Wolf Richter www.testosteronepit.com [9] www.amazon.com/author/wolfrichter [10]
San Francisco is unique in many ways, and not only because it gets cold in the summer. Wild boom-and-bust cycles rule the city, and right now we’re in a boom cycle. Medium-rise and high-rise buildings for offices and apartments are sprouting like mushrooms. Cranes dot the skyline. Construction sites are everywhere. Streets are even more congested than usual, with concrete pumps blocking three of the four lanes. Tax revenues are flooding city coffers. Money grows on trees. Rents are soaring. People are getting evicted. And home prices, oh my....
By February, the median home in San Francisco changed hands at $945,000, according to DataQuick [11] (now a division of CoreLogic). That was up a screaming 35% year over year, and 16% higher than the peak of the prior bubble.
That peak was in November 2007, the craziest time when nothing could go wrong because stocks were still riding high, though some had already fallen off a cliff, and San Francisco was immune to the implosion of the housing bubble that had been ravaging other cities for over a year because everyone knew that San Francisco was unique and not subject to gravity, and a month later it all blew up. Afterwards, everyone called it “the housing bubble,” and everybody knew it had been a crazy time, that it hadn’t been sustainable.
This time, it’s not a bubble. It’s just a “healthy housing market.” But in March, distinct screeching sounds emanated from the big money machine of San Francisco and Silicon Valley. It was still hard to see at the time, but the machine had started to grind down. The fuel that feeds the machine? One, publically traded companies whose stocks are valued at insane or infinite multiples that can buy tiny startups for billions of dollars in freshly printed shares, and thus transfer shareholder wealth from around the world to the Bay Area; and two, IPOs of small companies with big losses that generate billions for the sellers, and for stock option holders as well, again transferring money from buyers around the world to the Bay Area.
Nothing works in San Francisco and Silicon Valley without this money transfer machine. It’s how early investors exit with immense profits. It’s how engineers become sudden millionaires. It’s how people with median incomes suddenly don’t mind plunking down a couple of million in cash for a three-bedroom apartment. It’s how billionaires are created. And many of them plow part of their windfall back into the startup mill, convinced that their genius had made them rich, hoping to benefit from it a few more times, though most of it will simply dissipate in the local economy.
What they all must have are soaring stock prices – but not the stocks that are in the Dow or in the S&P 500, which have been setting new highs but which don’t really matter that much here, except for Apple, Google, Facebook, and the like, but tech stocks, biotech stocks, cloud stocks, Big Data stocks, sundry app makers, internet stocks, or social media stocks – which are mostly about advertising and personal-data collection technologies, another hot area.... And they have been getting slaughtered. So the average stock in the Nasdaq is down over 24% [12] from its 52-week high.
San Francisco’s favorite baby, Twitter – so favorite that the city’s taxpayers were shanghaied into granting it tens of millions of dollars’ worth of payroll tax exemptions so that it would move from one building to another a few blocks away, rather than move to another city whose taxpayers might have been shanghaied into an even worse deal. Well, Twitter is the locally best known among these momentum fiascos, down 56% from its high in less than five months. Hope has wheezed out of it.
The Bay Area is full of these companies that are part of the big money transfer machine that is screeching to a halt. Take FireEye, in Milpitas, next to San Jose. It sells network and cloud security products, one of those formerly white-hot sectors. These outfits follow the same pattern: immensely hyped pre-IPO funding rounds with ever sillier valuations, an even more hyped IPO (last September), a Wall-Street instigated run-up into the stratosphere, and then a giant hissing sound. It’s down 72% from its high in March and trades well below its IPO price. Like Twitter and most of the others, it’s still way overvalued. In this manner, spread over hundreds of companies, many billions in fake wealth have evaporated in just a few months.
That brutally bursting stock bubble is wreaking havoc on IPO and momentum-stock hype, and on the necessary flow of money from all over the world to the Bay Area. The whole construct begins to teeter. And it’s already taking down housing in San Francisco.
That magnificent February, when the median home sold for $945,000, something terrible was already under way: sales were stalling. Turns out, only a few wealthy people could afford to buy a median home at this price, but wealthy people – even those freshly minted millionaires – don’t like to live in median homes, which is a two-bedroom apartment in San Francisco. And so in March, the price of the median home dropped to $937,500, according to DataQuick. The hot air had begun hissing out of the San Francisco housing bubble. And in April, the price dropped again [13] to $922,500. While that is still up 13.2% from prior year, it’s down 2.4% from just two months ago.
That this drop came in March and April is particularly nasty. This is the time when home prices rise. Even during the down-years of 2008, 2009, 2010, and 2011 when the housing bubble in San Francisco was imploding, home prices religiously rose in March and April! So this downdraft is very special; and an early indication that this fabulous boom is once again turning, as it always and inevitably does, into a bust.
Even while the googly-eyed mainstream media celebrate the Dow’s record highs, beneath the gloss, thousands of stocks are getting gutted. And the carnage is spreading. Read.... The Brutal, Beneath-the-Surface, Slo-Mo Crash of Stocks [12]