Sales volume for listed single-family homes and condos in San Francisco fell 37% on a year-over-year basis in May according to San Francisco Schtuff, with listed single-family home sales down 27% (235 transactions in 2008 versus 172 in 2009) and condo sales down 48% (210 transactions in 2008 versus 110 in 2009).
The biggest drops in sales volume occurred in Districts 8 (down 55%), 5 (down 43%) and 2 (down 43%). Not a single district (nope, not even the much maligned but now suddenly “real” 10) recorded a year-over-year sales “rebound.”
Tomorrow Monday, the medians.
UPDATE (6/11): In case you don’t know your Districts: San Francisco Real Estate Districts: Maps And Neighborhoods.
∙ Single Family Homes May 2004 v. 2006 v. 2008 v. 2009 [SFSchtuff]
∙ Condo and Loft Sales May 2004 v. 2006 v. 2008 v. 2009 [SFSchtuff]
∙ No Rebound For You! (In Fact A Below Average Seasonality Bump) [SocketSite]
Hey District 6 is looking pretty good compared to the others, go District 6! Woot! Oh wait, crud that means my appeal to the assessor’s office isn’t going to go so well.
Not to worry, volumes will be back. Parts of southern California are doing well, I hear…
“Properties in several areas are selling for less than they did 20 years ago, and that’s not including inflation. Some first-time buyers are nabbing houses for less than what their parents paid.”
http://www.latimes.com/business/la-fi-cheaphomes10-2009jun10,0,4802553.story
Yes, well, district 6 went from 12 combined sales in 5/08 (3 SFH, 9 Condo) to 10 in 5/09 (1 SFH, 9 Condo).
At some point the volumes get so low that you’re straining to reach statistical relevance. What is the probability that the difference between 3 sales and 1 is just random noise, especially given the total number of SFHs in the district? N is large enough across the city that I believe the numbers, but extrapolating a per-district trend is stretching it.
Using the same numbers, I can claim median price is up almost $600,000 on SFHs in 6, and that the number of days on market is down 33%!!!
[Editor’s Note: We’re not sure if you’re responding to us or Rillion, but keep in mind that sales in District 8 dropped from 47 to 21, in District 5 from 67 to 38, and in District 2 from 58 to 33. We’d characterize all three drops significant but would agree that swings in 2 and 6 are not.]
These numbers are even worse than I expected given all the recent recovery hype and the low mortgage rates we’ve seen, particularly with respect to condos. I suspect the sales volume numbers will get a little better in the June and July peak months, although with interest rates ticking up not insubstantially, that may not happen. I do sense (at least in the realtor blogosphere) that realtors have woken up to the fact that the only way they will start earning money again is for the built-in price declines to come quicker and deeper, so my bet is we will see increasing pressure from them on seller-clients to keep lowering prices.
Again, I think these numbers largely miss the most interesting part of the story, which is the far steeper falloff — in sales and prices — at the higher end (which is really most of SF in the grand scheme of things). The D7 numbers offer some illustration of this. We may see some leveling off nationwide and statewide in the not too distant future, but in SF and other higher-priced areas (NY, wealthy suburbs), we are not even close to the end of this unwinding.
Interesting data. my guess is much of the reason continues to be restriction of credit and also mortgage rates.
Unfortunately, headwinds appear to be building again for real estate in general. the 10 year Treasury has risen 80 basis points in just 1 month. (from 3.19 to 3.99) This is unprecedented. As I’ve been saying for a while, this is the story to watch, at least for now. The Fed seems to have lost control of the long end of the curve.
Of course, the 10 year Treasury is important as it affects the 30 year fixed mortgage rate among other things. Higher mortgage costs obviously mean lower housing affordability. One can of course stick with adjustable rate mortgages, but given the volatility and the credit restriction that is taking a big risk. (you may be caught in an ARM while rates skyrocket)
The Fed has a decision to make. Purchase the 10 year Treasuries themselves to keep the yields down, but this risks severe inflation concerns. we already have oil at $71+/bbl and gold back above $950/oz. I doubt they want to go back to the $150/bbl oil days again.
or let the 10 year Treasuries float to where the market wishes, which will probably mean significantly higher yields which will kill housing.
The Fed/govt can’t buy everything although they seem to be trying. (short term Ts, long term Ts, Fannie, Freddie, FHA debt, RMBS, CMBS, cc debt, student loans, GM, AIG, Bear Stearns, etc)
I’ve been waiting patiently for this- The market is starting to gag on all of the debt that the Fed/Treasury is puking up. let’s see what they do now.
unfortunately, the Fed/Treasury/Administration has been far more willing to destroy our economy in the attempt to save its connected insider interests than I thought would have been politically feasible 2 years ago.
thus, my guess is that they will continue to hold the FFR near zero, and continue quantitative easing and monetization of debt (in other words, buying the Treasuries). all the while they will talk about deflation to keep investors calmly buying overpriced debt (in other words, they’ll try to convince investors to buy debt with low yields). it works until it doesn’t. thus, I wonder how long until the Fed is the only one buying 10 year Treasuries? That will be a sticky wicket indeed.
it’s a dangerous game of chicken. it’s also tiring needing to invest and make important financial decisions (like buying a house) based on the whims of a small handful of people.
lastly: this is NOT the Ka-POOM I’ve talked about before. Ka-POOM will look like this but there will ALSO be increased GDP, increased employment, etc and so the POOM will have much more legs than what we’re seeing now…
instead this is the so-called reflation trade caused by floods of liquidity released by the govt. this liquidity is not going towards productive endeavors, instead it is being used to trade the various markets, causing the stock market and commodities markets to boom these last few months. However, too much of this money is going into commodities. if this continues, the commodities will choke any recovery and thus we fall back down into recession again.
It would not be surprising for the official end of the recession to be sometime later this year (Q3/Q4) with a fall back after that, the “w” shaped recession.
as you all know, I had been upside down on some oil trades. I never thought I’d go positive in so short a time. (stock market might be up 40% over the last few months, but oil is up 100%+)
The Fed can pump in liquidity, but it can’t control where it goes.
remember: end of recession does not mean recovery is coming any time soon. and an increasing stock market does not mean that main street is any better.
isn’t it ironic? The Fed is pumping money into the banks/IB’s who are taking that cash and making huge bets in the markets causing the markets to surge which then stokes inflation concerns which causes Treasury debt to do poorly! ROFL.
“Kill housing?” Don’t you mean “Kill Housing Prices?” Housing will be just fine, regardless of the price…. the housing stock here has been around for 50-100 years, higher interest rates will not “kill housing” nor will they “kill the housing market” (people still need a place to live, others will die, move, or be foreclosed on thereby ensuring supply), and the world will not end even if people somewhere in the East Bay or Bayview can one day soon buy a basic starter home for what it cost 20 years ago.
Nothing fundamentally bad will happen if mortgage interest rates rise significantly.
Gavin’s eco-diva’s seem to think everything is swell.
http://co.sfgov.org/webreports/details.aspx?id=925
Discussion:
Some positive economic news began to appear in San Francisco in April, after several months of contraction in the local economy. The unemployment rate and number of unemployed both declined in April, although these are seasonally unadjusted numbers, and it would be premature to claim unemployment has peaked in the city. A clear positive sign is the upturn in temporary employment, which rose a robust 2.3% in April alone. This growth may lead to growth in wage and salary employment in the upcoming months.
The tourism industry is showing clear signs of improvement, particularly in passenger data to and from San Francisco International Airport. The domestic passenger count was up in April, even surpassing the totals from April 2008. International traffic was sharply up, as a global economic recovery is leading to both stronger demand and relative weakness in the U.S. dollar. Both trends bode well for San Francisco tourism, which is more dependent than most cities on the international market.
The recovery in airport activity has not yet translated into any general recovery in retail trade. Monthly weekend BART traffic and parking garage counts in Union Square show continuing declines. Housing prices may be nearing a bottom locally, however. April marks the third consecutive month of growth or very mild declines in city housing prices. Rental housing, however, continues to decline at essentially the same pace we have seen for several months.
Jimmy,
Lower prices can be detrimental to housing quality. People with a 120K 1500sf in Lancaster have less incentive to maintain their houses with the same effort than when the same house was worth 400K. Redos were often financed with refis and those refis will not be very fat…
On the other hand, NEW buyers who buy this 120K house will have a very low mortgage payment, which means more disposable income for the same salary.
Therefore, I think we’ll see a great disparity between the lucky ones (low entry point) and the stuck ones (upside down highly indebted).
But overall, I think cheap homes are good for society: how do you finance your kid’s education, your retirement, healthcare and so on when 50%+ of your wages to to a stupid mortgage? Pay yourself first, the bank last.
nice analysis xsfr
the Poom, if it happens, is well down the road (many years) – I’m not holding my breath. but the Poom always happens, and to a small degree, the Poom is being lit by present actions.
as for the Fed ‘controlling the long end of the curve.’ Now that is a ROFLOL. the fed can try, but it simply cannot exercise control over the (long term) natural rate of interest, of course, it can do so if it is willing to destroy the underlying currency.
Greenspan couldn’t get long term rates to rise, Bernanke can’t get them to fall.
Both pretended to care, neither tuly did. Both have used the yield curves they were given to create and inflate those assets that respond to the curve in question.
Greenspan got a flat curve – thus the asset price bubble, Bernanke gets the steep one, thus the bank balance sheet bubble (the banks are loving this steep curve – who needs nationalization when you can just game the system 3 different ways?).
YOY sales in SF proper are finally cracking, with more than just anecdotal evidence of substantial price drops.
Next year the metaphorical blood will be running whether we like it or not…
SFS- I have no idea what mortgage rates were in 1909 but there were plenty of so-called architectural gems built in SF in that era, which were very likely sold under much more favorable financing terms from the buyers’ perspective. To most people, affordability means lower prices, not higher prices.
And, just because you can spend your home’s equity today to renovate doesn’t mean you won’t eventually have to pay the money back! What’s the difference between saving your cash and then renovating? (Other than less debt service payments — a good thing for everyone).
Who even thinks like that? Surely not you.
All fun macro comments (so far)!
I haven’t changed my tune fwiw. To the extent that the Fed really buys the long end of the curve in a size sufficient to really stoke price inflation fears, you get a collapse of the private debt markets, which are many times larger than the government market. Then, you get into a credit rationing situation, where the gooberment figures who and what activities get credit, and you get a corresponding collapse of potential gdp because government can’t figure it out (no one could).
If the Fed just lets the long end go, you’ll get a sort of oscillation, as rates rise on hopes of recovery or too much debt-stuffing by government, and then fall as a 400% debt/gdp economy responds as it must to a rise in the baseline rate: by contracting. Rinse and repeat – it’s pretty much a self-correcting process and at the end of it you wind up with an economy that has gone nowhere for a decade or more, lower asset prices, much higher government indebtedness, and coordinately lower private indebtedness. A la Japan.
It’s a long process, folks. The key to the “poom” part is always going to be the reduction of private sector indebtedness and increasing percentage of economic activity represented by government spending. When enough private sector debt has either been repaid, defaulted or absorbed by the USG, and the USG (or state entities) directly employ enough people to raise wages by “fiat” (literally, by printing their salaries), then you’ll get the poom.
If and when the Fed then step in to stop the resultin mass inflation, you’ll get a horrendous recession/depression. The next 10-20 years are going to be nothing like the last 20-30 imo.
Jimmy,
Agreed on your points. Affordability for me means cheap price, not cheap mortgage.
I was just pointing to the fact that the quality of homes and home maintenance sometimes depended on home prices. Also, less houses will be built if they cannot be sold under a certain price.
That’s how booms/busts are doing their magic: during boom times, the hope of huge returns unlock all that cash hoarded under the mattress and this creates new goods. During busts, the newly minted goods are sold to the general public at firesale price.
Think railroads, broadband networks, housing and such. All created through booms. And people enjoy them for much cheaper than the original cost.
For instance, all those 5000sf McMansions that invaded suburbia will be put to a good use in the next 30 years and plenty of families will be happy in them without stretching their finances too much (apart maybe for the power bill, but 30K of solar panels should remediate that).
^ you depict a possible scenario unfolding, but if the end result is the government’s printing of money, why does this whole process have to be such a slow unfold (ie 10 years+)? What’s preventing this process unwind from occuring within 2-3 years?
my post ^ directed at Lmrim’s
45YOH – It’s going to take a while because you need to get private sector debt down to a level where a huge rise in interest rates (caused by the money printing) doesn’t collapse the economy and lead to mass riots. At about 250%+ of gdp (someone could dig up the exact figure) it’s going to take a while, unless you’re ready for about $15-30T of debt/wealth to go “poof” inside 36 months! (Perhaps this could be countered by the Fed printing $15T in currency, in which case go long wheelbarrows and weapons!)
Believe me, and on this point (and a few others) even neo-Keynesians, monetarists and Austrians see eye to eye: there’s no easy answer to a debt-driven deflation – or quick solution.
rr, I’m aware that because of the low volumes the data for district 6 are not statistically significant. My post was a bit tongue in cheek and just bring some attention to D6. Also from my experience there are not many SFH’s in D6, most of it is multi-unit buildings (TIC’s & Condos). So that contributes to the low totals for SFH’s in the area. I don’t know if the info for “condos & lofts” includes TIC’s or not (I’m remember reading that they are not included in the SFH numbers).
there’s no easy answer to a debt-driven deflation – or quick solution.
Indeed, we are in a pickle. 1/6 of incomes are now funded by government benefit programs — this does not include wages of government workers or stimulus spending on projects, just benefits to the poor, old, feeble-minded, etc. So, given this massive amount of counter-cyclical spending, it is no wonder that the free-fall is slowing down. Of course, it has to slow down eventually; we can’t keep losing 600,000 jobs a month.
But what will we do to get the economy going once we stabilize?
I think we are overlooking the WW2 model:
First, have the government seize control of the economy, labor, and institute rationing for basic goods. We don’t need to actually bomb anyone. Recruit tens of thousands of PhDs, and put them in the desert, paying them soldier wages, to work on cancer and the like. Recruit engineers and managers, paying them slightly above laborer wages, to build infrastructure projects, universities, space telescopes, and particle accelerators. Force down wages for the rich, setting the upper income rates to 90%, and force up wages for the poor, by decree. Close the borders, limit trade. Create a culture of togetherness and fear via a massive propaganda campaign against “un-americans”. Jail dissenters. In WW2, the savings rates were north of 20% of GDP — it was very hard to buy anything other than war bonds. So, a campaign for reconstruction bonds would be in order.
We do this for about 10-20 years, until household balance sheets are repaired, and wages are sufficiently compressed for a new boom. Then, we take the lid off! Free speech is slowly re-introduced. As industries are de-regulated, rich profit opportunities arise. Consumer loans become legal. It becomes possible to buy a house with less than 35% down, and for a higher amount than the government mandated limit. It becomes legal again for people to buy stocks. Top income rates are reduced. Federal deficits come down from 10x federal receipts to a rough balance. Decisions about wage rates and industrial policy are no longer made in smoky rooms filled with government bureaucrats and monopolists. Movies about rebels appear, wearing wife-beaters and driving around in motorcycles. Think tanks spring up, extolling the virtues of unregulated markets and the libertarian gentleman farmer. A huge generational boom commences — for our children.
Of course, the main problem here is that we need something like the red scare to justify the shared sacrifices. Cancer is just not scary enough. Not even the childhood autism — the bane of the upper-middle classes — will do it. The main problem is that we have it too good.
A huge generational boom commences — for our children.
Oh, that made my day! Excellent stuff in this thread. Also keep in mind that everything gumming up the works on a national level is magnified by about 3X on the state-wide level in California. Only the state cannot print money to take over the economy and work its way out of it, or raise taxes for that matter (at least not readily).
Politically, this will play out just like Japan b/c the people don’t like hard choices, nor do they like Great Depressions. At the end of the day, the Lost Decade maintained respectable employment level at the expense of little to no growth/wealth accumulation. Everyone that decries the Lost Decade has not contemplated the only realistic alternative. The real question is, what happens when the Japan in question (us) holds the world’s reserve currency and owns an economy that’s not driven by exports. The hyperinflation fears are overblown. What I think we’ll have is moderate deflation for another 6-7 years, which of course will be masked by the official numbers.
Hey Robert, that Ph.D idea/tech pressure cooker is great! I just got $97k from the NSF today as part of the ARRA act. I think I’ll have a beer to celebrate (don’t worry, it’s on you).
Have said that (and this is way OT), the House is currently debating H.R. 2767 which is in effect attempting to allow VCs and big corporations to gut the SBIR program which basically already does what you describe. Markup is tomorrow morning. So if you care at all, fire off an email and say ‘no’ to handouts to the big boyz. (but say ‘yes’ to handouts to the little guys!).
Hey Jimmy, congratulations on your cheese!
I once worked for a startup that sold a lot of gear in the federal/intelligence space, and it’s a great business to be in. I read the bill and don’t see it making a big impact — hard to get fired up about it; perhaps I’m missing something.
Besides, I don’t think there is anything wrong with VCs — they play an important role and have contributed a lot to the bay area.
For instance, all those 5000sf McMansions that invaded suburbia will be put to a good use in the next 30 years and plenty of families will be happy in them without stretching their finances too much
Somebody will probably be living in them, but it won’t be middle class families. Have you seen the Slumurbia article?
Unless we can figure out a way to move people around cheaply in their cars when oil is $200/barrel. Which we probably will, but not in time to save the suburbs.
Well, the big change as far as SBIR is concerned (and this is way, way OT) is that VC-controlled firms will be able to get their hands on my source of government cheese. Naturally, California politicians support that (more money for them overall) while politicians from states that don’t have a large VC presence ought to oppose it (if they are aware of what’s happening now).
Its interesting to see how the VCs went as far as hiring lobbyists (Bio and NVCA) to squeeze every last little dime from Washington (and at the expense of truly small independent businesses — no surprise there). SBIR represents only $2.2B/year in funding (15 days worth of GM bailout money) and yet 8,000 firms currently participate…
VCs hate competition for funding so why not stamp out all those little guys, indeed? Big money always knows best. That’s why they have all the money (haven’t you heard?).
Well, Jimmy, I don’t know your business, but I doubt VCs are in competition with small businesses, at least on a meaningful level.
As far as the fate of the suburbs, I once read that before the suburbs, the outskirts of cities were where the misfits and outcasts lived. They had freedom, living off of the land, and could go to town to earn (or steal) a bit of money. It sounds like a practical arrangement, and I would be in favor of exporting the homeless and other marginal members of society to McMansions, where they could grow rabbits and tend beans in the yards. In my more tender-hearted youth, I had a homeless friend live with me off and on for a few years, and the fact of the matter is that he didn’t really want to work. He valued his time and independence, and didn’t want to be told what to do, and was willing to live in extreme poverty in order to achieve this. I think, creating a space for people like that would be beneficial.
The long end of the Treasury curve going from 3.1% to 3.8% is a good sign, not a bad sign. It means that people are moving out of panic mode and into riskier assets and it means that The Feds attempt to stoke the fires of inflation is starting to work. I agree that it will tend to get mortgage rates up off the floor, which won’t be so great for housing, at least in the short term.
and then fall as a 400% debt/gdp economy responds as it must to a rise in the baseline rate
This number is bunk. It was never 400% in the first place, it was 350% and there has been massive deleveraging in the financial sector since then. The Federal share of debt has grown and even more importantly, they are now guaranteeing something like 100% of GDP of private sector debt. And most of the consumer debt is in the form of 30 year mortgages, who should not care if short rates go long.
So the only ones really hurt if interest rates go up are those who have need for short term capital. Profitable businesses and most consumers will be fine. The government will just print more, as inflation is what they want, at least for a while. At some point, they will want to reign in inflation and at that point they will need to crush the growth in money supply to do it. This will no doubt lead to another recession.
Have you seen this post by Blodget, LMRiM? I cannot find the original Credit Suisse report, so I am skeptical, but perhaps you can shed some light on the subject.
Well, they definitely compete with small businesses for government R&D funding (and if you read HR 2767, they would very much like to compete for more of it). SBIR is $2.2B/year, representing 2.5% of government extramural R&D funding, while VC funding is currently around $20B/year. Total government R&D funding is something like $90B/year, 4.5x what VCs invest.
Regarding the suburbs, just read John Howard Kunstler (kunstler.com) — a rather unfortunate last name but an entertaining read nontheless.) He’s my favorite apocalyptic utopian blogger, right behind Satchel/LMRIM (I preferred ‘Satchel’).
Well, Jimmy, V.C.s are just a funding mechanism. If you are an entrepreneur, you can go the VC route, dip from your savings, go to a bank, get a government loan, etc. Each of these choices carries certain costs/opportunities, and I don’t have any problem with the entrepreneur determining the capital structure that is best for them.
Allowing a mix of VC/government program funding just means that there are more choices, no? I guess, for you, the choices represent competition — but hey, you already got some cheese, right?
As a taxpayer, all that matters is how likely the loans are to be paid back, and/or whether or not the grants result in enough economic activity to generate offsetting tax revenue. So, from that point of view, I don’t see how this bill would make a difference.
I wouldn’t bet against the continued “suburbanization” of the US, a process that has progressed since post-WWII. Sure, there will be ebbs and flows, and true “exurbs” are going to be hit pretty hard in this downturn, but don’t go thinking everyone is going to want to live in central cities and walk to work.
About debt/gdp, I wouldn’t pay any attention to Blodgett (lol) or CSFB for that matter. Unfortunately, I can’t see all the charts that Blodgett links too for some reason, so I couldn’t comment specifically on the rationale and data.
But just a little common sense goes a long way in these matters: in order for debt to be sustainable, in that creditors are willing to extend credit and/or roll over existing credit, a real return must be provided. Maybe it’s 1% on average, maybe it’s 3%. Who really knows? But when you are up at 350%+ debt to gdp, you can see you need at least 3.5*[positive real rate] or the system cannot continue. Not too easy when your maximum potential output is on the order of 3%, and falling all the time as government takes up an increasingly large and inefficient share of the allocation of resources.
Just one last thought, and then I’ll leave it to Robert to expand or disagree (if he cares too – he’s better at thinking about the technical aspects of all this than I am):
NVJ wrote And most of the consumer debt is in the form of 30 year mortgages, who should not care if short rates go long.
This might be technically true (although the prevalence of floating rate structures and credit card/auto debt of shorter duration should not be glossed over), I think they’ll care a lot when the higher interest rate causes their home to fall in value even more. After all, most people have very little in the way of real assets, other than equity in their homes.
As a market junkie I do enjoy watching this unwind, as so many can tell, and it is a real privilege to watch it from the vantage point of the Bay Area. So many here trust in large government so completely, and so innocently (almost religiously; as the programs all fail (which they will) it will be interesting to observe the rationalizations that will ensue. It is so hard to let go of the reassuring fiction those in charge actually know what they are doing and have the common person’s best interests at heart.
We both agree that we are going to have to deleveraging, we just disagree on how it is going to happen. You claim that there it is going to happen via massive default and I via inflation. It is even possible that it will be slowly paid off, but that would require a big change in our society.
And no one is as fanatically religious as the Free Market Fundamentalist, as I am sure you will agree. Where did The Invisible Hand go wrong?
Man, that first paragraph is mangled, I hope you can figure out what I meant to say. I should not try to post on SocketSite and watch the kids at the same time!
Rillion,
I was speaking more at the data the editor cited and not your post. In fact, when I started writing mine, yours hadn’t yet appeared.
I suppose the declines cited are significant if only because the rates over the past 7 years had been constant. But I still wonder what the noise amplitude in sales data is..
Robert, these aren’t loans they are grants or contracts (depending on the agency) i.e. revenue (very big difference). Let’s say you have a new idea for a technology. Do you:
a) Go to a VC or Angel, hand over 90% of your equity (through multiple funding rounds), work hard for 5-10 years and then get 2-5% of the resulting sale, or
b) Write a series of 20-page proposals to the government, collect about $4.3M in revenue via SBIR contracts and then pursue commercial sales to grow your business further, all the while keeping 100% of the equity?
I think I’d choose (b), given the choice. The funding pool is limited. More competitors equals fewer grants per participant.
And no, the taxpayer does not get “paid back” per se — they get paid back out of profits via a mechanism we call the I.R.S.
And the idea that you can “go to a bank” clearly shows that you’ve never “gone to a bank” to ask for a loan because you have a neato invention you’d like to sell. That’s cute but banks don’t loan money for ideas, in reality. Ever.
as far as best apocalyptic-utopian (sic) postings, Lmrim is actually quite moderate compared to robert’s post @ 5:10. and as for the requisite coalescing of society, i’m sure dick cheney could scare up some folks, if he’s still around.
regarding the plight of sub-exburbs, i don’t see wholesale exchange, but a small city like SF could benefit from the reverse inflow. what with all the rent reductions i’ll be giving, punters with a 2 hour commute in an SUV will rediscover why ess-eff is so special 🙂
jimmy- but they loan money for dry cleaning businesses. SBA, anyone!?!
(on a serious note- interesting info on those grants, as i was not aware of them either.)
True, SBA will sometimes back loans for businesses that they understand (like drycleaners and restaurants and stuff).
So when I started on this little adventure, I went to my local WaMu branch (where I did all my banking) with $1.45M in signed government contracts in my hot little hand, and asked for a $100k line of credit to get started working.
The guy I talked to, who was probably around 25 years old, asked me “do you own any real estate.” I said no, and he said “there’s no point in applying for a line of credit in that case.” Happy to say I’m still in business and they’re not (and I profited by shorting their stock to zero).
That was an awakening for me, at least. Reality is that banks don’t fund new tech companies, VCs almost never fund new tech companies (and 90%+ of the ones they do fund are bankrupt within 5-7 years), which basically leaves the government and “friends, fools and family.”
Unless your friends are really, really rich … well you get the idea. Its important to keep the VCs greedy paws off the last little crumb that goes to the truly little guys.
I have an interesting (hopefully) perspective on those SBIR grants versus “evil VCs”.
I briefly consulted with a company years ago who used the same reasoning (100% versus “5%”). The problem was they didn’t know what they were doing, so they got 100% of nothing.
Working with VCs is competitive, which is why many entrepeneurs claim they don’t want to — the truth is, they can’t.
But if you don’t know what you are doing, it’s better to have 5% of something than 100% of nothing. And if you get 5%, or even 0%, as long as the VC breaks even with its liquidation pref, then you are in the club and can come to bat again (much, much wiser, and with better connections).
Of course, *nobody* ever admits they are clueless, not even the wise and learned folks here 😉
Where did The Invisible Hand go wrong?
I’m searching for a metaphor… “Arthritic”? No. “Chopped off”, Taliban-style? Nah, too un-PC and graphic.
I know. I think the poor Hand starts leafing through the ~80,000 pages of 8-pt type double (or is that triple now?) column pages of the Federal Register on Jan. 1 of each year, and unfortunately cannot get around to guiding the economy until the new Register starts publishing the following Jan. 1. Sort of like how they keep painting the Golden Gate Bridge continuously from one end of the span to the other and never stop.
Thanks, FDR! It’s taken some 70 years before the genius of the American system has been eviscerated, and it would have been sooner I bet had not most of the productive capacity of the first world been destroyed in WWII, leaving the US to “set the rules”. What an inheritance that has been squandered by misguided Fabians and miserable bureaucrats!
http://www.llsdc.org/sourcebook/docs/fed-reg-pages.pdf
So, dub dub, everyone who “could” work with VCs should? Should I have taken the $500k angel round (in exchange for 60% of my equity) or gone with the $4.3M in government cheese and kept it all?
Would it have benefited me to have a board packed with VC cronies and the CxOs of my company all flying around the country in first class, pulling down $250k/year salaries and draining my equity and financing while I toil away in the back room making the stuff they would like to be selling?
Uh, I don’t think so.
How many companies have you actually started? Funded? For how much? What was the outcome for you personally? Just curious, really. Life as an employee is very different from life as an owner.
Jimmy not so fast, I have seen it happen to owners as well. The real corupt guys, the ones that seem smooth from the beginning burn holes in everyones pockets with out them knowing.. than they ponzi the insolvent company to the next clueless investor, run to the new company they have built themselves into, all the while – the others don’t notice a thing until they are blind sided with the lates numbers on the bottom of the K-1 they get that year. Not fun. This happens even to the smart VC’s.
You have a very strange temperament, Jimmy. Did I say every person who could work with a VC should? Read what I wrote.
Have you heard of “negotiation”? In your (presumed) position of strength, you would not need to cede board control, especially to an angel!
I predict if you succeed jimmy, it will be in spite of your temperament, not because of it. Good luck!
It means that people are moving out of panic mode and into riskier assets and it means that The Feds attempt to stoke the fires of inflation is starting to work.
not necessarily. There has been some data that indicated that much of the outflows from Treasuries is going into non-Treasury government-guaranteed debt (like bank debt), into the short end of the curve, and perhaps into Non-US sovereign debt.
why buy a Treasury when you can buy bank debt with a higher yield that has a implicit or explicit guarantee? law of unintended consequences.
at first it was plausible that people were moving into riskier assets due to their belief in an improving economy… but not 80 bps in 1 month.
Regardless, we NEED people to keep buying the govt debt to fund our bailout and stimulus proposals. we’re the largest debtor the planet has ever known, remember?
NVJ,
Yup, that’s highly probable but what is the problem? After all, they probably built it!
There also could be some middle class families living there provided at least one of the 2 earners can telecommute. Driving 3 hours a day to sit at a computer which is often connected to a server 100s of miles away is ridiculous. I can see how this could attract knowledge workers looking for a taste of that good ole American Dream in suburbia.
SBA loans are fun. My company’s approved for one, but there’s “no funding” for it right now. How exactly does that work?
I think we need to look into these grants. 🙂
Regardless, we NEED people to keep buying the govt debt to fund our bailout and stimulus proposals. we’re the largest debtor the planet has ever known, remember?
What we need is for the dollar to fall, to help speed up the process of global wage equilibrium. American workers are much more productive than Chinese workers, but not 6 times as productive, so wages need to continue rising there and falling here. For the dollar to fall, say 50%, would go a big way to making America an exporting nation again. Plus, it would make oil so expensive, that we would use less and help close the trade gap there as well. Our economy today is like England’s after the war.
The strangest thing about this whole financial crises to me was watching the dollar appreciate. Why people would want to rush into the currency of an economy with so many problems was astonishing to me.
Only after that takes place will we be able to find out how much we need to borrow and on what terms.
“You have a very strange temperament, Jimmy. Did I say every person who could work with a VC should? Read what I wrote.”
Since Jimmy continues to insist on using the technique, somebody should break the news to him that the “straw man” argument is hard to pull off when a quick scroll is all that is needed to read the original post.
Of course, Jimmy will then move on to his next “rhetorical technique” which is changing the subject (or claiming vendettas) to avoid having to explain the inconsistencies or errors in his arguments.
In any case, Jimmy seems to spend an inordinate amount of time bloviating for a start-up tech “entrepreneur”.
What we need is for the dollar to fall
Agree completely
although we could also improve our fates if the American consumer simply saved more and spent less.
to help speed up the process of global wage equilibrium
Unfortunately, our dollar can’t drop where it needs to due to currency pegging. Dropping our currency will be ineffective until the Pegs drop. Also, if we drop our currency too fast then our debtors will squawk and not buy our debt, putting us in immediate risk of default on our debt.
The strangest thing about this whole financial crises to me was watching the dollar appreciate
it’s because the dollar, believe it or not, is still the reserve currency and also the safest instrument. Our economy is bad but the Eurozone/Japan isn’t much better (and is arguably worse)
I agree with you though. Over time clearly the “solution” is to default on our debt due to inflation. But we can’t go too fast as we rely on foreigners to buy our debt to continue operations. Before we can inflate our debt we need to balance our current budget. it is also not easy because most of the countries are trying to debase their currencies in order to export to the others (competitive devaluation, a so-called race to the bottom).
which is why I foresee not only FUTURE inflation, but also protectionism coming our way. it’s the only way for wages to rise given global wage arbitrage and currency pegging.
The dollar falling wouldn’t help a thing.
The dollar rising last year was one of the things that least surprised me. It’s funny that a year and a half later we’re all kicking around the same ideas (and some of the same players).
On the dollar and related “curve watching”, “Fed”, mortgage rates, etc., this old (and mercifully short) thread is a fun read now in the fullness of hindsight:
https://socketsite.com/archives/2008/01/justquotes_the_federal_reserve_cuts_rates_yet_again_05.html
OK, you’ve guys convinced me.
I’m moving to China. Time to bail on the United States.
Any ideas on what country I should apply for PR long-term? Who’s got the best balance sheets and best prospects?
The US dollar falling against the yuan, peso, and canadian dollar would definitely help domestic manufacturers (we can keep the peg to the riyal however). Growth in exports i.e. productive output from the workforce is the only way out of this mess. China’s currency manipulation has definitely distorted global trade in a meaningful way (to our detriment).
On mortgage interest rates, Bankrate reports that 30-year conforming rates now average 5.95% and jumbos are at 6.96%. That is a huge leap in a very short time. Let’s see how this affects sales and prices (both in SF and elsewhere). Pretty easy to predict.
http://www.bankrate.com/finance/mortgages/rate-roundup.aspx
LMRIM:
ah memories.
that thread (and my post in it) brings me back.
It was the first day that I officially became a day trader and the official day of my total disillusionment. I never thought I would go down that path, and am still angry that the govt forced me to do so.
I may have to start daytrading more and more again (arrgh) and I hate it, because the game is so rigged. Unfortunately, a lot of my Treasuries are soon to mature. they had great rates.
🙁
No, I think that we can only seriously devalue our currency *after* foreigners lose interest in buying our debt. As long as they keep buying up whatever we are printing, it has the effect of them sterilizing our currency interventions. We need to convince the BoC to break the peg between the Renminbi and the dollar. Alternatively, they can just keep financing our deficit and then pay the cost later, when the dollar inevitably falls, and let the bulk of the depreciation happen against other currencies for now, like Jimmy suggests. That appears to be what is happening now.
I am less worried about global wage arbitrage than you, for a reason I have been meaning to share for a while. It is just one anecdote, but it has real data behind it, so I thought you might be interested. I put together an analysis of what it would cost to open a 24X7 Network monitoring team in Beijing, where we have offices. Salary for an Engineer in China was only 1/6th the cost of one here, but to hire a whole team, including an English speaking manager, plus travel for him and me, plus training time, which I was told was expected, plus bonuses, pushed the cost up to 1/3 for a similar number of people here. And this did not even include my time, which presumably has some value.
I talked to a number of managers in my company who have teams in China and they all told me that I should expect my overseas team to be 50% to 2/3 as productive as the one here. I am not sure why that is, but numerous people told me this. At 50% that means I would pay for 3 and get 2 employees worth and at 2/3s, 4 for 2. And salaries, at least at the time, were going up 15% a year in China. So I could have spent a year or so on this project, only to see all the gains go away in 3-5 years. My boss looked at these numbers and said “no thanks.” I would have still liked to do it, as I think it would have been a good experience and looked good on my resume, but he was not interested.
The dollar falling rapidly right now would be a godsend for Americans workers and businesses and a disaster for countries which export to the US, which is precisely why it probably won’t happen.
If and when China and the other exporters manage to wean themseleves from depending on exports to the United States to drive their economy (perhaps around 2014), that’s when a dollar crisis becomes a real possibility. By that time, private sector balance sheets should be in much better shape and this is also about the time boomers start retiring en masse, leading to higher budget deficits. The combined effects of these 3 factors will be highly inflationary. Assuming the Fed tries to counteracts these inflationary pressures via higher interest rates (as I am 99% sure they will), we’ll have another nasty recession then, which will lead to a California-style crisis at the national level. Either we’ll have higher Federal taxes or big cutbacks in entitlements and military spending. I’d bet on the latter, though given that this crisis is at least 5 years away, it is difficult to be too certain.
All things considered, the outlook for housing prices should be bad until at least 2020.
rr – Okay. I do agree that the numbers are so small for some of the districts that it is hard to say that there is a statistically significant trend or not, particularly D6. But I do think there is enough data when you combine them all together to make a judgement on the city overall.
Sorry to hijack the thread by posting on topic, you guys may now resume your discussion of the apocolypse.
NVJ,
A lot of companies are coming to the same conclusion. Especially as salaries fall here. We knocked 20% off our salaries this year and we’ll probably lop another 10%-15% next year. Makes foreign competition seem downright expensive!
Sounds like China is the one that needs to devalue, to get their labor costs more competitive 🙂
(Actually, it’s a very common dynamic for emerging market economies to suffer real appreciation of their currency vis a vis their trading partners through domestic inflationary policies. Arguably, this dynamic is exactly what China has done through its massive unsterilized printing of yuan in exchange for US dollars received through trade surpluses. Right before the domestic currency blows (e.g., Thailand or Indonesia in the mid-90s) there is typically a huge rush of research showing how the domestic currency needs to or should appreciate dramatically. Ooops! The latest data show Chinese exports still falling on a 27% yoy basis, btw.)
NVJ:
I agree with you that the cost savings with off shoring are usually significantly overestimated. however, global wage arbitrage is more than just China and more than just outsourcing. it’s a much broader “problem”
For instance, if the dollar is worth more than the Euro, then Hershey’s has a competitive disadvantage (globally) than Cadbury Schweppes, and Boeing is at a disadvantage compared to Airbus and Irish Goat Cheese is cheaper than American Goat Cheese. this puts pressure on Hershey and Boeing and american Goat herder salaries, even though there is no outsourcing.
hope that helped clarify…
Jimmy, thanks for the heads up on H.R. 2767. The company I work at got initial funding from SBIRs and STTRs. From what little I can see of all the waste in the larger system, I can safely say that the government gets much more bang for its buck funding the little guys versus throwing it down the black hole of R&D at large contractors (or VC jets 🙂 This discussion does remind me that perhaps the whole VC ecosystem will need rethinking during the current downturn — specifically the last part: foist company on an unsuspecting public. Here’s an interesting take below about other bubbles.
This isn’t just a bad job market – it’s the popping of a “human capital bubble.” Wall Street and its assorted reckless offshoots didn’t just squander much of our capital; the financial industry also sucked up human talent for the better part of a decade that should have gone somewhere else. It’s the human equivalent of those empty subdivisions in foreclosure that never should have been built.
PS – Anybody out there have experience with synthetic equity in an LLC?
EBGuy fortunately I personally don’t but have close ties to a person that was tossed in the middle of the synthetic equity ring with out knowing it. I still think the bloke that dreamed up the whole scheme is still scheming and after a small bit of research I found it would cost an arm and a leg to pull all the books and prove it. What’s a person to do? Based on your comment I too would be interested in hearing the responses re: experience with synthetic equity as it may help my friend out.
EBGuy I have said this before, in a different manner. A bunch of guys who were trained to work in finance are going to have to go through the difficult process of changing careers. For the younger ones, especially with in demand skills (mostly programmers – the quants) the switch will be relatively painless. For the bankers, it is going to be very hard.
Uh, did I miss the promised medians?
Hi – when will teh June sales figures be posted?