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Is the Bay Area Economy in a Bubble?

Uploaded: Feb 19, 2016
I think it is helpful to try and use common language here.

Most talk about bubbles refers to asset bubbles—like the sharp decline in tech startup stock prices after the dot.com boom or the sharp drop in home prices that started in 2005.

But some people talk about a bubble in the real economy—so there are two uses of the term.

Second, a bubble breaking implies a decline in prices or jobs. So the end of a bubble is different from a slowing of asset price or job growth.

And finally the end of a bubble should be distinguished from a recession. The end of the dot.com boom or the end of the housing bubble in 2005 contributed to the recessions that followed but they preceded them. The housing market correction after 2005 was really the end of a bubble because the rise in prices was not caused by a shortage of housing but rather from exuberant valuations.

The real Bay Area economy is not in a bubble. Jobs and income are not poised to decline. Major companies like Google, Facebook, Apple and LinkedIn have major expansion plans underway as well as millions of customers and $billions in revenues, still rising. UCLA does forecast a slowing of job growth from over 4% in 2015 to 3% in 2016 and 2.7% in 2017 with even slower growth after that.

It is hard to match the growth rates possible when coming after high unemployment but now unemployment is already low so that part of job growth is behind us. But a decline is not in sight.

What about asset prices. I am not an expert on stock prices so will not comment on the stock market except to say that if asset prices continue to fall, it IS more likely a revaluation of future prospects than a sign that a recession is coming.

Home prices and rents, like jobs, may see a decline in their growth. But in this case the price and rent increases ARE the direct result of a housing shortage, which is unlikely to be erased any time soon.

We are not yet building enough housing to match even a slowing job growth rate.

Disturbances in the world economy or policy muck ups at home can cause a recession but that raises a whole different set of questions than assessing whether jobs or asset prices are currently at a bubble stage.

Comments

 +  Like this comment
Posted by mauricio, a resident of Embarcadero Oaks/Leland,
on Feb 20, 2016 at 2:06 pm

deleted, off topic

but if you want to see what Mauricio posted look on the main Town Square site where he has posted this comment several times.


 +   3 people like this
Posted by Edward J. Dodson, a resident of another community,
on Feb 20, 2016 at 2:14 pm

Twice a year I prepare an analysis of the state of the U.S. economy and society, part of which focuses on property markets. The property markets in and around San Francisco are particularly at risk of a significant crash because they are no longer affordable for a high percentage of working people or businesses that must lease space and do not enjoy the high profit margins of high tech firms or financial institutions.

San Francisco's situation is not exactly unique. The difference is a difference of degree only from other metropolitan areas. With very few exceptions the problem is the means by which local government raises needed revenue. Most impose exactly the wrong sort of taxes on residents, businesses and working people. A far better source of public revenue is land value, which exists because of aggregate demand and the aggregate public and private expenditure on amenities that create locational advantages. Here is the economics in (hopefully) simple terms.

Every parcel or tract of land has some potential annual rental value, as determined by competitive bidding in a market economy. This rental value is independent of what the owner of land does or does not do as owner. If the public would collect this rental value in taxation, there would be no imputed or actual income stream associated with owning land. Owners would need to construct improvements, operate businesses, or sell to someone who would. Land prices would fall (theoretically, possibly to zero). Rental values would remain but would be likely to fall back some as land speculation become unprofitable and the hoarding of land became costly. With the rent of land as a stable and growing revenue source, all local governments that followed this course could eliminate the taxation of property improvements, thereby encouraging renovation and new construction. The taxation of worker wages could be reduced as well; and, in all likelihood, the profits of businesses.

In short, by bringing land to its highest, best use, San Francisco (any city really) could set the stage for non-inflationary full employment.



 +   8 people like this
Posted by An Actual Technologist, a resident of University South,
on Feb 20, 2016 at 5:59 pm

"The real Bay Area economy is not in a bubble. Jobs and income are not poised to decline. Major companies like Google, Facebook, Apple and LinkedIn have major expansion plans underway as well as millions of customers and $billions in revenues, still rising."

I recall hearing those claims just before the last dot-com bubble burst. Then, suddenly, poof.

We are definitely in dot-com.bubble 2.0 Look out for flying bits again.


 +   8 people like this
Posted by Bubble Busters, a resident of Another Palo Alto neighborhood,
on Feb 20, 2016 at 10:03 pm

If you define a bubble as an unusual, precipitous and unsustainable increase or decrease in demand then there are four significant factors that do support the bubble theory.

1. The social media market segment blossomed. As those companies mature and growth slows, they will focus on cost reduction and shift jobs off shore where there are additional growth markets and lower cost structures. We saw the same process at HP, Cisco and Oracle. Unless some other segment replaces it, we can expect an outflow of people back to India and China from the social media boomlet.

2. The local VC investment in Q315 was ~71% higher YoY than 2014. Several studies have correlated an increase in VC funding to an increase in bay area housing prices. If the historical failure rate for startups is consistent with the past, the majority of those companies will flush out and the people drawn here for those jobs might leave.

3. Although I don't know of an official source, the influx of foreign cash buyers from China empirically seems to be very significant. It has been partially caused by a one time change in regulations in China allowing individual citizens to move money from Chinese real estate to the Chinese stock market (Which temporarily skyrocketed) and then out of the country to buy properties in Palo Alto.

4. Interest rates have been at historical lows during the same period. Nobody knows when but there is no place to go but up.

If all four of the above temporary factors disappeared, it is not unreasonable to believe that housing market would be suppressed.


 +   8 people like this
Posted by Curmudgeon, a resident of Downtown North,
on Feb 21, 2016 at 7:33 pm

Nobody who recalls the crowing about California's "recession-proof economy," when the early eighties' Reagan Recession largely bypassed the state, will forget the shock when the nineties' .com bubble vanished overnight. The difference was that the eighties boom was solidly based on genuinely novel computer hardware and software that permanently revolutionized our work environment, while the latter inflated itself on a flimsy ponzi promise of infinite growth fueled by an indefinable "irrational exuberance" of the Internet.

Like its predecessor, the current overhyped software-based bubble is highly portable. There is no essential reason for it to happen here, and there is no ironclad mandate for it to remain here.

Consider what happened to Detroit, despite its highly non-portable industrial base. Our position is far more tentative. One only needs a few friends with laptops to participate--from anywhere in the world.

Tech hubris is recollection-proof.


 +   4 people like this
Posted by systemBuilder, a resident of Greenmeadow,
on Feb 22, 2016 at 9:19 am

There is a reason to think that the deregulation of startup capital in 2012, 2013, has led to a bubble of unicorn companies with extremely high valuations and as a result, associated bubbles in the property market. There are now roughly 100 unicorn companies, but if the average company has even 50 people, this is only 5000 people who are benefitting from the bubble. There is a great deal of housing pressure near Mountain View because Google stubbornly insists on packing more and more employees into the corporate headquarters. A change in Google's fortuntes or a few more disappointments from Unicorn companies could begin the process of unwinding this bubble.


 +   3 people like this
Posted by Death of a Unicorn, a resident of Old Mountain View,
on Feb 22, 2016 at 1:55 pm

I believe this year, we will see the implosion of a small handful of "unicorns". Several companies have raised absurd amounts of money, but have not been able to create a self-perpetuating engine of success. They may try and go public and find that no one wants to pay their IPO price, or run out of money and simply fail to raise more (and subsequently either end in a fire-sale or just disappear)

It's harder to predict the broader implications of this. We will have a flood of talented engineers hitting the market, but probably not enough to satisfy the demand of the rest of the industry (and so not enough to affect the housing market) It may be harder for startups to raise money, since the blockbusters will be fewer and further between; and, LPs may be less keen to invest after watching the VC mega-funds fail to make their returns.

It will be an interesting year.


 +   3 people like this
Posted by stephen levy, a resident of University South,
on Feb 22, 2016 at 2:36 pm

stephen levy is a registered user.

This does not present like a bubble and the reminders about 2000 and the dot.com boom seem not responsive to the tremendous differences.

I agree with previous posters that some start up company valuations may be too high and come back to earth.

But the idea that big companies are about to leave seems oddly disconnected from such events as the planned expansion of Facebook in Menlo Park, the applications of LinkedIn and Google to expand in North Bayshore (by the way MT View is developing plans for 9,000 housing units there) and the land acquisitions of Google and Apple in San Jose.

If anyone is interested in a friendly wager (maybe with funds donated to the Weekly Holiday Fund) I am open to betting that there will be more jobs here by year end and that housing costs will be up not down.

This is all consistent with slowing job growth and the continued large under building of housing in the region.


 +   2 people like this
Posted by Curmudgeon, a resident of Downtown North,
on Feb 22, 2016 at 5:00 pm

"But the idea that big companies are about to leave seems oddly disconnected ... "

Remember Sun Microsystems, who built that big campus now occupied by Facebook? Remember Silicon Graphics, who built Google's core plex? Pillars of the Valley, both.

Big companies don't always leave when the bubble pops, they vanish in place.


 +   5 people like this
Posted by stephen levy, a resident of University South,
on Feb 22, 2016 at 5:21 pm

stephen levy is a registered user.

I do remember but memory is not analysis Curmudgeon. I have confidence that the companies planning expansions, spending millions on planning studies, buying and leasing land are not planning to vanish. Some smaller companies may well not make it, that is the Valley story, but the major employers here are in the right fields and can adapt to bumps in the road.

You are not arguing that their fields are bad, you have been arguing that they will leave for greener pastures and have been arguing that for the last 300,000 jobs added to the region. I argue that you are wrong on that.

But if you want to bet that Google, Facebook, Apple and LinkedIn--any of them--vanish here in the next three years, I am interested and offering 5-1 odds.


 +   2 people like this
Posted by Fact, a resident of Menlo Park: Central Menlo Park,
on Feb 22, 2016 at 6:16 pm

Tech isn't going away, ever ! It's HERE to stay and grow in an endless amount of ways. Moore's Law !
Menlo, PA, Wdsd & PV properties have been bought with cash for many years. And this still continues. Owners have tremendous equity. Our real estate market couldn't be more stable. Very, very few will NEED to sell with any down turn in the economy, NASDAQ or other. This was the case during the 2000, 2001 & 2008 financial disasters. Owners sat tight and waited it out and then prices increased. At best an economic downturn would be a buy opportunity, less multiple offers. This is prime Silicon Valley land and they're not making any more of it. This level of real estate is insulated from the national norm. The opposite of Stockton, CA in 2008 which had high loans to values, no equity. That was the recipe for a housing disaster. Not going to happen here.


 +   5 people like this
Posted by Commentator, a resident of Professorville,
on Feb 22, 2016 at 7:13 pm

"But the idea that big companies are about to leave seems oddly disconnected from such events as the planned expansion of Facebook in Menlo Park, the applications of LinkedIn and Google to expand in North Bayshore..."

The biggies are always the most clueless in the headlamp of the oncoming train. They are institutionally incapable of comprehending that the party could end. Lehman Brothers, AIG, and Washington Mutual come to mind. Have you read _The Big Short_?

"Tech isn't going away, ever ! It's HERE to stay and grow in an endless amount of ways. Moore's Law !"

It's more like Moore's Observation, which by the way applies to hardware, not applications or even real estate. It was overhyped into a "law" during the era of irrational exuberance Curmudgeon mentioned above. Every techie knows there is a limit to what can be achieved in a finite space. For example, have you noticed that CPU chips smashed into a 3 GHz speed limit about fifteen years ago? They got caught in the barriers of heat and the speed of light. All development since then has been incremental, slowly adding blocks of functionality but not raw Moore performance.

What's left to drive this bubble? Software and hype directed at ever more sophisticated user surveillance and analysis, in service to and financed by Madison Avenue, which is Google's biggest customer.

"Our real estate market couldn't be more stable."

Heard that a decade ago and in the late eighties. What can I say? Those who insist on repeating history do not remember it.


 +   2 people like this
Posted by Fact, a resident of Menlo Park: Central Menlo Park,
on Feb 22, 2016 at 8:47 pm

Web Link

My comments are Fact, not Proffessorville theory. Maybe this is why academics get so mad at their limited income with such huge tenure given knowledge ! (this is gonna get fun) And the rest just keep doing what they do, not for profit but for love of innovation. And they reap the rewards... One being no mortgage in a beautiful and very expensive place to live, for so many reasons. This attracts more savvy buyers / demand, less supply. PRIME real estate is a stable and positive investment... The founders, VC's, engineers, start ups aren't going to move north, south, east or anywhere else. They move here. Similar to Hollywood, very little business has moved for many of the same reasons, if you're truly in the movie business Hollywood is it. Tech. some business will leave, very little. If you're in Tech this is it. There's plenty of people here not solely because of money, they've made it. They're here because of like minds and the machine that's Tech. It started here and it's staying here !

Please sell soon and move to Detroit and prove me wrong......


 +   5 people like this
Posted by Living in a Bubble, a resident of another community,
on Feb 22, 2016 at 10:04 pm

I don't think the Bay Area economy is in a bubble. I think there is a lot of pent up demand in housing, employment, investment etc. that is still playing out as the US and rest of the world recover from the Great Recession. We are still in a rebalancing phase and there are defintly some geographic regions that are doing better than others. There are areas that still have not broken even in terms of employment, property values, etc. from where they were before the Great Recession, and for some of them they may not anytime soon. Other areas such as the Bay Area have already surpassed their past prerecession highs and are moving even higher. The need for tech office space is pushing companies beyond the fringes of the last boom and across the bay to Newark, Oakland, etc. California and the Bay Area more specifically has a lot going for it and the best and brightest worldwide want to go west to strike it rich in the latest gold rush. It will always be a great place to live and you just can't beat the weather!


 +   5 people like this
Posted by Stash the Cash, a resident of Mayfield,
on Feb 22, 2016 at 10:15 pm


While it has been widely reported that money (in some cases ill gotten) has been flooding out of China for several years, I think it is generally just a minor contributor to increases in real estate prices in the Bay Area and other hot markets in the US and worldwide. Another perhaps more significant contributor is the fact that the US is one of the world’s top three countries to stash cash behind Switzerland and Hong Kong and the US is the new largest tax haven in human history. This story is just starting to play out, but the extent to which it will have an effect on real estate prices is unclear.


 +   2 people like this
Posted by Curmudgeon, a resident of Downtown North,
on Feb 22, 2016 at 11:28 pm

"I do remember but memory is not analysis Curmudgeon. I have confidence that the companies planning expansions, spending millions on planning studies, buying and leasing land are not planning to vanish."

Memory of what happened before is key to successful analysis of the present.

Very few companies *plan* to vanish. But some nevertheless do. e.g., SGI bought a bunch of real estate, built some really edgy edifices for itself, then vanished.

"you have been arguing that they will leave for greener pastures"

No, for *global* pastures. Our high tech savants do not yet understand they obsoleted the traditional centralized employment model when they created the internet. It's amazing how one might not comprehend the impacts of one's own invention. As the once monolithic auto industry globalized away from Detroit, software development will disperse even more rapidly and thinly, to wherever its creators happen to be. It's the future, and it's coming sooner than our local traditionalist thinkers want to realize.

That's not halcyon news for Silicon Valley real estate developers, but they'll eventually accept the new reality. They have no choice.


 +   7 people like this
Posted by Train Fan, a resident of Atherton: other,
on Feb 23, 2016 at 9:37 am

Ugh, the word "bubble" is so overused.

Economies go up and down. "Up" does not mean it's a bubble, "down" does not mean it's a depression. Industries go up and down, including tech; "Up" does not mean it's a bubble, "down" does not mean it's a depression.

If people want to say, for example, that local real estate is looking historically expensive, I can see the arguments for that (and I'd agree, actually). But that's not the same thing as a bubble. If real estate went into a 10-20% correction in pricing, that's not a bubble; that's normal economics.

Correction != Bubble


 +   1 person likes this
Posted by Palantir_Watcher, a resident of Downtown North,
on Feb 23, 2016 at 3:17 pm

Deleted. Post again if you want when you have verifiable proof.


 +   3 people like this
Posted by Mr.Recycle, a resident of Duveneck/St. Francis,
on Feb 23, 2016 at 10:52 pm

Facebook, Google, and Apple may not be going away, but note that they occupy the locations of now defunct tech giants that were flying high during the last tech bubble in the 90's: Sun, SGI, and HP. OK, HP isn't defunct yet, but it is a shell of what it was then.

They'll be around in 5 years, but 10? 20? Who knows, but if SV innovation isn't dead, hopefully a couple will be gone. In the 50's the lifespan of a company on the S&P 500 was 61 years. In 2011 it was 18. If you grew up in the 50's and 60's, you probably expect much more stability than there actually is today.

--
Web Link

1. US corporations in the S&P500 in 1958 remained in the index for an average of 61 years. By 1980, the average tenure of an S&P500 firm was 25 years, and by 2011 that average shortened to 18 years based on seven year rolling averages. In other words, the churn rate of companies in the S&P500 has been accelerating over time (see top chart above, and examples of the S&P500 churn in the bottom chart).

2. On average, an S&P 500 company is now being replaced about once every two weeks.

3. At the current churn rate, 75% of the S&P 500 firms in 2011 will be replaced by new firms entering the S&P500 in 2027.

4. In 2011, a total of 23 companies were removed from the S&P500, either due to declines in market value (for instance, Radio Shack’s stock no longer qualified as of June) or through an acquisition (for instance, National Semiconductor was bought by Texas Instruments in September).


 +  Like this comment
Posted by Harry Merkin, a resident of Ventura,
on Feb 25, 2016 at 8:25 pm

The crash vibes are building fast. portion deleted.


 +   1 person likes this
Posted by Harry Merkin, a resident of Ventura,
on Feb 26, 2016 at 3:55 pm

Why did you delete my citation backing up my comment? As you ought to know, citations are an essential element of civilized discourse. If they are unwelcome on this blog I must question the purported authoritativeness of it, and the alleged academic credentials of its author.


 +  Like this comment
Posted by stephen levy, a resident of University South,
on Feb 26, 2016 at 4:40 pm

stephen levy is a registered user.

Harry,

I deleted the part of your post that referred readers to unsubstantiated drivel about Palantir. See the actual facts below.

Rather than responding by questioning my credentials I expected you and the other malicious rumor spreaders would be apologizing in droves for making up and posting garbage that could scare employees and slander a company when your allegations were only made up hot air.

Yes, that kind of posting is unwelcome here. Please read the actual reporting below.


[Web Link ]


 +  Like this comment
Posted by Harry Merkin, a resident of Ventura,
on Feb 26, 2016 at 6:38 pm

OK, perhaps I overreacted, and I will apologize if you retract your characterization if me as a vicious rumor monger. I'm sure you agree that direct unfounded name calling is much worse than questioning credentials.

I say unfounded because, as was pointed out today in another thread Web Link- , Bloomberg actually confirms that Palantir employees are at risk of losing their stock renumeration. To wit, "Palantir staff can relax a bit. The terms of recent fundraising rounds don't contain many of the provisions that can crush the value of common shares held by employees."

The employees can relax only *a bit* because the terms of recent fundraising rounds don't contain *many of* the provisions that can crush the value of common shares held by employees. Those are stealth weasel words if I ever saw such. Not containing *many of* the provisions is significantly different from containing *none of* them. Surely you noticed that?


 +  Like this comment
Posted by Jason, a resident of another community,
on Feb 27, 2016 at 1:26 pm

"The real Bay Area economy is not in a bubble. Jobs and income are not poised to decline. Major companies like Google, Facebook, Apple and LinkedIn have major expansion plans underway as well as millions of customers and $billions in revenues, still rising."

"if asset prices continue to fall, it IS more likely a revaluation of future prospects than a sign that a recession is coming."

So which is it? Asset prices have fallen. Regardless, if they do continue to fall, what do you think will happen to those "major expansion plans"? As to the revenues still "increasing", look again. Only Google and Facebook increased revenue. Apple was practically flat.


 +  Like this comment
Posted by stephen levy, a resident of University South,
on Feb 27, 2016 at 2:13 pm

stephen levy is a registered user.

@ Jason

If stock price multiples for the companies planning major expansions fall, I would expect nothing to change in their expansion plans. These companies do not need to borrow and even if they did, they can borrow at historically low rates.

If, for example, Apple's stock price fell because IPhone sales were lagging, i would expect them to go faster for new products. Perhaps IPhone production in China where they are made would fall, but why R&D efforts here would fall makes no sense.

We are in the development of new goods and services business here and these companies will just try harder if existing product sales stop growing.

If a new company cannot raise the money they need to expand, that would affect their prospects but new companies are always at risk and most fail. That has not stopped the Bay Area economy from surging in terms of jobs and income.

I do not think a change in stock price multiples for the big Silicon Valley tech companies will negatively affect their plans for expansion and at the moment stock prices for these companies are just off all time highs.

If you have some insight into why Apple would stop expanding because sales of existing products are flat for a short time, please share.


 +  Like this comment
Posted by Jason, a resident of another community,
on Feb 27, 2016 at 3:05 pm

@Stephen Levy

No, I don't have any insight into how/why Apple might stop expanding because sales of current products are flat for a short time. Other than:
1. flat/declining sales for a long time start with flat/declining sales for a short time.
2. global trade is decelerating.

You say "these companies do not need to borrow". Interestingly, Apple seems to be proving this statement wrong. Yes, Apple has a ton of money on its books. Sad fact is that money is overseas and amounts to at most 50% of its current value if it were to be moved back stateside.

Yes, Apple/Google/FB/et al could go faster for new products in the face of flat/declining sales. The problem with this argument is that it is colored with the notion that the pie will always be increasing. Recent history shows that this notion is actually wrong. Witness the efforts of central banks worldwide over the last few years. Once you get to the realization that technology is inherently deflationary, you get to the dilemma of how to increase the size of the pie that technology is going to change.

Actually, Silicon Valley is no longer in the development of new goods and services. It is in the business of optimizing existing goods and services. The "new goods/services" portion of SV is a rather small proportion of its "value" proposition. No, this is not a knock on SV. It's endemic in all things tech.



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