the Time” of some time ago. I almost got mugged.

  13. Joe
    Jan 22, 2020 at 7:42 pm

    This is just a pause. California’s economy is based on stock related capital gains. The Fed has only just started to pump money into the markets and QE4 is going to expand in scope. I find it odd that no one seems to notice the stock market is now completely dependent on Fed intervention, and I see no reason that will ever change with one exception.

    Should Sanders be elected president QE will be instantly unwound to allow Americans to experience yet another crash.

    • Cas127
      Jan 24, 2020 at 11:33 am

      “no one seems to notice the stock market is now completely dependent on Fed intervention”

      We noticed, we noticed.

      The only we that have not noticed are those that rely on the MSM (Andersen Cooper’s Sphincter) for their daily dollop of information.

  14. raxadian
    Jan 22, 2020 at 7:48 pm

    Where is all that money? In South Dakota of course.

  15. WES
    Jan 22, 2020 at 7:56 pm

    Could there be any correlation between shares being monitized and house prices?

    In other words all the shares have been sold, sucking the last dollar from the last greater fool?

  16. Just Some Random Guy
    Jan 22, 2020 at 8:13 pm

    Existing homes sales up 3.6%, supply down to the lowest level since 1982 and prices up 7.8% nationally in December.

    Where’s the crash everyone’s talking about?

    • Jan 23, 2020 at 1:03 am

      Supply NEVER includes new builds that are sold directly by the developer to the public. There is a TON of new supply that is totally under the radar. The supply figures only include units listed for sale in the MLS.

      Zillow does the same thing. I just got email confirmation from them that their supply data is based on what is listed on Zillow and on the MLS and does NOT include the homes developers are selling through their own sales channel. In SF, for example, there are a few thousand units that are now being sold either completed or soon to be completed that are not showing up on the MLS. This is the result of a condo-tower construction boom.

      So take this NAR stuff with a grain of salt.

      • Just Some Random Guy
        Jan 23, 2020 at 8:48 am

        Fair enough. But the numbers are counted the same way every month. So no matter what the actual number is, the % increase is still real. Trend is what matters not the raw numbers.

        • Just Some Random Guy
          Jan 23, 2020 at 8:49 am

          Meant to say % decrease. But you know what I mean.

        • Cas127
          Jan 24, 2020 at 11:40 am

          “Trend is what matters not the raw numbers.”

          Raw numbers matter a lot in that 1 sale at $1 million says something a lot different than 1000 sales.

          Thin volume highs are brittle – there are always valuation outlier idiots – but they might not be there when you need them.

          December is always a thin volume month for RE transactions.

    • sc7
      Jan 23, 2020 at 7:52 am

      Yea, Powell coaxed another little bit of juice out of the market by capitulating. Now there’s just about nothing left in the cannon to keep it going. Remember, a bubble can remain irrational longer than you can remain solvent.

      The YoY metric is deceiving, as Dec 2018 was just about when the market should have rolled over with rates at 5%, sales were pathetic and prices had started heading down.

      If you’re so confident the housing market is fine and its only up from here, why don’t you buy a new property (or two) at today’s nosebleed prices?

  17. Woah
    Jan 23, 2020 at 12:11 am

    When you design a system that only sells to millionaires, you eventually find out that everyone is not a millionaire.

    Housing was a keystone of American economy because ordinary families could buy houses. Which meant there was a big market in which to sell houses. Big Demand. Now, especially in the bay area, you have to be a millionaire or probably richer to even think about buying a house. We’ve cut income to ordinary families while jacking the price of housing through the roof, then everybody act surprised when suddenly there aren’t any customers.

    And then we all sit down and wonder and act shocked why China is passing us by. Its because we’ve been greedy and stupid.

    • nhz
      Jan 23, 2020 at 4:25 am

      My impression is that CA is pretty similar to Netherlands when it comes to much of the political decisions including the housing market. What is going on over here is that housing has become totally unaffordable for 90-99% of starters (depending on part of the country). Those who are buying are speculators and existing owners who are moving to even more expensive homes thanks to almost-zero mortgage rate and zero-down mortgages for everyone. The gap between the haves and the have-nots in the housing market is increasing by the day.

      At the same time, newly arrived migrants and people on social security, many of which haven’t ever worked in their life, are living in homes that are now worth 300-400K euro and would require at least 2x median wage if you want to rent them outside the social housing system. This leads to waiting lists of 10-20 years for social housing in much of the country, basically it is only accessible for new migrants and a few other special cases like single moms. I know people who are living for 300 euros per month (paid out of social security allowance) in a nice apartment in Amsterdam city center that would normally rent for 2000-3000 euros (unaffordable for the middle class). Of course, many of those apartments are illegally rented out to others while the official renter retires early on the Turkish coast or a Greek island ;(

      Give the bankers and politicians a few years and housing especially in the more attractive areas will be only for the elites and those who fully depend on the government; total control :) I just wonder if the elites will like their surroundings by then.

      • Xabier
        Jan 23, 2020 at 10:52 am

        That was revealed in London when the Grenfell tower block went up in flames a couple of years ago: horrible tragedy, but an awful lot of people were living there who shouldn’t have been. But it quickly became un-PC to mention that, of course.

        African and Asian tenants pioneered illegal sub-letting, aided by compatriots who landed jobs in local government.

        Local government in the UK has often been corrupt, but they added a whole new level to it….

        • nhz
          Jan 23, 2020 at 1:14 pm

          Yes, same here; I discussed this once with local government officials because sub-letting of social housing was rampant in some areas. But they strongly warned me that the first thing they do in such a case is tell the official renter of the place that there has been a complaint, and by whom (complete with address etc.) – so only those who complain about these criminal practices will suffer, while government will protect the criminals (I can’t remember even one case of someone who lost his/her home or social security allowance despite years of huge illegal sub-letting profits). We also have large numbers of people from some foreign countries who are on the dole in Netherlands, but live outside the EU and own homes, businesses etc. over there – politics simply doesn’t want to know. Apparently same story everywhere in Europe :(

    • Just Some Random Guy
      Jan 23, 2020 at 8:51 am

      “When you design a system that only sells to millionaires, you eventually find out that everyone is not a millionaire.”

      You don’t have to be anywhere near a millionaire to buy in SF. A couple each making $150K, which is pretty entry level in tech these days can easily afford a median home. Why is this so hard to understand?

      • Petunia
        Jan 23, 2020 at 10:36 am

        The problem with SF right now is it is no longer attractive to new tech hires. Everybody in tech knows the taxes and cost of living are very high, and the quality of life is questionable. It’s not a coincidence the FAGs are expanding in NYC, it is relatively more attractive overall. I expect the CA brain drain to continue. Chinese investors are welcome to keep the entire mess.

        • Jon
          Jan 23, 2020 at 11:35 am

          Very true
          I work in Tech and almost all of my friends and colleagues in Tech do not want to to go SV to work for the obvious reasons.

        • Cas127
          Jan 24, 2020 at 11:47 am

          “NYC, it is relatively more attractive overall”

          Relative, indeed.

          There is nothing like the magic of a midnight January stroll in Manhattan, dodging the crack-addled muggers, listening to the gentle sounds of an army of rats gnawing through garbage bags stacked 4 feet high.

          Then, heading home, to take a relaxing poop on the stoop.

          But the coasts were always the cultural Mecca’s…

      • Zantetsu
        Jan 23, 2020 at 12:08 pm

        That couple will be spending every last bit of their money on their mortgage though. Yes they can afford it, in the same way that everyone could afford a Ferrari if all we spent our money on (besides basic living expenses) was our car.

        Some people do take the plunge and agree to spend all of their money on their house. They are incredibly over leveraged in housing and will be destroyed completely when/if housing prices crash. Of course, they presumably can just wait for high prices to return again, but in the meantime, they are making zero on their leveraged investment, and if the economy falters and they lose one or both of their jobs … total catastrophe.

        I could “afford” a 1.5 million townhouse in Cupertino, which is my target, but I remain on the fence for over a year now because I simply cannot stomach risking everything I have or will have just to own it.

        • sc7
          Jan 23, 2020 at 12:15 pm

          This sums it up beautifully. Same thing going on in Boston right now, which is why I recommend anyone who bought after around when I did (2015)… to wait it out.

          Not sure why this so hard for the RE permabulls to understand. The free money spigot will stop flowing at even the slightest whiff of a slowdown.

        • ft
          Jan 23, 2020 at 12:58 pm

          I and everyone I know who owns a property free and clear in the
          bay Area got started by risking everything, sometimes more than everything, just to get into it. That’s how it works.

        • Zantetsu
          Jan 23, 2020 at 1:43 pm

          ft, alot of people who don’t own a home right now in the bay area did own one in 2007, and the lost it, plus alot more.

          The winners always think everyone wins … I have friends like this. Bought a house in mountain view in 2009 and it has more than doubled in value since then. They always have a rosy outlook on bay area housing prices because they can’t imagine being anything other than a winner in this game.

        • Zantetsu
          Jan 23, 2020 at 1:46 pm

          Also ft — since you’ve been in this game a while, can I ask you to please, with all honesty possible, and considering all aspects of the situation equally, without rose colored glasses or a doom and gloom approach … just even handedly … please assess whether or not the current situation looks any different to you than other housing situations in bay area past.

          Are things now really the same as they ever were? Was the choice always really between risking everything or owning nothing?

          My ex-wife’s parents bought in Cupertino in 1985. From what I pieced together of their family history, it didn’t seem like they had to stretch too hard to do it, and they were pretty squarely middle class, not highly well paid, at the time.

        • ft
          Jan 23, 2020 at 5:32 pm

          Zantetsu, I don’t think the risk now is much different than it was when I started in 1978 – namely throwing everything you’ve got at a purchase, then hanging on to job/income to service a mortgage. Coming up with a down payment has always been a problem; I did my own but my siblings all got parental help. I didn’t give a thought to property tax back then; now you must. I also didn’t think of buying a house as an investment – it was more a way to live in my own place on my own terms. The basic financial challenges are about the same but I think it’s harder to come up with the money now.

        • Zantetsu
          Jan 23, 2020 at 7:06 pm

          You bought in 1978? What I wouldn’t give to have been around for the early PC boom in silicon valley. What amazingly interesting times those must have been.

          I came in 1994 fresh out of college and right in time for the internet boom. First company I worked for was right down the street from Netscape, who started it all. Those were interesting times too. Wish I had been farsighted enough at the time to parlay being in the right place at the right time into riches. But oh well.

  18. nhz
    Jan 23, 2020 at 7:56 am

    In related news, the ECB today is said to be considering adding housing (probably owner-occupied housing only) to its inflation index.

    Right on time, I guess this idea will become effective right at the top of the current 30-year EU housing bubble, so they can keep lying through their teeth about real inflation. A little (at some point inevitable) decline in home prices in the next few years, used with the right statistical magic, will go a long way in convincing the peasants that there is no inflation, and we need more money printing. When home prices start surging again, they can always introduce new hedonics to convince us that the homes are not more expensive, just much better than at any time in the past ;(

    • Jan 23, 2020 at 10:41 am

      nhz,

      There is already a housing component in the EU inflation calculation, but it’s small. It’s under housing related services, and I think it accounts for only about 10% of the total. In the US, housing (rent, owner’s equivalent of rent) accounts for about one-third of CPI.

      But I think it’s a great idea for central banks to revisit the inflation indices they use, including PCE in the US. The Fed has gotten an earful at its the “Fed Listens” events, from people complaining about surging costs of living despite low PCE inflation growth.

      • Lisa_Hooker
        Jan 24, 2020 at 12:27 pm

        Unfortunately what goes in one ear of the FED immediately goes right out the other ear. We’ve been complaining for a couple of decades.

      • nhz
        Jan 24, 2020 at 3:34 pm

        @ Wolf:
        Agree that it is a great idea to revisit inflation indices. But I’m suspicious of the timing.

        It looks similar to the coming Dutch tax system overhaul for “investments”. For twenty years they taxed all investments (whether cash/savings accounts, stocks/bonds or real estate) exactly the same, assuming one makes at 4-8% return depending on amount of available capital. They tax the assumed return, not the real return – which was great for stock/bond/RE investors who made more than 6-8% in the last ten years and punishing for those with savings accounts due to (near-) ZIRP, their tax bill was far higher than the interest they received.

        In the new Dutch tax system interest on cash (savings) would be tax-free up to probably 400K (but with NIRP/ZIRP and 2.6% CPI not much reason to cheer, real returns would still be significantly negative) and higher savings amounts would get taxed even more than in the past, while stocks/bonds would be taxed based on the real return (which could well become negative for some years). RE investment would be taxed in a way (again not related to real cost/income) that would punish especially small landlords who purchased recently.

        It looks like they are doing everything they can to keep investing for really rich folk and companies fiscally attractive in the coming years and make the small players suffer out of proportion, all of course while stating that the new system is “more fair”. I expect much the same for ECB policy :(

    • Xabier
      Jan 23, 2020 at 10:45 am

      The peasants are rarely convinced: but being peasants they just have to put up with it. …..

  19. Petunia
    Jan 23, 2020 at 10:57 am

    My cable bill is up almost 7% and that’s just the beginning of the year increase. We started 4 years ago with a $120 promotional package and are now at $125 because we have cut back service twice. When the contract is up it will go up again and I will cut back again. The hedonics of continual cutbacks in lifestyle may be masking the true inflation rate. They think my bill only went up $5 in four years, but my service is down by half, and nobody is counting that.

    • Jan 23, 2020 at 11:11 am

      Teach them a lesson. Cut the cord!! Get broadband only. Do the rest online.

      We did that to Comcast in 2007 (I think). Works great for us.

      • Petunia
        Jan 23, 2020 at 11:23 am

        I used to watch CSPAN but haven’t watched much in the past year, just too damn crazy. If I were an investor I would definitely be short the networks.

      • Zantetsu
        Jan 23, 2020 at 1:50 pm

        I suspect that the more people do this, the more that cable companies will just shift their rate hiking to broadband. My broadband bill already went up 50% since my ‘introductory period’ expired and has seen a yearly increase since then as well.

        If you have a choice of broadband provider in your area, then you may be lucky enough to enjoy price competition … but many people like myself live in a place with only one broadband provider, and they can charge whatever they want.

        • Jan 23, 2020 at 2:26 pm

          Zantetsu,

          Maybe they “will” increase the rates. But our Comcast broadband went from something like 2 Mbps download speed in 2007 to about 75 Mbps now — which is a 35-fold improvement, and it still costs the same.

          Competition is my cellphone connection, which gives me 17 Mbts per second. And I’m already paying for it. It serves as my backup broadband for my network here, when Comcast goes down.

          There is a Verizon fiber cable hanging off the infamous utility pole 8 feet from our balcony. But it hasn’t been hooked up yet. That’ll be competition too. I suppose it will provide 1 Gbts or more.

        • nhz
          Jan 24, 2020 at 3:47 pm

          I have had cable internet for over 20 years from the same provider (initially using modems when the provider was still a two-person company, switched to cable in second half of the nineties). The cable internet in its early days was one of the best in Europe (fast, relatively cheap and reliable).

          I’m surprised how the monthly cost has kept increasing almost every year (by 5-10%) despite technological improvement, usually using all kinds of tricks like continually changing the subscriptions to add stuff you don’t need. Bandwidth has gone up a lot over the years (even for the cheapest subscriptions) but I have noticed very little improvement in actual web use, maybe it works better for downloading movies but ten years ago this already worked fine so I don’t see the need.

          Unfortunately, because my provider was early they have a monopoly in this part of the country and no real competition. I’m keeping an eye on cell phone access but it isn’t competitive yet here.

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