Agreed, many landlords seem to feel like the trouble is a mere few months away, although often any attempt at getting them to discuss how they arrived at that conclusion gets something like "I just know it."
So one wonders about the whole "wisdom of the crowds" or "herd" in this case, and whether or not they can sense something that isn't showing up in other indicators. I've been looking but other than the extensively covered late stage valuation madness I've not found good correlation for this feeling.
As James Surowiecki makes clear in his book "The Wisdom Of Crowds", the wisdom is only apparent in situations where the people are not able to talk to each other. But real estate agents are able to talk to each other.
In Surowiecki's telling, if you get a room full of people to write down a guess about how many jelly beans are in a jar, the average of all the guesses will be surprisingly accurate. But if the people are allowed to yell the answers aloud, the first person who yells a guess "anchors" the guesses, and so if that first guess is radically wrong, a substantial bias is introduced into the overall distribution of guesses.
Real estate agents in a small geographic area, such as one city, often talk to each other, and therefore they generate a conventional wisdom, but each of their opinions influences everyone else's opinion. So you can get a herd action that is greatly at odds with reality.
Except in this case it's not just a local phenomenon. My company does business in several markets outside the valley (and outside CA) and we are hearing the same thing, often with the same lack of evidence but no direct connection between the sources. That said, I do think there's an industry echo chamber effect.
The strong real-estate market in general makes it a bit easier to act on these kinds of hunches, even if they're somewhat flaky. It's probably the case that a portfolio of big companies and clients in "conventional" industries poses less risk over the next 5 years than a portfolio of startup clients does, regardless of your exact estimates of the probability/timing of a potential crash in the startup market. With rental rates what they are, you can still make a ton of $$$ by renting to those other clients. So why not take the lower-risk clients, even if it leaves a few bucks on the table in rent? Once you're making really healthy margins, attention often turns towards thinking about how to maintain them and avoid big risks to those margins: you're a lot more worried about the possibility of everything going south next year, than about juicing the margins another 10-20%.
A lot of this may come from the belief that the economy is only being propped up by the easy money policies of the Fed, and that the Fed is going to start tightening rapidly in the fall. There's a sense that once the tightening starts, everyone will run for the exits at once, and we'll have another 2008 situation but worse.
More like when the rates rise, investors seeking interest won't have to take on as much risk to get it, so a large volume of investors will go up a class leaving the riskier endeavors with a more difficult time getting funds. This is probably a good thing, preventing bubbles from forming and popping.
I don't think there is anything, including yesterday's fed statement, to suggest rapid tightening. Smart money is currently on a .25 pt increase in either September or December, with September slightly more likely.
That's less because the numbers (measured inflation and unemployment) actually call for an increase and more to just remind markets that: rates won't stay at zero forever and non-zero rates aren't the end of the world.
Not to pile on too much, but the Fed has been amazingly slow to raise rates and only shows signs of doing the most timid increase. It's the cheap money that's fueling the mad rush, yes, but it's a blunt policy tool being used to help along parts of the country that are really still struggling.
Until Detroit and Stockton and Pittsburgh are doing well again, aggressive policy is going to continue to fuel massive growth in SF and the Bay Area.
Pittsburgh's actually been doing very well over the last 10 years— the recession barely happened there. And, of course, the stakes are much lower when you can buy a nice house in the city or a nice school district for $150,000.
What happens if those areas simply don't start doing well again? Large parts of America have been declining for generations (West Virginia, much of Ohio, etc)
Federal Reserve's objectives operate at federal level, and involve national unemployment level (target rate of ~5%) and inflation (target rate of ~2%) http://www.federalreserve.gov/faqs/money_12848.htm
Which is likely. Echoes of the eurozone here for sure; SF probably needs 8% interest rates but even 0% is doing very little for the Rust Belt and other perennially depressed regions. Now, the eurozone critics think the problem is lack of fiscal union, but the US suggests it goes a lot deeper than that.
In principle, couldn't the issue be too few fiscal transfers? I.e. San Francisco should be paying even more into the federal coffers, to be redistributed even more to Alabama and New Mexico?
Or, thinking about the other direction, even restricting ourselves to within California San Francisco and the Bay Area single-handedly pay for a massively disproportionate part of state government services and redistribution. Perhaps it's time to go way back to metropolitan city-states as the proper scale of government.
It doesn't make sense to separate Marin from San Francisco. And while we're at it, I'll take Sonoma and Napa. Maybe Davis too, because, you know, YOLO.
I don't think more fiscal transfers are the answer. If you took an even bigger chunk of money away from SF, you might succeed in reducing the rate at which real estate prices there are driven upward. But air-dropping that money in Akron will probably serve only to drive up real estate prices in Akron, which doesn't really solve anything (in particular, it does not increase output).
The problem here is twofold: first, not enough of the money being created is flowing into operating assets; second, the operating assets being purchased with this money aren't productive. This seems like an obvious and natural consequence of a service economy, in which the dominant inputs are labor and real estate. When you pay higher wages, that money has to go somewhere. Some of it goes toward consumption, but most is surplus and gets invested. It has the same problem it had when it was created: it can go toward real estate, operating assets, or portfolio investment. No one wants operating assets in a service economy (because they're not productive), so it ends up in real estate or portfolio investments. That drives up asset prices but does not increase output. Diverting more of this money into operating assets (things that make stuff) would increase output and alleviate the pressure on asset prices. Instead it goes into more wages (paying people more does not make them produce more) and real estate (paying more for land or office space does not make it produce more, either). One of the few bright spots was oil, but the sharp drop in prices has made investment there unattractive as well, and has reduced nominal output at the same time.
The central bankers can control the rate of asset price inflation by making money cheaper or more expensive, but they can't do anything to increase output when the money they create is used primarily to acquire nonproductive assets, or to acquire at higher prices assets that are already being fully utilized. That's why real estate is expensive and output is stagnant, and why fiscal transfers won't solve anything.
Any number of solutions suggest themselves: relaxing regulatory requirements to make manufacturing, utilities, and other non-service industries more productive; fixing China so that surplus cash in the US can be invested in operating assets there instead of domestic real estate; fixing laws that limit the supply of real estate, both to directly reduce the price and to make it less appealing as an investment; investing more tax revenue in infrastructure instead of transfer payments to individuals (where much of it ends up in ... real estate); radical alternatives like breaking up the United States into separate nation-states that are more cohesive internally. I'm sure you can think of others as well.
Your response coupled with your username gave me a shiver, heh.
That said, why would the Fed tighten money in the fall when we're so close to an election year? I know they hold longer terms to hopefully avoid political swings, but, it just seems like bad timing.
Well, if the Fed doesn't tighten, they're at a pretty high risk of introducing serious inflation into the economy. The high commercial rents are a form of inflation; so are the wages of tech workers, and people being priced out of the Bay Area. So far, this is local to a few industries and metropolitan areas, but if the Fed doesn't act you could see it start showing up in nationwide statistics.
That said, I'm not entirely convinced Yellen will tighten. She has a reputation as a dove on monetary policy and seems weak to me, overly afraid of the effect her actions will have on the stock market. It wouldn't surprise me if we end up with another 1997 situation, where some temporary economic instability makes the Fed put off tightening or even introduce additional stimulus, and this ignites a speculative bubble that raises prices beyond all reason and then bursts.
(The username is ancient, I've had it on various sites since college, and while I'd love to be thought of as a prophet, my track record isn't that good.)
"Well, if the Fed doesn't tighten, they're at a pretty high risk of introducing serious inflation into the economy."
I doubt this will take place. If anything, I think we will see deflation?
These low interest rates have provided gambling money to the 1 percenter's. (I don't want argue--just the way I see it.)
There's a part of me that want to cash in on these low interest rates(part owner in a home in the Bay Area--that people really seem to want.), but my inner voice--wants the fed to raise rates?
Why--the poor/middle class have been left out of the recovery(unless you are in tech.). We get essentially 0 % on our meager cd savings accounts. We can't gamble in this bubbly/momentum/free money stock market?
In essence, what the poor/middle class got out of this recovery is no change in wages, higher rent, higher fees, and 0 percent on our savings. (I do appreciate the access to health insurance though. At least, they(hospitals) can't attach my interest in a home-- if I got sick, and managed to survive? Before Obama Care, I couldn't get health insurance, and always knew I was one judgement away from being homeless.
(For those that hate ObamaCare, I would be happy with a 2 million, nationwide--homestead exemption, incorporated into our federal bankruptcy laws? All homes should be judgement proof.)
So Janet--raise the interest rates. The rich boys are just gambling, and laughing! They have so much money they don't know where to put it? The REIT's are buying up too many commercial/residential units; on your free money--I sometimes wonder whether its foreigners(who can buy a home in the U.S., as easily as picking up a phone), or REIT's whom own more?
See, only the banks, and their Best clients are given this free money. I am not seeing the trickle down? We got out of the risk of Depression? It's time to raise rates, and never bailout another bank again.
Couldn't agree more. There is no inflation nationally, and we are nowhere near full employment. The only reason to raise rates is to curb asset inflation among the 1%.
The problem is that the American middle class needed the bailout that went to the banks and raising interest rates will hurt an already down and out main st. Frankly, we should have just given a massive tax rebate to the middle class. Of course, it's politically infeasible, but they would have actually spent the money in the real economy rather than using it to drive up asset prices.
On a nationwide scale, the oil-price crash is adding some offsetting economic slowdown (since the U.S. is a huge oil producer) which I think significantly reduces inflation risk. The previously booming energy sector is stalling and moving towards a contraction: reducing investments, laying off employees, etc. SF rents are going up, but Houston rents are going down. The overall engineering employment market is also getting slightly less tight as petroleum engineering is no longer sucking up every ounce of spare talent.
Plus just in terms of the benchmarks they watch: The headline CPI is currently at a miniscule 0.1%, way below the 2.0% target. The personal-consumption-expenditures (PCE) rate is somewhat higher at 1.3%, but still below the target.
I'd turn that on its head: keeping short rates as low as they are requires extraordinary economic weakness. The only bad time to raise rates away from zero is when a total collapse is ongoing. None of the recent economic data suggests that a collapse is ongoing; quite the opposite.
You're right that it's bad timing in that their rate increase is likely to come shortly before a bust, and therefore will be second-guessed to no end. But that's the case precisely because it's coming far too late. The solution was to normalize rates near 2% during 2013 and then raise them slowly from there as data improved, not to delay further. Normalizing policy sooner would have limited the overheating this article is all about and therefore limited the impacts of the coming bust, perhaps even to a sub-recession level. Further delay will make things much worse.
The election is irrelevant to an independent central bank, and in any case the major elections are (not that you'd know it from reading the MSM) 15 months away.
The best time to raise rates was a long time ago. The next-best time to raise rates is now.
They would need a new approach to monetary policy to really have justified raising rates in 2013, because there was neither inflation nor full employment, the two things the traditional Taylor rule watches. Inflation was stuck around 0.1-0.2% for all of 2013 (below target), while unemployment was around 7-8% (above target).
If the SF Bay Area had its own monetary policy, things look a lot different in the local statistics, of course.
Part of the problem is that the CPI-U (and the PCE chain deflator) indicators they use don't do a very good job of capturing the cost of living for anyone. Cue rant on hedonics, basket problems, etc.
In the 70s the big focus was on the wage-price spiral, so hourly wages and prices paid were important indicators. Today there is zero wage inflation going on despite near-full employment, and instead asset prices are in an upward spiral. The preferred indicators should have changed to reflect reality but they haven't. That reality is that outside of a bubble sector there may not be wage growth during the lifetime of anyone now living. When the unions ruled the roost and labor's share of revenue was sky-high, a focus on wages was appropriate. Today, unions are almost gone, wage growth is nonexistent, and virtually all money being created is flowing to owners of capital. I'm not interested in debating whether this is healthy, and neither should the FOMC; that's not its job. But under these conditions, asset prices should be the primary driver of monetary policy, not wages or employment and certainly not the near-useless CPI-U. That driver is screaming slow down!!! and has been for some time now.
I have talked to people who are in property management companies who are worried about (possible) rising interest rates are going to do to their profitability. It may not be a concern in SV but elsewhere very much so.
It doesn't really take a lot of intuition to know that the vast majority of startups are going to fizzle. Heck, "fail fast" is a mantra of the startup scene. Landlords just "know it" because they've already gone through it.
I think that the shared office spaces are really a wonderful solution so that young companies can have a great space without the long-term commitment. Ironically when we visited one (in Chicago) there were quite a few corporate "outposts" there with large companies like IBM.
The REIT's that own Class A space are conservative. This reflects the investment goals of the institutional investors whose money they hold. Real-estate time horizons are long term in order to span across market cycles and because of the underlying nature of the asset. Real property really is different.
I've been solidly in the "actual value is being created by a lot of companies, mainly because tech (via startups) is destroying existing monopolies", but that's less true of some.
I think SF itself is probably a startup bubble and will correct, but it might just be a "go back to how things were a year ago", not a complete implosion. And the least bad way for this to happen is by sub-sector, like happened with all the shitty social buying apps a few years ago.
I did YC back in S11 and people were telling us "Winter is coming" even then. Markets are cyclical but it doesn't make so much sense to stress out about it.
It makes a great deal of sense to stress about it when you have a lot of long-term debt used to purchase your real estate assets, and have some control over the lease terms you offer. If you think the end of the boom part of the cycle is 6 months away, you want to lock people into the longest-term leases possible, so that they expire when the market is again, if not strong, at least not weak. If you think the end of the boom part of the cycle is 4 years away, you want to offer the shortest-term leases the tenant will accept, because they will then be forced to renew at a higher rate.
This is very similar to the dry-bulk market. It should be instructive to look at how companies like DryShips and Diana Shipping handled the enormous spike in the Baltic Dry Index several years ago, how they've fared since, and how they've managed their businesses afterward. The cyclical nature of markets cannot necessarily be controlled, but it can be harnessed to outperform one's peers, and if you are a REIT portfolio manager or smaller property manager, your job depends on doing just that.
So one wonders about the whole "wisdom of the crowds" or "herd" in this case, and whether or not they can sense something that isn't showing up in other indicators. I've been looking but other than the extensively covered late stage valuation madness I've not found good correlation for this feeling.