- ~10% of the S&P 500
- 6 of the top 20 companies by market capitalization
- 30 of the 65 Information Technology companies on the S&P 500
With Great Wealth Comes Great Property Inflation
94% of homes received multiple offers in March, up from 88% last year (source: Redfin). Compare that to the national averages of 61%, down from 64% last year. 34% of homes go above asking price (source: Redfin).
The median property sales price in the Bay Area is $1M+, up 25% from the peak in 2007 and up 67% since 2012. Not coincidentally, the stock market was flat until 2012 and has since surged 67%.
The stock market has fueled a tech bubble through the mechanism of IPOs and stock options. Things took off in 2012 with Facebook’s IPO. Prior to that there were a few big hits (Skype, Trulia, LinkedIn), but Facebook signaled that the game was on.
2013 had Twitter (and Splunk, Workday, Palo Alto Networks, ServiceNow). CBIN cites estimates showing that of the top 15 tech IPOs in 2013, 40% were Bay Area companies. That trend it hasn’t stopped. There’s been a steady flow of IPOs that have enriched literally tens of thousands. A lot of hot money is chasing the yield offered by those start-ups and IPOs.
And, just like in 2000 and 2007, a lot of dubious start-ups have emerged.
The Criticality of Stock Options to Local Real Estate Prices
The Bay Area enjoys the highest incomes in the nation. Median family income is $87K in San Francisco, $104K in San Mateo, and so on. Even that’s not enough to get a loan to bridge the 20% down payment on a $1M house.
An income of $100K can yield a mortgage loan of $400K on a good day. If rates rise, that figure comes down to $300K. Incomes and mortgages don’t matter when the median home is $1M and the down payment is $500K+. That’s stock option money, and if you have $500K in stock options, you probably have $600K, $800K, $1M or more.
For the rest of the country, rising interest rates will affect real estate prices. In the Bay Area, interest rates aren’t a gating factor: affordability is defined by the down payment, aka stock options. God forbid a drop in the stock market.
Inflation isn’t limited to real estate. The cost of living is up everywhere here. Based on recent personal experience, a steak dinner in San Francisco is now more expensive than one in New York.
Bay Area Optimism
In fact, speaking about steak dinners, let me share a story from one last week. It started with a tale of woe shared by one of the guys at the table. One night recently, he and his wife and another couple went out for drinks and dinner. On the way home, his wife suddenly realized that she had forgotten her purse. They called the restaurant which still had the purse but was closing in an hour. They could either pick it up at that moment or in two days. Meanwhile her husband was drunk and the restaurant was 20 miles away.
The solution? He called Uber and got a ride to the restaurant and back. I wondered why he didn’t just have an Uber go to the restaurant, pick up the purse, and drive it up to his house. Someone else wondered whether he should have set up a Taskrabbit (an online resource where folks bid to do your small chores).
The point here is that in Silicon Valley everything is seen through the prism of a software or hardware solution. In Hollywood, the cocktail chatter revolves around writing and performing stories. In New York it’s about investing. Meanwhile, in San Francisco, a potential marital issue is immediately addressed as a problem solvable with an app. In fact, the table conversation included some great start-up ideas just waiting for a little capital investment.
The San Francisco economic experience is extreme but the optimism is universal. Looking across the country, the concept of a recession is on nobody’s plate and job security fears continue to fade, finally hitting pre-recession levels.
So what issues concern the US household? Concerns about inflation and interest rates are rising and have hit post-recession highs.
At the same time, interest in oil prices has surged to levels not seen since they collapsed in the recession.
Taken together, we see optimistic households mostly concerned with factors that can move their disposable incomes up or down: inflation, interest rates, lower prices, and so on. These are not life-threatening issues by any stretch of the imagination.
Tread Carefully During Peak Optimism
The lack of anxiety and fear is bolstering consumer spending. That and the gas price dividend. Looking at 401Ks, the typical worker sees lack of growth YTD and increased volatility, but that’s paper money. In their pocket they feel richer thanks to the discretionary spending boost from commodity/energy fueled deflation and disinflation.
And that’s precisely the problem: households aren’t prepared for the next downtick. We have all the ingredients for a sharp pullback of consumer spending:
- Over-reliance on a diminishing gas pump dividend
- Households unprepared for an economic slowdown or recession
- Rising concern about inflation and interest rates
The exposure is much more limited than in the previous cycle, but the reaction to a reversal in gas prices will be a sudden retreat in spending.
Sitting in Silicon Valley, it feels like we’ve reached the peak again. Hot money is chasing deals at ridiculous valuations. Housing prices are more than incomes can cover. Optimism is high. Jobless Claims are at cyclical lows.
We’ve seen this before, in 2000 and 2007.
As deflation and disinflation fade in 2H – taking with them the consumer economic benefits – and as we enter the seventh year of the recovery cycle and the economy further slows, expect consumer sentiment to drop right alongside consumer spending.








Housing is nowhere near a peak in most places once you get outside of the criminal hangouts of California, Washington, DC, and New York City.
How do interest rates rise again? That would bankrupt everything. Can't be allowed. An emergency would be declared and we'd be put under a control regime a la FDR in WWII, but electronically policed.
My optimism peaked about 30 years ago. Never had consumer confidence, whatever the fuck that is.
The 'market crash' will happen, but Interest rates won't rise. Our $1M shacks will be $2M shacks in five to ten years while incomes remain the same. The 30yr will be a 50yr/100yr mortgage - generational.
In my opinion, the IOT bubble WILL be blown after the crash, and Web 1.0 and 2.0 bubbles will pale in comparison to the IOT bubble. There will be a shitload of work and opportunities for a lot of people, though for similar (for the sharp crayons), slowly stagnating (for the average crayons), or much reduced (for the dull crayons) wages. The question is, how many Bay Areans will get that work vs. it being offshored, once the technology base becomes standardized and stable.
Either way, the Vulture Capitalists are waiting...
The tell with IoT is the "things".
Things get commoditized, flatlining profits and mowing down swaths of startups. Standardization of the protocols kills profit margins for the standardized hardware and firmware. The profits will concentrate with the owners of higher level IP. Software businesses.
What goes up must come down...
Ya 'feel' me tekkies?
Its flipping nuts...a little blow to the confidence levels will have a bad outcome...until the next time.
Just posted this - http://www.zerohedge.com/news/2015-05-14/silicon-shark-jumps-shark
As someone working for a San Fran tech "unicorn" I can say that there is absolutely no awareness of the current bubble. Given the median age in the late 20s of most of the senior executives there are few people that remember how quickly tech bubble 1.0 crashed.
I live in SF. These little Ivy League, 20-something douches earning 6 figures literally ride razor scooters to work whilst wearing their favorite anime costumes. If you'll pardon me, I have some pizzas to deliver...literally.
Yep, the reckoning this time around will be brutal....no trigger warnings or safe spaces will be issued by Wall St.
I remember how much I drank in NYC in summer 1999 versus summer of 2001 was in direct proportion to maximum emotional high (getting rich day-tradin bitchez!) to a complete low (how will I pay rent now?)
Peak Optimism: getting an 'equity' line of credit on your stock portfolio to buy overpriced real estate. as I mentioned on this site many times.... Securities Based Lending is the thing no one is talking about, it is the hidden leverage that truly makes this stock bubble far worse than 2000 (that was only the nasdaq).
we all know about margin credit being very high. mix in Securities Based Lending and its worse than anything ever before.
choose your targets, set your parameters, and be ready for the long bomb. bears dont eat often but when they do, they eat it all.
Any oldsters around who remember the early 80's...? That was the time of the 1st ramp-up in Silicon Valley - and a huge one it was. It was coined back then that the technology sector was 'recession-proof'... Raise your fingers off the keypad and give me a wave if you remember that... And then, long about late '81/'82...
There has not been a real washout since, with a brief exception in 2000 where a lot of hardware was liquidated, but Greenspan's Ctrl-P put a tourniquet on that. And here we are again. She's gonna blow, but not quite yet... Gonna get so freaking upside-down you will wonder if you're living in parallel universe. Not a bad time to be thinking about the companies that make Haldol, Paxil, Luvox and a host of other zombie drugs, because when this baby does take a dive, the need to be numbed - or 'escape' will be legendary.
Yep, I went to work for National Semiconductor. My buddy went to work for Linear Technology. One of us is rich now. Fucker.
Hmmm. Apple 86-91, just about coincidental with Sculley, sandwitched inbetween two completely other kinds of disasters. Still, it was when driving 280 was not unpleasant either way. in 86, that is. in 92 it kind of sucked already.
housing in SV has ALWAYS BEEN AT NOSE BLEED LEVELS since the 80s. in 10 years people will say I could have bought that shack in Palo Alto for 2 mill... it's now worth 40 mill. Silicon Valley is the epicenter for tech and a magnet for the best and brightest.. that' ain't gonna change in our lifetimes. so there might be a correction but real estate will ALWAYS be in high demand in that area. as for texas and the midwest different story
Agreed, however water is now a major black swan for California...let's see how real estate prices react to city/state water restrictions limiting showers to once a week...
When they need water in Silicon Valley they just Google it......
Scottrade called me today, wanting to discuss my account.
Last time a broker called me, unsolicited, the market crashed within a month.
They know the bubble is popping, but they try to keep it inflated with a bunch of little bubbles inside the big bubble.
Three weeks ago I got a letter from Schwab where I left a few hundred dollars when I pulled my money out of stocks: