Those who say there are only two sure things in life, death and taxes, should add a third sure thing: realtors and stock market mavens will deny there’s a bubble even when it’s obvious to everyone the bubble has already reached insane levels of overvaluation.
And so here we are yet again, with housing and stocks both hitting price levels that make no sense in terms of traditional measures of value. And since these pesky metrics make it impossible to claim there’s no bubble, those benefiting from the bubble have to claim that this time it’s different: not only is the current bubble rational, there’s no reason it can’t keep expanding indefinitely.
In a zero-yield world, it’s perfectly reasonable for corporations to borrow trillions of dollars to pump up their own stocks with buy-backs. Profits may be sagging but thanks to the miracles of Cargo-Cult mumbo-jumbo such asmargin expansion, profits don’t really matter that much. What counts is the central banks have our back: to guarantee a profit, just buy stocks now before the central banks push valuations even higher.
Housing may not be in bubble territory everywhere, but it’s reaching bubblicious heights wherever global hot money is pouring into the domestic economy: for example, the San Francisco Bay Area. Global hot money has two increasingly desperate goals:
1. find a positive, low-risk yield
2. shift the staggering gains reaped from corruption and central-bank financialization bubbles into hard assets such as Impressionist paintings, real estate, etc.
On a global scale, trillions of dollars are sloshing around, frantically seeking a low-risk yield or hard asset. By some estimates, $2 trillion has already fled China as corrupt officials and cronies are rushing their ill-gotten gains out of China before the hammer of social unrest comes down on their fortunes.
Much of this hot money is landing in the U.S. and Canada, as the U.S. dollar’s strength generates global demand for just about any asset priced in dollars.
The San Francisco Bay Area is being inundated with a second tsunami of hot money–cash seeking to invest in the next Facebook, Uber, AirBNB, etc. The current tech boom is another this time it’s different story: this time (we’re assured) is different from the 1999-2000 dot-com tech bubble because now companies are profitable and the global market is expanding for all the mobile apps and systems being designed/coded in Silicon Valley and San Francisco.
(Never mind the same line drove the blow-off top in 2000. This time it’s different.)
And since the billions of dollars keep flooding in, it makes perfect sense to put in a bid of $1.5 million for a 750-square foot fixer-upper flat in Haight-Ashbury when the asking price is $775,000. By all means, don’t fool around nickel-and-diming the deal by bidding $785,000 or $800,000–just cut to the chase by nearly doubling the asking price.
If you’ve managed to escape China with $5 million in bribes, what’s $1.5 million? If you work for a tech start-up that just got bought out by a cash-rich tech giant, and your options are now worth $10 million, why wait around while that flat goes from $1.5 million to $2 million? Better to buy it now before it becomes even more expensive in a few months.
This is of course the bubble mentality.
Meanwhile, renters are being offered one of three beds in a small bedroom for $1,000 a month across the Bay in Berkeley. You have to share the bathrooms and kitchen with 19 other people, but hey, you’re only a 25-minute BART ride away from all the action in downtown San Francisco.
Here is a rental listing for a 7-bedroom nothing-special house with 20 beds for $20,995 per month–such a deal! Instead of paying $3,000 and up for a studio or $4,000 and up for a 1-bedroom flat in S.F., you can share a small bedroom with two friends (and crowd into the kitchen with 19 other friends) for only $1,000 a month. (Please note the CraigsList listing may be removed at any time, so this link may no longer work.)
The advert claims that the 2,700 square foot house is “Huge and Beautiful,” and maybe a suburbia-sized house over-run with 20 people strikes you as huge. Personally, I think a more apt description might be Jean-Paul Sartre’s famous line from the play No Exit that“Hell is other people”, especially when your bladder is about to burst and a few of your 19 housemates are hogging the bathrooms.
For only $3,675 per month, you can rent a 2-bedroom apartment in Berkeley and share it with 3 friends. With only two people per bedroom, this lowers the monthly bed-rental nut to only $925/person. (Please note the CraigsList listing may be removed at any time, so this link may no longer work.)
So a worker with a $15/hour job (the new minimum wage in San Francisco and some nearby cities) who works 35 hours a week will take home around $1,700 per month after payroll taxes and deductions, leaving around $700 for everything other than rent of their bed–their share of utilities, transportation (just getting to their job via BART will cost over $160/month), food, clothing, and whatever fun can be afforded after all expenses.
In other words, the incredible luxury of having a bedroom to yourself is out of reach for all but the very well-paid. Having an apartment to yourself requires serious money. For those who don’t have trust funds or a big-bucks job, the options for affordable housing are slim: one enterprising young man paid $500/month a few years ago for a 7-by-5-foot laundry room, but it wouldn’t surprise me if the rent for the 35-square feet space has doubled since then.
But no, housing and tech companies are not in bubbles. That $1.5 million 750-square foot flat will cost $3 million shortly, and the buyer who nearly doubled the $775,000 asking price to $1.5 million will be revealed (along with everyone else who buys into the bubble now) as a stone-cold genius.
Look at the rental income potential. An enterprising owner should be able to cram at least 6 people into the 750-sq.ft. flat at $1,000/bed, and generate $6,000 a month ($72,000 a year) in rental income. With mortgage rates so low thanks to the Federal Reserve’s zero-interest rate policy, the new owner might even be able to skim a profit if a 7th desperate soul rents the closet for $500/month or the sofa for $900/month.
Looking ahead, it’s clear the next buyer who pays only $3 million for the 750-sq. ft. fixer-upper will also be a genius, because the sky’s the limit: in a few years, those who didn’t snap this flat up for $6 million will regret it, because $10 million is right around the corner.
Pity the poor corrupt Chinese official who escapes the Second Cultural Revolution with only $3 million, or the techie whose options are only worth $3.5 million. They’ll soon be priced out of the Bay Area, and probably New York and West L.A. too.
But there is still a slim chance these poor millionaires can own a piece of the Bay Area: the corrupt official can go in with two other corrupt officials and together they will still be able to buy a one-bedroom flat in San Francisco. The techie can pool his meager $3.5 million with two other bottom-of-the-barrel tech millionaires and still be in the game.
Heck, if the three go with triple-tier bunk beds, the living room will still be open for entertainment and dining. If they stick it out a few years, they’ll be able to sell to evengreater fools and skim millions in profit. The sky’s the limit here, pal, you snooze you lose, get in now or get lost.