“Housing prices in Silicon Valley remain defiantly high. New BMWs and Saabs cruise Highway 101. But for the first time there are signs that the current economic downturn is taking its toll on the country’s cradle of technology and innovation.
Job growth has slowed, start-up companies are hiring and spending more cautiously, and early-stage investors who nurture the start-ups with money and expertise are growing more frugal.”
Economy Has Become a Drag on Silicon Valley [New York Times]
And What Happened Seven And One Half Years Ago In San Francisco? [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by anon

    I often wonder how dynamic the tourist-trustafarian economy is. Is it not true that we are the unearned income captitol of America?

  2. Posted by The Milkshake of Despair

    As I mentioned earlier, some tech companies are already freezing hiring even in their low cost outsourcing sites located in India, China, Malaysia, etc. Wages there are about 20-30% of bay area wages.
    This seems like an effort to stabilize costs and batten down the hatches in case the storm gets worse.
    I’d like to know the answer to anon’s question. How much of an effect do the “retired” but wealthy people have on the SF RE market ? Surely they have some role in skewing prices upward, but is it enough to shore up SF prices during an economic downturn ?

  3. Posted by dub dub

    New BMW’s and “Saabs”, eh? I had no idea SF had so many people who could afford a 350/month lease payment.
    Not to argue the broad points, but VC’s are fanning this “it’s now tough out there” idea to get better terms (almost all the named quoted folks in that story are VCs). It’s well-played, as you would expect (and scary if you need them).
    Until google blows it and armaggeddon ensues, the valley is fine — google at or near a 52 week low is not “blowing it”. You’ll know it when you see it :)

  4. Posted by tipster

    Startups being funded doesn’t let people buy homes. Startup salaries are bare living expenses and won’t let anyone qualify for a mortgage. It’s startups being sold or going public that does that.
    When the numbers drop from 31 IPOs per quarter to 5, another source of money to prop up bubble pricing for housing is essentially gone. And those issues are also a HUGE source of cash for the bankers who underwrite the IPOs, lawyers, as well as the VCs who take their cut (distributing the rest outside of the area to investors).
    @dub dub, Google employs far less than one tenth of one percent of the workforce in SV. They aren’t going to single handedly save SV, they just aren’t that big. AMDs most recent round of layoffs are more than 10% of Google’s local workforce. Google’s lack of disasters is not going to replace the money that has been lost due to deals and IPOs that aren’t happening.
    As for Milkshake’s question, I happen to have met the guy who runs the Center for the Continuing Study of the California Economy, cited in the article. He looks like he’s about 65 and has a pretty big pile of money. He isn’t retired, but he sold his house at the start of 2007.

  5. Posted by Craig

    Startups being funded doesn’t let people buy homes. Startup salaries are bare living expenses and won’t let anyone qualify for a mortgage. It’s startups being sold or going public that does that.
    When the numbers drop from 31 IPOs per quarter to 5, another source of money to prop up bubble pricing for housing is essentially gone. And those issues are also a HUGE source of cash for the bankers who underwrite the IPOs, lawyers, as well as the VCs who take their cut (distributing the rest outside of the area to investors).
    If you actually knew what has gone on in start-up world lately, you would realize that mergers have been the main pathway to exit for start-ups for a while now. IPOs are only a small piece of the pie. (Trying to keep things balanced).

  6. Posted by tipster

    @craig,
    the 31 to 5 number was Q407 to Q108. That money is gone.
    Acquisitions are also down, though by 30%. There were 83 acquisitions in Q407, not quite 3X the number of IPOs. So IPOs are not inconsequential.
    But a lot of acquisitions are weaker companies getting bought by stronger ones, where the employees don’t make out like they do in IPOs, and the ancillary work for an acquisition (by bankers and lawyers) pales in comparison to an IPO. There are some acquisitions where the employees can cash out, to be sure, but that number is only a fraction of them.
    So IPOs are really a better indicator for housing. That money has all but dried up.

  7. Posted by anon

    IPOs and startups may get all the headlines, but there are lots of companies in SV paying high wages, and THOSE are driving the economy. The number of people who strike it rich with an IPO is pretty small, but the number of people in SV making more than 100K/year is pretty large. I would say overall employment is a better indicator of where the economy is headed, not the headline-grabbing IPOs.

  8. Posted by Spencer

    “The number of people who strike it rich with an IPO is pretty small, but the number of people in SV making more than 100K/year is pretty large.”
    Yes, but you can’t afford to buy a condo on a 100+K salary only.

  9. Posted by Foolio

    @anon:
    $100k/year? LOL…that and a winning lottery ticket will get you a 2/2 in San Francisco. ;-)

  10. Posted by badlydrawnbear

    Prices are falling in Silicon Valley?!?!?! … anyone who checks out the weekly listings on View From Silicon Valley blog already knows this
    http://viewfromsiliconvalley.com/id125.html

  11. Posted by anon

    Of course, a single 100K salary won’t get you a condo/house in decent parts of the bay area. But a couple making 200K+ can afford to buy. And that income level is pretty common here (from my personal experience).

  12. Posted by alex

    Ummmm, you definetely can buy a condo if you make 100k in the city, I did in 2004, didn’t overextend myself, and it was a pretty nice little 1 bed in the Mission near Valencia (i.e. nice part) with parking. I just sold it and moved on up to a deeeluxe 1200 sf 1 bedroom in the Pac heights sky. If you live below your means and save a downpayment, you can buy.

  13. Posted by Foolio

    In SF, we have a name for couples that make $200k/year…renters. ;-)

  14. Posted by Spencer

    “Ummmm, you definetely can buy a condo if you make 100k in the city, I did in 2004, didn’t overextend myself, and it was a pretty nice little 1 bed in the Mission near Valencia (i.e. nice part) with parking. ”
    yes, you can, but who wants to spend 50% of their income on housing in a falling market?

  15. Posted by Spencer

    you need a $250K income to comfortably afford a $800K condo. most entry level condos in ncie neighborhoods start in this range.

  16. Posted by janeknowsbest

    Housing prices and activity are not slowing the San Francisco Northside high-end buyer, look at these stats from end of March/April properties that were on the market less than a week and pending currently:
    2511 Octavia $2,400,000
    2944 Scott $2,995,000
    1900 Green $3,495,000
    3647 Washington $3,595,000
    2221 Baker $3,795,000
    2939 Divisadero $3,850,000
    3474 Clay $4,000,000
    1333 Jones #1606 $4,380,000
    2848 Union $5,000,000
    3855 Jackson $5,995,000

  17. Posted by lies...damn lies...statistics

    re: janeknowsbest
    This is what I’ve been saying-housing at the upper end of the market is still moving just fine. The only real shake out in San Francisco thus far has been the undesirable properties that were bid up in the recent insanity and the stock of poorly designed, unappealing new(er) construction. We can argue until we’re blue in the face about where the market is going, but can anyone deny that this is what’s happening right now?

  18. Posted by Dude

    The 2 comments above remind me of the that guy who used to post here that a recession was impossible so long as there were waiting lists at Ferrari dealerships.
    Unfortunately, as Spencer and Foolio both point out, local wages aren’t enough to support average condos/homes at $800K prices. What percentage of Bay Areans can afford a $3MM property? Maybe 1%?People buying these properties are monied collectors out trophy hunting.
    Many of you have denounced the relevance of Bayview foreclosures or 40% price drops in East Palo Alto. By the same token, I question the merit of these types of home sales. If you knock out the bottom segment of the market when looking at the general trend, you should do the same with the top segment. Fair is fair.

  19. Posted by toniknowsbetter

    @janeknowsbest – next year you could post the following:
    2511 Octavia $1,400,000
    2944 Scott $1,995,000
    1900 Green $2,495,000
    3647 Washington $2,595,000
    2221 Baker $2,795,000
    2939 Divisadero $2,850,000
    3474 Clay $3,000,000
    1333 Jones #1606 $3,380,000
    2848 Union $4,000,000
    3855 Jackson $4,995,000
    Looks just as impressive even though every price is now a million less. Your list only speaks to the fact that there are expensive homes in San Francisco not the direction in which it is heading. Is it not possible that every one of those homes would have sold for $500K more two years ago?

  20. Posted by lies...damn lies...statistics

    I never said we should knock out the lower end, I said the impact thus far in San Francisco is limited. Anyone care to dispute that fact? So far, all I’m hearing in the two blurbs above is what is going to happen soon and discussion about bayview and east palo alto. This isn’t cheerleading, this is questioning the generally accepted view on this site that the market has already tanked.

  21. Posted by Foolio

    @Jim:
    Oh, and one more thing:
    We’ve all heard of houses that go with “15-20+ offers,” and I don’t mean to impugn anyone’s credibility…but I wonder what legal liability a seller’s agent would face if they just flat lied about the volume to another agent?
    I’m not an agent, but I can’t think of any repercussions from that (doesn’t affect the sale, as the offer has already been made and accepted), but perhaps others can.

  22. Posted by Foolio

    Oops…wrong thread, please remove.

  23. Posted by Dude

    “This isn’t cheerleading, this is questioning the generally accepted view on this site that the market has already tanked.”
    I don’t think anyone holds that view. At least I don’t. I believe prices are falling quickly in “suboptimal” areas which, as you say, were bid way too high. I believe they’re falling slowly, even in nicer areas, and will continue to fall for the next year or two. It’s a long-overdue correction, returning to sustainable market fundamentals. San Francisco will ride it out much better than Antioch, no question. But we won’t be immune. That’s all I’m saying.
    I made my previous comment in reference to the comps thrown out by jane. I totally agree that the high end is holding up better than expected while the low end is getting clobbered. But that’s extraneous to 99% of people, because the vast majority of us fall somewhere in the middle. So the $5MM Marina comp is about as useful to me as recent mobile home sales in Vallejo.

  24. Posted by lies...damn lies...statistics

    @Dude
    we actually seem to be thinking along the same lines, although very seldom do I see a post as reasonable as this. Toni’s post just after yours suggested 30-40% drop off in a year, for the high end homes that are still holding up well. More than a little sensationalist and highly doubtful. Many others get caught up in this as well-reverse cheerleading, let’s call it. As is usually the case, both extremes are likely going to be wrong.
    So, we agree the high end is doing just fine, the low end is not-what about the middle? Are they getting 10-12 offers on every property and selling over asking? Definitely not. Most of the buyers of the “middle” properties that I know in the area are looking at this as an opportunity. So, we’re rolling out a lot of pent up demand right now and as a result, that section of the market is doing ok. Not great, but ok. I am curious as to what will happen when that demand runs out, especially with much of the crappy new inventory being released onto the market in San Francisco.

  25. Posted by tipster

    Perhaps the reason the high end homes are selling more quickly is that the owners want to get out just as badly as the owners at the low end, but the owners at the high end aren’t 100% financed, so they can afford to price their properties more aggressively. If you owe $2M on a $5M home, even if it was worth 6M at the peak, you can price it at 4.5M and sell it in a week.
    People at the low end who are 100 loan to current value or more have to start at prices much closer to, or even above, the market price, because they will have to come up with cash to sell it for less. So those properties languish.
    Are there 5 buyers in every range who are actively looking for deals? Always. But right now, those deals are being offered at the high end, because people at the low end can’t afford to offer them.

  26. Posted by $200K

    $200K couple here. Or better half of one, anyway . . .
    Let me speak from experience – we’ve been looking for something to buy for over a year now. We’re not willing to spend more than the historically recommended percentage of income on mortgage (we will have to retire someday after all, and I’ll bet we’re not going to be able to sell a massively appreciated house to do it). And we’re not willing to take out some questionable loan – 30-year fixed, please. We’ve got a sizeable down-payment from selling in another part of the country, and excellent credit. And still, there’s nothing available here in a range we’re comfortable with that we’d be willing to live in for a few years.
    Once you’re at the stage in your life where you’re making more than 100K, chances are you’re not going to be looking for a 1-bedroom to house 2 people. In fact, you might have to expect to be 3 people at some point soon.
    And lastly, the market in 2004 was pretty different from the market in 2007 (although it looks like the market in 2008 may get close – fingers crossed).

  27. Posted by janeknowsbest

    The high end homes are selling because there is NO inventory. What makes a home sell on the northside of town? the 3 rules of Real Easte in every book…location,location, location, views, parking,and location! We are in a very special city where most of the buyers are CASH. Unfortunately, the 200k a year renters end up moving out of the city to purchase their home.
    Jane knows best as Jane is living this everyday.

  28. Posted by $200K

    Jane, is that supposed to be a selling point for the city? If you prefer your city as a playground for the independently wealthy . . . well, no accounting for tastes. On the other hand – a special city where most of the buyers are cash? Where is that figure coming from? Don’t we lead the country in “creative” mortgages?
    As for leaving to buy a home, well, living in the crappy SF suburbs is no different from living in the crappy Atlanta, Cleveland, Phoenix, etc. suburbs – if I wanted to suffer in a vast suburban wasteland, I’d definitely do it somewhere cheaper.

  29. Posted by another200k

    I have to wonder how many career oriented women making over 100k actually want to have kids these days. If a growing family is not in the picture 1br condos would probably work fine for a lot of people.

  30. Posted by lies...damn lies...statistics

    @tipster,
    Way to turn a positive part of the market into a negative. The high end is still moving because the owners are in a panic to get out. Wow.

  31. Posted by anoncannotsleep

    While prices here are going down, farm land prices are going through the roof. Could it be that we are returning to another type of economy? Food riots in the last week in Haiti, Egypt and India. Fuel prices up 25% this year alone.
    Bay Areans love “the next big thing”, and it is no longer Face Book and Google. It is now rice, soybeans, wheat, natural gas, petroleum and WATER.

  32. Posted by ex SF-er

    We are in a very special city where most of the buyers are CASH.
    Do you have a source on this? This is the first time I’ve ever heard this claim.
    now if you restrict your claim to “most multimillion dollar homes in the north part of the city are bought with cash”, then I would entertain your thinking.
    Most buyers in the city are definitely not paying cash. Most buyers are financing, and up until recently they were financing using “exotic” loans at a higher and higher rate. I believe the % of IO ARMs went from 5% of market in 2000 to over 60% of market in 2006.
    I will dig up a source later

  33. Posted by crockergal

    “I have to wonder how many career oriented women making over 100k actually want to have kids these days.”
    Based on my experience, my work colleagues, my friends, my ex TIC partners, the C-level women who interview me for senior jobs at large firms around the bay, and my neighbors, I would say MOST women making over $100K want to have children. HELLO.

  34. Posted by atorih

    WHAT WILL HAPPEN?
    If you mixed the slowing econ (even in tech – it is all connected) with the housing/credit crises with the over built condos and consider many people move to SF from other places, you’ll come up with that fact that housing prices are and will decline over the next few years. It is starting to happen and the slide down will only increase. If you want to buy, I’d wait until @ 2010, but don’t wait to long because rates will soon be back up to 7%+.
    FACTS:
    -prices are very high and have seen great appreciation
    -tech econ is slowing like the rest of the economy
    -subprime, housing and credit problems will effect the SF housing market – it is all connected in getting finance to build, buy and it will effect the job market and confidence index too
    -you now have to put a min of 15-20% down to buy, that wasn’t the case over the last 5 years which help drive prices up
    -the have built thousands of condo units helping to soften the demand for 1 and 2 BR places – look what happened in Seattle when they overbuilt the condos and they don’t really have TICs there
    -if tech slows like it did in 2001-2003 you are going to see a mass exit to LA and the East Coast (hopefully;), rent will quickly fall and then buying won’t seem like a great option
    -new job openings are already slowing
    -most people who work in tech are from out of state – they are only flirting with SF, but a small % actually want to stay long term and call it home
    -what goes up, must come down.
    -they aren’t building anymore SF land, so it won’t come down too far or for too long. get in on the next down turn.
    -atorih

  35. Posted by Foolio

    @atorih:
    Nice summary. Only point I’d add is one many natives ignore…eventually, we will have another big quake. And when that happens, many transplants will bolt…

  36. Posted by anon

    You can’t time the housing market any more than you can time the stock market. If you have a decent down payment, need a place to live, buy within your price range with a sensible loan, and plan to stay for at least 7 years, then it’s a fine time to buy. If you’re doing something else, you might get burned, but really, no-one knows exactly what will happen.

  37. Posted by The Milkshake of Despair

    Foolio – Funny you should single out transplants as the ones who will bolt. Why not natives (as small of a group they are) as well ? There aren’t any natives left to remember the 1906 quake and fire. Natives might be just as easily scared as transplants.
    Oddly even though I and many others remember “The Medium One” (a.k.a. the 1989 Loma Prieta quake), there are transplants that I know who have endured much more severe quakes. Transplants from Iran, Pakistan, Japan, etc.

  38. Posted by Foolio

    @Milkshake:
    I don’t know…just my gut, I guess. I wasn’t here in 89, so I don’t know how I would react to a medium-to-large quake, but I just figured natives would shrug it off more easily.
    Regardless, I think a quake could cause a significant exodus.

  39. Posted by The Milkshake of Despair

    I agree that a big one will spook a lot of people, both natives and transplants and will cause some level of exodus. Probably the biggest factor will be loss of a home and no funds to rebuild in SF though some will leave simply out of fear. Sadly others will leave because they died. The last FEMA analysis I read of what would happen if another 1906 magnitude quake occurred specifies that 3000-11000 people will die in the bay area due to the quake depending on what time it hits. The low end if it occurs at night, the high end if during the day. That was from a study produced in 1984. Since then there have been a lot of seismic improvements so hopefully the body count estimates will drop.
    I was a recent transplant when the 1989 quake hit and do not recall any exodus. But the effect of that quake was small compared to the damage a 8+ quake could do.

  40. Posted by chuckles

    Um…
    I only looked up one listing:
    I just checked 3647 Washington St.
    It is 4000 sq ft
    Selling @ 3,595,000
    Which equals $898.75/sq ft
    Someone should check on this but I am pretty sure $900/sq ft is a slight drop from last year and possibly from two years ago, too…

  41. Posted by Rillion

    @milkshake: There aren’t any natives left to remember the 1906 quake and fire. Natives might be just as easily scared as transplants.
    I think most of the ’06 quake survivors have moved down to Colma at this point, but I wouldn’t say they made the move because of the quake & fire…

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