Inventory of Homes for Sale Is Rising in Silicon Valley and San Francisco
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Last week, one nicer 4BR house sold for 20% less than a smaller 3BR house that sold in April for a ridiculous $2.4M (that then underwent major remodeling for 6 months.)
Now look at the stock price of those companies between then and now, and the increased interest rate.
AFAICS this has not to do with foreign investments unwinding or people moving out of CA, but houses having become too expensive compared to what people could afford earlier with a mix of increased fear and uncertainty thrown in.
It’s not a bet that I would make at today’s prices, so I’m surprised that a hedge fund would still do it.
I think the real issue is that we let market forces determine housing prices and housing strategy. Housing is, like medicine, something that is poorly served by markets - since markets distort basic resources away from the common good.
It depends on the amount of risk and diversification you are looking for as well as where you are in your financial career. For example, if you have no college debt, and can afford to live off of your salary alone, leaving RSUs as company stock when they vest is no different than a non-employee buying shares of that stock at the vest price.
Diversification is great but not everyone is in the same financial situation to assume there is a one size fits all rule.
Wrong - if an employee holds stock in the company they work for, they are doubly screwed when things turn for the worse at the company. They lose asset value, and they may lose their job. Its a lousy idea to hold more than a trivial amount of stock in the company that employs you.
The chance of a dev getting the same job with the same comp is suddenly much lower, and will be like that for years, especially if said dev is looking for another job in the Mountain View area.
Google crashing would flood the market with very similar job seekers and would also likely cause FAAN stock prices to tank as well, making their comp much worse in total too.
Sell your RSUs people! :)
People often evaluate personal risk in terms of money when they really should be evaluating it in terms of utility, which can lead to very different results.
The only situation where that makes sense is if you're not only good at whatever job you have, but you're an expert stock picker and you discover through your superior skill that the one stock with the greatest upside is..... your employer!
The argument against your POV is right in your answer: leaving RSUs as company stock when they vest is no different than a non-employee buying shares of that stock at the vest price.
If instead of getting $X in RSUs you got $X in 'bonus' cash every month would you turn around and put it right into your employer's stock? Probably not.
Regardless of how confident you are in your employer, most people's single biggest investment is their job. Correlating your investments and your regular income is making an incredibly narrow bet which is reckless unless you can see the future.
One other reason to hold on to stock instead of selling are taxes: in the case of ESPP, holding on for a year (or sometimes more), it can make a huge difference in the case of heavily appreciated stock.
Completely legal but obviously ethically dubious.
It’s simply undeniable that employees know more than others.
And it’s unrealistic to think that none of knowledge would ever be helpful to better predict the stock price.
For a stock with lots of appreciation, the real bonus is in the stock price appreciation in the 2 year during which the price is locked in.
That part gets taxed at capital gains if you hold the stock long enough.
https://www.mystockoptions.com/content/how-long-must-i-hold-...
Probably is the key word in this statement. There isn't a one size fits all investment strategy so why are we pretending that one exists.
My decisions to invest in the company I work for or my lack of risk aversion could be based on attributes that are unique to my situation and not yours (or others).
> narrow bet which is reckless unless you can see the future.
This is just another way of saying what OP said that I replied to, its not really addressing the point I am making.
For example, what if I have a lump sum of money in the bank so I can afford to make a risky decision like doubling down on my employer. What if I have a dual income house hold and we can afford to do this because even if I lost everything my spouse would account for enough income to cover our expenses. Again, stop prescribing one size fits all advice because investing and finance are extremely diverse because everyones situation is unique.
They are two very different things.
You're going to reply with a chart of the S&P over the last 100 years engaging in the cliche fallacy of thinking that past returns dictate future results.
The only time it really makes sense not to sell an RSU instantly is if there is some extra tax consideration that can be avoided by selling slightly later or some similar benefit.
That’s incredibly ignorant that without knowing people’s situation, you brush it off as reckless behavior.
This might be the case that OP is thinking about.
But if then the stock goes down, you simply decide to not buy a house at that price.
I definitely don’t sell my ESPP shares when I get them, mostly for tax reasons.
Stock grants vest over a period of 4 years, and are targeted to equal a certain dollar value at the time of grant. If your grant is supposed to equal say $80K/year of stock compensation at the time of grant, and then 3 years later the stock has appreciated 3x, then your effective stock compensation when your stock vests, assuming you sell it immediately, is $240K. Combined with salary and what was supposed to be a $200K/year total comp package is now $360K/year.
I'm told (by a mortgage specialist at a Silicon Valley Wells Fargo branch) that the big banks often count stock compensation of big public tech companies as income for the purposes of determining how much mortgage you can afford (because you can always just sell it as it vests), so this increase in average income is absolutely reflected in housing prices.
1. Not everyone is a boglehead (well diversified every single minute of life). People do remain married to the company they work for. Even if it is 20% of high earners, it is a big number for bay area.
2. Even if you wanted to be diversified, the lessons of Enron and 2008 are too old for many. So you sell GOOG and invest in ... Netflix? Amazon? Facebook? NVDA? In the leading companies of the past decade, you traded one devil for the other. Even without insider product knowledge, you do not want to move away from your thriving neo-monopolist.
3. People do diversify but in small numbers. It is anecdotal data but people would have a million in vested RSUs and they will diversify only 50K to 100K because the fear of taking wrong decision is too great.
4. Many people do diversify from their RSU into housing. There are people (not me) who own 3, 5, 10 houses. For someone owning 3 houses (bank still owns it, but they have rent > payments), the utility of stock diversification is very small, and the next time they accumulate enough RSUs to buy another house, they do. As someone said, most of the banks have added on RSU specialists to amortize the unvested RSUs over the next 4 years and show that income as income that could be used to qualify.
Of course, this is the outcome of the last 10 years of low interest regime. And of course there are many people who do differently, but believe me there are enough people with 6 figure vested RSUs which apart from their house is the single biggest investment they have and they live(d) lucky : until the recent market hiccups.
The NIMBYism is insane. You have people who own $2M houses ($1.9M of which is capital gains) complaining about gentrification and ruined neighborhood character.
The city spends 2600U$S per month household. (11 bil / 360k households). Because the city levies taxes on sales and corporate taxes and business taxes, the ultimate burden of taxes is borne by consumers, workers and business owners.
Thus owning a home is a way to capture the value of all that tax expenditure, possibly with an incredibly reduced prop 13 tax rule. If instead, San Francisco changed its tax structure from corp/sales to land taxes, workers would see their incomes increase, businesses thrive, and real estate residences plummet in value. Think that if every propery had to pay 2600U$S monthly in taxes they would be worth almost nothing.
The most stern nymbism will very desperatly ask developers to nuke his own house if he had to pay that much every month.
Unless they make up the difference with a business, working, or consuming enough to offset with sales taxes, they are 26k+ positive.
But now, the homeowner gets a very sweet deal, probably 50k a year in rental per unit he has.
That's it. All taxes are borne by consumers.
https://www.youtube.com/watch?v=hPp3u4Jrdmw "Corporations don't pay taxes, they collect taxes..."
The concept is called tax inciddence.
SF has lots of properties that sold at $3 million+ at their last sale, and so would be paying about that in basic property taxes before the 2% annual basis value increase allowed under prop 13, Mello-Roos assessments, etc.
Now,if every housing unit (not property) were assessed a $2600/mo tax, would that drive sale prices down? Maybe. Would it drive up incomes and make businesses thrive? Well, it would increase the income of people living in SF (excluding the homeless) by driving lower income people out even more than the status quo does. But it wouldn't cause incomes for the same people to rise. But, also, that's not a land tax.
What you really seem to want,if you want a land tax, is something like a tax not of $2600 on every property or every housing unit, but on every unit of land area equivalent to the average per-household land footprint of existing housing units. And, sure, that might encourage density, but not the income or business effects you claim.
You are correct, incidence is not the same of property vs land. Land is preferrable becuase the 2mill single family hosuehold that takes the same space than the 5 mill 9 unit apt gets more tax benefits.
You also have the added difficulty that prop taxes are capped. But land taxes aren't. In any case, shifting the burden from consumers, workers and businesses to landlords will inevitable drop the propery values enormously, regardless of the tax scheme implemented. They are today tax-positive. Even if you only do half the tax burden, it would be enough change incentives profoundly.
I don't think California allows local governments to raise land taxes (it allows parcel taxes, that are apportioned on a flat per-parcel basis, but that's obviously not the same as a land tax.)
> In any case, shifting the burden from consumers, workers and businesses to landlords
...won't happen. The consumers and businesses that rent property (and the workers employed by businesses and whose sustainable potential pay is limited by other costs the employer has to pay to operate) will still bear the burden of the taxes, even if they are directly levied on property owners.
> ..won't happen. The consumers and businesses that rent property (and the workers employed by businesses and whose sustainable potential pay is limited by other costs the employer has to pay to operate) will still bear the burden of the taxes, even if they are directly levied on property owners.
I disagree, this is not what economic theory implies with tax incidence, LVT, etc.
Things like zoning and regulation can theoretically be fixed, if voters wisen up. But the longer this goes on, the more middle class residents will leave the bay area for good. Once the entire middle class is gone, we'll have no hope of ever building cost effective housing (other than automation) because there won't be anymore cost effective labor left to build it with. We're already seeing pretty large inflation on a local level for services: like eating out and plumbing, etc.
It's especially absurd since we're talking about a global, dynamic city, not some small rural town. Can you imagine if 1900s NYC had the NIMBY culture of present day SF? It would've severely choked its growth.
SF's saving grace is its VC ecosystem and network effect between existing talent. You can barely even say they have a monopoly on talent pool, since the ivy leagues and many other top schools are nowhere near SF. These factors are gradually growing in other cities, and the bay area will get to a point where the cost of living will turn it into just another city. They've essentially created one of the worlds largest funnels of money into landlords pockets. So much wasted capital.
This isn't like the finance stronghold in NY or entertainment in LA, tech companies are involved in every industry, and don't need to be in SF to thrive.
Poor choice of analogy, with proper maintenance this is perfectly reasonable and fairly trivial to achieve.
Hotels -> AirBnb
Taxis -> Uber/Lyft
Automobiles -> Tesla
Video distribution -> Netflix
Tech in the Bay Area is expanding its footprint, not reducing it.
And pretty much perfect year long weather matched with world class outdoor activities within driving distance. I don't think the cost of housing in the Bay Area is going down anytime soon. People figured out it's a desirable place to live and are willing to spend more to live there.
Sunnyvale at least has been doing a good job of adding housing in spite of the NIMBYism. It isn't a popular opinion on Nextdoor but every fora has its taboos.
Is there something obvious I'm missing here? This seems to be a salient point. Why should it cost the same to live by the beach in California vs. being in a rural area in Wyoming?
It’s slowing in other major markets Dallas (2), Denver (3), and others, although not as severely.
From my perspective as a recent home seller and a prospective home buyer, the turnaround is largely due to the increasing interest rates.
As a seller you suddenly don’t want to risk holding out for the best possible offer because you know the average person might not be able to afford as much soon, and even if that’s questionably accurate, the uncertainty makes you more willing to consider offers.
As a buyer, even a 50 basis points change (half a percent) has a significant effect on what you can afford especially if you’re going to be highly leveraged. You’d be surprised the number of people doing crazy things like 10/10/80 Jumbo loans to get in the market, even in tech.
From both the buyer and seller side there was an insane amount of demand just as rates started going up as people were pushing the limits to get in at the best rates. I suspect this pushed prices up sharply in early 2018, making the following slowdown as rates went up appear more severe than it otherwise would have.
In the Seattle area, taxes are also a minor factor; there’s recently been several significant hikes in property taxes that eat further into affordability - I’m not sure if that’s the case in other markets, but it wouldn’t surprise me.
1. https://seattlebubble.com/blog/2019/01/07/nwmls-home-price-g...
2. https://www.wsj.com/articles/the-u-s-housing-boom-is-coming-...
3. https://www.denverpost.com/2018/12/26/home-price-increases-s...
Put the other 10% down in a diversified stock portfolio over 10 years would likely fetch > 4.5% apr.
Once they accept the offer all they care about is getting their money. Note you still Need to show in your offer letter that you have the cash to do 20% down.
Note an 80-10-10 is both an 80-20 mortgage along with a 10% loan.
Markets have seen it too after many years of going up, and many of the tech workers in the Bay Area are paid in the growth-sensitive (rate-sensitive) shares of their employers. Those shares have come down a fair bit recently, and your marginal buyer might well be a big tech employee.
we started 2018 with a 3.95% for 30 year mortgage, it went all the way up to 4.94% in november. sure, it's declined since then, but only to 4.51% current rate which is still much higher than what we started 2018 at
https://fred.stlouisfed.org/series/MORTGAGE30US
Going back even further, Measuring Worth https://www.measuringworth.com/datasets/interestrates/
has long term interest rate data from 1790 and rates now are lower than in 88% of other years -- the only other major periods of such low rates was the depression era to WW2 price/rate controls: 1936-1955. Roughly prior to when the Federal reserve gained its independence and was able to set policies apart from federal budget needs.
You are living in a very special period of historically low rates.
Edit: “Bay Area” not “Baby Area” :)
Not sure if this was intentional but makes for a great reference to SV's apparent ageism.
> These hopes still exist, and at least some of those IPOs will happen this year. While the water is a little ruffled, these are still the boom times in the Bay Area.
It's more like the market comes back to a stable position, stopping the craziness of the last couple of years. It's actually a good thing. I'm in Europe and did not buy an apartment in the last 3 years even though I could have and wanted to. Just waiting for the overpriced square meter prices to fall to a more sustainable level - and if SV takes the first shot, so it might do in the rest of the world.
With higher principal and lower interest rate, you're stuck paying the higher principal no matter what.
I dont think that many people do.. (beside us here)
Actually, drops in food prices aren't seen as an unmitigated good thing, which is why a number of food prices are subject to price supports.
If you want to buy that $1.5M project, you need like $200K for the down payment and fees. Plus, you need the capital to remodel.
Perhaps salaries simply haven't kept up with the rise in home prices?
I honestly think a lot of buyers have paused into a “wait and see” mode.
"Would you leave all your friends, family, coworkers, and local knowledge behind for $50K?" is a hard sell. For $500K some people would consider it, but lots more wouldn't. For $1M and suddenly people might be like "Y'know, starting over in a new location is a pain in the ass, but a million bucks is a lot of money." Plus a lot of the big tech companies will let you relocate to satellite offices and keep your job if you've had several years tenure with them.
A house in my neighborhood with extensive, extensive termite damage went pending after its first weekend, for over $2.0 million with multiple offers. My friend and I were discussing strategies for how much to bid, thinking it might go for $1.4 million, and then he could commit cash for a reno, but nope.
There are still a lot of people with a lot of money that want houses in good, safe neighborhoods in good school districts.
What shocks me most is when I hear this story and learn that the downsizers (not always old) is shocked by their tax bill — they don’t know about prop 13 and no one told them!
Prop 5 would have applied statewide and would have freed up thousands of such homes in the Bay Area.
Some might mark a distinction between "there is no bubble" and "this author's predictions of when there is a bubble are not reliable or trustworthy". The former is a pretty strong claim, requiring precisely the sort of clear and specific evidence you have wisely and correctly called for.
The latter point suggests that the author should not be taken as authoritative and the evidence they present for their argument is not to be taken seriously. As a side effect, this means that the question at hand - bubble or not - remains unaddressed.
If their calculation is to stay and even expand in the Bay Area, it would be best to understand why (concentration of talent? network effects? etc?).
Personally, I don't completely buy that explanation, and think there's an unspoken cult-like quality to the tech scene of SF/SV that confines it to a few cramped spaces in the country. Big "tech" still represents the modern form of the American Dream and the Gold Rush to countless people, and San Francisco is symbolic of that idealism in and of itself. Making six figures and living in the outskirts working for a company nobody's heard of isn't as cool as working for Unicorn X in Mountain View, CA.
Once you have non-retirement financial assets over $100,000, you may get a low interest revolving loan (SBLOC) from the broker that is 50-90% of your portfolio without other restrictions.
Mortgage against the house + SBLOC might combine into very high level of risk. It has been amazing leverage during the decade long stock market boom, but if there is downturn, it can create massive havoc. These loans are subject to a maintenance call asking more collateral with little or no advanced warning.
As far as SF - everyone there seems to think they will never lose money on real estate and it will pick back up within a year or two whenever it drops.
SF was weird to me - I expected it to be a huge city, and it's this town with a cool bridge, expensive park, a bunch of overpriced houses, and a scooter app which gives you a distinct map of the "bad" neighborhoods.
"The study found that two-thirds of all sales of detached houses in the University Endowment Lands, Dunbar and Point Grey neighbourhoods were purchased by buyers with non-anglicized Chinese names. That group purchased 88 per cent of houses priced at more than $5-million."
https://www.theglobeandmail.com/news/british-columbia/vancou...
https://www.macleans.ca/economy/realestateeconomy/andy-yan-t...
https://globalnews.ca/news/4658157/fentanyl-vancouver-real-e...
https://www.zillow.com/dallas-tx/home-values/
Even if you restrict yourself to the nicer northern suburbs, that's still way off:
Are they sustainable? Or, just maybe, do some of the present owners want to cash out?
As long as people move to magnet cities and are willing to put half their pay into housing, the prices will hold up.
But, somewhere along the way the HR departments at big tech will start hearing, "I'd love to accept your offer but I can't afford to live anywhere near your office." That's when the "fundamentals" (stockbroker lingo) underneath housing prices will start to erode.
Now it seems like we might be better off holding in to it and renting it out.
The funny thing is, we aren’t obsessed with maximizing value so it should be interesting. If there was a model for limit orders in real estate we’d just set a limit or a buy-it-now price just to get the process over with. The whole real estate industry is a messy dance.
The last cycle of the valley startups intended to disrupt this stuff - Zillow, zipreality, Redfin - seems to have quickly been co-opted into the traditional model.
If you're not worried about maximizing value overmuch, I wager that demand will be sufficiently high in a month that you can complete a quick sale if your house is priced at the market rate.
Sellers in the bay area are accustomed to pricing houses 20% above market and still seeing a bidding war that includes cash offers. I'm guessing that the houses sitting on the market have sellers that are unwilling to let go of them without getting a big profit.
Ever?
Why do we expect Nasdaq to crater?
The only way we will know is by waiting and seeing.
Oh, you can blame that on all of us olds that have lived through 3-6 business cycles, yet still have functioning memories and attention spans. The last time, we were presented with data proving that it would never crash. We heard stories about why things were different this time. The time before that, we got data and stories. The time before that, we got data and stories.
Lest you panic and feel sad, we can also tell you that without fail, things will be going well again a few years later, we will have incredible gains in the markets and workforce, and soon after that we will start hearing of record highs in the markets and records lows in the unemployment rate. Such is life in an advanced society.
Everything I see points to a crash, but I am not sure a crash is even possible when people expect it.
1) People telling you that. "paradigms have shifted", "a new way of doing business," "things are different now," and that fundamentals no longer apply.
2) People telling you that a particular market or investment will only go up. Common sense that this is a safe investment.
3) Average people who don't regularly deal with investments getting in on the game. I.E. if the minimum wage kid from McDonald's is talking about an investment then it is probably a bad sign.
If you are good with numbers you can take any date in history and make a good solid case that tomorrow things will crash (or crash worse if today was a big crash). Sort of like statistics.
The tl;dr is that as soon as demand exceeds supply, prices shoot up to the average software engineers can afford.
You see this most dramatically with startups. A single engineer might go for $200K/year. If that single engineer founds a startup that develops a commanding lead in a market that suddenly becomes interesting to a big company, they can fetch billions. Why? Because now instead of there being one Yahoo and 30,000 Jan Koums, there is one WhatsApp and some very deep-pocketed Googles/Facebooks/Yahoos.
It applies to other markets like gasoline, therapists, health care, etc. too. When demand exceeds supply, all the "excess" demand simply has to go without, and the market-clearing price rises to the maximum that the marginal customer can pay.
The weather is a shock to lots of people.
I just sold my house in Seattle and will be leaving next month.
Despite that, it is having an unprecedented net population boom.
Over half of my bay area friends now live in Portland. I left the bay myself (for a new country), but not due to housing costs.
Eventually, making it a rotten place to live for anyone who's not a millionaire had to catch up to it.
Seattle, Portland, Austin, Denver, etc would do well to heed the warning. I'm sure they won't though because "mo' money, mo' problems" is a lesson cities haven't learned yet and there's no reason for them to learn it now.