Silicon Valley Housing Burst in 2018?

4 Replies

                                                                        Sam Shueh

                                                                   Realty One Group

                                                                        Campbell, CA

Below is a summary of all jobs including San Francisco, Peninsula and Santa Clara County including most of SiliconValley:

In 2017 it was Verizon merged with Yahoo that resulted in plant closing and employees get booted out including Yahoo’s CEO who would like to stay but was told otherwise. You have growth and let go often at same time to justify a realignment in business. Technology companies always favors new things and the first company get there have an edge. Those who got behind get booted out often including most brilliant scientists. If job growth outpace shrinkage the technology will survive. While it is the business model it can shrink when inflation, cost will wreck the housing industry. In my opinion 2018 continues having strong demand for housing and homes will appreciate perhaps slightly less than past years because there are still plenty of highly paid jobs. There are already some ingredients suggest it will not stay that way very long.

Bay Area: Tech job growth has rapidly decelerated- Even with looming layoffs, tech still drives region’s economy

Below is a summary of all jobs including San Francisco, Peninsula and Santa Clara County including most of SiliconValley:

In 2017 it was Verizon merged with Yahoo that resulted in plant closing and employees get booted out including Yahoo’s CEO who would like to stay but was told otherwise. You have growth and let go often at same time to justify a realignment in business. Technology companies always favors new things and the first company get there have an edge. Those who got behind get booted out including most brilliant scientists. If job growth outpace decline the technology industry thrive. While it is the business model it can shrink when inflation, high cost of doing business will wreck the housing industry. It is my opinion 2018 continues having a strong demand for housing and homes will appreciate because there are plenty of high paid jobs. There are already some ingredients suggest it will not stay that way very long.

San Francisco Bay Area Employment 

Employment growth through Oct 2017(Bureau of Labor)

YEAR SF to SCC employment
2007 2,235,100
2008 2,304,500
2009 2,188,700
2010 2,184,800
2011 2,349,700
2012 2,570,700
2013 2,736,000
2014 2,926,900
2015 3,114,900
2016 3,267,300
2017 2,708,200

Affordability of housing is a key issue.  I doubt the well educated seasoned home owners will stop purchase because of $10,000 property tax limit (avg is over that today).  One percent of mortgage interest increase is affecting mortgage borrowing limit by 10%. That may take 4 increases through may be 2019 to reach 1%. Today, $2,000,000 home mortgage is common. Most can afford to put a higher down. However, if the interest rate moved to say 6% from 4% one will see possibly less competition from 8 offers to 4 ? offers. But it is still a competitive market.  The real question is how the economy will affect high technology employment two years out?  I know Uber, Lyft they are all local startups wanting to go ipo. Venture Capitalists will still able to bring in seeded money at least for months.

          ----to be continued in the next blog

Sam Shueh

Updated over 3 years ago

Yield curve is short term 2 year, and 10 year. The editor provided hangs up..Sorry

I look for clues when the recession is ripe. The economists often show and talk about interest rates show short term(2 year) and long term (10 years). When the short term interest rate is higher than long term interest. The economists claimed they can predict an impending recession a few quarters in advance with high probability. 

The Yield Curve between 10 year and 10 year can be interpreted as a precursor to recessions (vertical gray columns) when the blue line crosses over horizontal line.  On the basis of above curve I see that two years away during 2018-2010 it will happen.  The degree of recession depends.  The dot com recession in 2000 hit SFBA Silicon Valley more than other cities. In fact, the high tech employers were got hit hard. The dot com start up companies all took a hit as the technology was not mature. Housing in these neighborhood took a 10% price erosion while service worker neighborhoods were barely affected. Highly educated workers took 1-2 years to find a similar or lower paid job.

The same neighborhood housing are artificially inflated today. How it will affect these areas depends on how severely the recession will be.  My opinion is a $2.9 M 2300 sf newer home TODAY on an average size lot in a rating 6 elementary school will not stay that prcie forever.

I welcome your opinion and comments.

Thanks

Sam Shueh

Great analysis thanks for posting. I agree it is getting out of reach, but as of now outer bay area is expanding and getting really hot places like tracy Modesto.somehow I heard from so many people when the crash happen it start from out side and than hit bay area. again all of us know crash  going to happen but not sure when :) . when we were starting 2017 I ahve seen many people forcasting 2017 crash but it seems most bullish year :) 

for the school rating and 2.3MM home  that is very intresting. but in general school ratings are on rise ? at least in Fremont. so after some time i think rating will not matter because every thing will be 10 here. 


Originally posted by @Sam Shueh :

I look for clues when the recession is ripe. The economists often show and talk about interest rates show short term(2 year) and long term (10 years). When the short term interest rate is higher than long term interest. The economists claimed they can predict an impending recession a few quarters in advance with high probability. 

The Yield Curve between 10 year and 10 year can be interpreted as a precursor to recessions (vertical gray columns) when the blue line crosses over horizontal line.  On the basis of above curve I see that two years away during 2018-2010 it will happen.  The degree of recession depends.  The dot com recession in 2000 hit SFBA Silicon Valley more than other cities. In fact, the high tech employers were got hit hard. The dot com start up companies all took a hit as the technology was not mature. Housing in these neighborhood took a 10% price erosion while service worker neighborhoods were barely affected. Highly educated workers took 1-2 years to find a similar or lower paid job.

The same neighborhood housing are artificially inflated today. How it will affect these areas depends on how severely the recession will be.  My opinion is a $2.9 M 2300 sf newer home TODAY on an average size lot in a rating 6 elementary school will not stay that prcie forever.

I welcome your opinion and comments.

Thanks

Sam Shueh

I like others expected the economy to slow down last year. Evidently investors and institutions do not mind technology sector. Given that be another social media, hotel, taxi service can be non-profitable and still attract investors. Listening to business news recently the investors will losing interest and divert their money to other sector of business which are profitable. 

Rahul, I think you are right about inland housing which will take a hit first. For example, Santa Cruz and northern part of Monterey county where there are more service industry housing affected by lack of employment from Silicon Valley. The more affluent in Silicon Valley have more reserve funds to sustain when unemployed. Last time, those residents in Palo Alto boasted their home price will never drop experienced a bubble 2-3 years after other neighborhoods. A carpenter can find employment faster than a hedge fund manager. 

Here are some thoughts:

Why will it crash?

1) Expansion is now in year 7!
2) Home Prices are at record levels
3) Stock markets are at record levels
4) Changes for homeowners in the new tax bill
5) "black swan" event. China, Greece, Bitcoin, Saudi Arabia! Stuff we just can't foresee!

Why won't it crash?

1) Low unemployment
2) Robust earnings at top tier tech companies
3) Upcoming IPOs
4) Pent up demand for housing in the Bay Area
5) Massive tax cut for corporations
6) Supply of housing vs Demand

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