The problem is shrinking global liquidity. Losses in the Chinese financial system and in the global energy sector are forcing governments, central banks and sovereign wealth funds to sell assets around the world. These are some of the biggest asset managers in the world.
It is unclear to me how this will end. When the mortgage market melted down and destroyed the balance sheets of banks, the Federal Reserve liquified their illiquid assets using QE. For better or worse, QE restarted the jammed shut credit engine.
At the moment, outside of wholly energy dependent countries (Middle East, Latin America, Nigeria, etc.), there does not appear to me a 2008-like financial system shutdown.
Coming back to tech. IMHO, big tech companies with inflated multiples (as benchmarked against the FCF generating engines at GOOG and AAPL) now have a target on their backs. Unicorns that aren't cashflow positive are going to learn how to negotiate down rounds. Real estate values are sticky and will hold up longer than people think. Engineer salaries are not going to drop a whole lot. The number of people employed might.
http://www.constructionenquirer.com/2016/02/04/opinion-is-th...
I give it more credence than the usual "property market correction incoming" because certain fundamentals have actually changed, oil is dirt cheap, China as you say is volatile having blown multiple bubbles and now dealing with the consequences.
Perhaps those who previously bought for investment purposes may need to liquidate?
It will.
> Engineer salaries are not going to drop a whole lot.
Basic economics say that will follow.
None of these events are isolated. They're interconnected and cascade. Everyone will be affected, even those who are flipping burgers in the Bay Area.
hey sure there is a bubble there, but last time I checked BA wasn't caput mundi yet. Plenty non inflated startups do exist, even if not specifically there.
Where the whole economy is sustained by VC money, well, there's gonna hit the hardest. But doesn't seem that the whole IT world is following that model.
Maybe not. Seems like many here are too young. I'm only in my early 30s and am already feeling deja vu. Life is strange.
https://en.wikipedia.org/wiki/Second_Industrial_Revolution
Accordingly, there's no reason to be investing in fluff like file sharing, app-based bike delivery, or "valuable" services like Shazam when there's real work to be done. In other words, the VC correction unfolding now is exactly that, a correction (long overdue, to my mind, and an unambiguously healthy thing). It will hurt a lot of overextended people to be sure, and unprofitable companies with dubious valuations that are laying people off now are wise to get ahead of the crunch.
As the squeeze tightens, salaries will even out, the balance of power will shift to employers, traffic may improve (slightly), and rents may even stop climbing. But 20-30% declines in the overall housing market? Dream on. Prices here are a function of a massive shortage, off-the-charts desirability, and deeply-rooted peculiarities in the tax code (Prop. 13), not Florida-style speculation. All of these factors are far more impervious to temporary downturns in the employment market.
Having lived through the dot.com crash, I can certainly hear echoes, but deja vu it isn't. The world is now a very different place.
That's not the same situation. Of course you're going to see the $150-200k premium for engineers fall once startups, funding, and jobs disappear. It's already happening in the form of cutting RSUs and bonus packages.
And it has happened before. Why is it so hard to understand this?
Regardless, I was stating that your dismissal of "basic economics" was wrong. It's not basic economics, there's a lot that goes into the equation. Wages might go down. Wages might not go down by a ton. They might drop like a rock. It all depends on a number of factors, but blithely dismissing people with some nonesense about econ 101 is not being intellectually honest.
The key is that wages for /engineers/ will fall if funding and jobs disappear in the tech sector. Today's wages for engineers are high and will be unsustainable when things go bust.
How much they will fall is anyone's guess. But the reasoning behind why they will fall is very straightforward.
Your extremely talented engineers who build things at scale and understand the fundementals, who are basically a safe per of hands, are still going to be in deep demand. Profitiable companies that work at scale are still going to have real problems and are unlikely to turn around and tell their engineers that they're going to be getting significantly less money, as those engineers are already in their own market and these companies will still want to compete for them.
The startups filled with architecture astronauts who spend most of their time overdesigning, learning new tools, and basically doing anything that isn't meeting user needs, delivering the product or tackling some tough engineering problem, then you're likely going to see a drop because they're not really worth it in the first place.
However, remove the funding and force these companies to actually compete on merit and only those who are actually capable of delivering will still exist. At that point, hopefully, we'll see a rise of new leaders who actally value excellence.
The point is, we can only afford to value hipness over experience in bubbles and it looks like this one's about to burst. Of course, I'm not from the future, so I could be wrong.
You can argue that the drop in employment in startup land may see some movement outside the bay area and into boring lower paid dev jobs, but I doubt that it will be more than a small blip.
TL;DR: If you're at a start up the good times might be over. If you're not, don't expect much change (maybe less likely to see a pay rise). If you're just coming out of Uni and into the job market, you may see interesting times.
Maybe the typical age on HN is 21? :)
This may be true in the general case, but there is a more relevant (IMO) general case here, and that is: demand outstripping supply causes prices to ramp up steeply ... but if that condition wavers at all they will drop.
That is to say, if there is even a single marginal house for sale in the SFBA that can't clear, the whole market drops. Right now that doesn't exist. All (normal, conforming) homes in SF are clearing. If that changes - if there are even one or two marginal houses left unsold - the price plummets.
If a house does not sell at a certain price, typically the owner can lower the sale price.
There's nothing stopping central banks from creating more liquidity through progressive rounds of QE, each of them buying in because they know their country will suffer in the short run if they do not follow suit. Of course this will lead to deflation and another recession in the long run with many losing faith in monetary policy/central banks altogether, but we're not quite there yet. We've still got another couple of years before we hit that phase.
This allows the economy to stay afloat as those with assets enjoy increases in nominal wealth as long as more and more liquidity is injected into the system.
But it hurts the economy in the long run by distorting market signals (wage, unemployment, asset prices) that would take a major correction if the market was allowed to match supply and demand in these respective markets efficiently.
Short summary: QE hurts aggregate demand in the long run through the misdirection of resources and the creation of rent seeking asset bubbles. Weak aggregate demand leads to deflation, regardless of how much liquidity we have on the bank side.
The implied growth rates in many tech stocks is unrealistically high.
The Bay Area's long-term employment prospects simply cannot support current home values or rental rates.
Once public and private equity valuations drop a lot of software development projects are going to get cut and with them the jobs of many software engineers. Engineers who keep their jobs probably won't experience pay cuts, but new hires are going to be expected to take much lower pay packages.
Why? Because the talent is going to be available at lower pay rates. So why pay more?
This is not necessarily a bad thing. There's a lot of irrationality in the tech business now and it's crowding out the rational participants. There needs to be a weeding out process. It is good that it has begun.
Remember to think long-term. Technology and the Bay Area are here to stay. Let's get the creative destruction process over with as quickly and painlessly as possible so that we can get on with making real innovations.
I'd say keep polishing your resume. If you dropped out of school, look for a school with low tuition that isn't University of Phoenix but finish your degree. Stay on your toes: work your way through to graduation, get internships each September (as much as you can).
And though the retire-as-a-millionaire thing might have vanished, you'll land on your feet.
Look at Vancouver, Hongkong, Shanghai, Moscow, Tokyo, all have waaaaay lower average household income than San Francisco Bay Area, yet wil much more expensive realestate price.
The median price for a single-family home in the Bay Area is $841,560 as of Summer 2015.
Why not? What are you basing this on?
I'd love to know what the median rent across all rentals is in SF! ~70% are rent controlled. I'd guess the median rent is maybe half? Around $2000? Just a guess.
There are other games in town, but those two games were seriously inflating salaries here.
that won't happen. During the 2008 big burst everywhere in USA was felling apart but in SF real-estate was just down 5%-10%.
SF can't expand easily since it's water 3/4 all around. Demand still high and supply very low.
That won't change dramatically, with or without a collapse in the public market.
It was a bit more complicated than that ...
You are correct that rents/prices fell much more in marginal areas, but "marginal" can mean a lot of things. Very expensive, 3-4 million dollar homes are also marginal (or at least, they were at the time) and those fell a lot. There just wasn't a healthy demand for 4 million dollar homes in SF and Marin during that period, and those prices dropped a lot.
So, yes - mid-range (mid-range for SF) houses in desirable areas did not fall a lot ... but just like houses in undesirable areas dropped a lot, so did a lot of other marginal properties - namely, very expensive ones.
ele/mid/hs
That might easily change.
If average salaries go down, people won't be able to afford pay rent they once used to. There will be less people living on their own and more people sharing with others. This will create oversupply of rental properties which means rent prices will go down.
If rent prices go down, property prices will go down too as property investors won't be able to justify holding a relatively expensive property yielding low rental returns. So they might as well put the property on the market creating more supply of properties for sale. Thus bursting the bubble.
I know both have diversified, and Google has become best friends with the Obama administration.
I just wonder if they will be relevant? These tech companies main reason for living is advertising, and their algorithms.
I look back, and Apple had a physical product. Other than Apple, exactly what companies will be here in a decade?
Actually, I don't think I would buy another new Apple product for myself. I still buy them as presents. It's a nice gift. For myself, I will still buy used while their is a surplus of parts.
I went into my Corte Madera Apple Store on 2-1-16. There's no cash registers. A few printers are attached under the counters for receipts. It's ambience was that of a operating room. I walked out, with a $39.00 iPad mini case. I said to myself, "Is this my last visit?" The case was not the quality I expected from Apple either.
Please don't beat me up. I won't even be back. Just thinking out loud. My prediction of future events have a poor track record.
Sibling comment, compares Goog with MS 10 years back. My humble submission is several people saw it coming even then. I remember reading a book called 'The Search', and also having some discussions with friends, where we felt that Google will overtake MS. But there is no such thing in the horizon, which challenges Google. And people tried - Blekko was noteworthy. DDG is also liked by hackers, but it remains to be seen in the long term.
Now talking about FB's algos (or AI). Its purely anecdotal, but till I was using FB, I found it highly irritating. Imagine if your email was trying to guess which email you like to read, rather than simple time sorted one (and brief categorization, which gmail does).
[1] This analogy of comparing Google to advertising company has become a bit tiring now as well. I think, thats their current way of making money, we should judge them by what their intrinsic value is - Search/self-driving cars/Youtube/etc. As the means may change (micro-payments via Bitcoin/etc who knows?)
Only Google is a lot more diversified than MS was back then, since Android isn't even their main business.
You didn't used to have to exclude the server market. They owned that too. Then Linux challenged them and won.
In fact, they used to own all PCs. Then Apple challenged them for laptops and won.
Microsoft isn't doing badly, but it's not an unchallengeable juggernaut any more.
And Google won't be forever either.
Google is up with Apple and Coca Cola as most valuable brands, but Facebook is not even top 10.
http://us.spindices.com/indices/real-estate/sp-case-shiller-...
It happened in many, many markets across the US and the world.
We just saw it happen!
I have watched Bay Area realestate for too many years. I do agree the decline will be at least 30%. I think it will be more like 40%, but who knows.
That said certain areas (Rich areas--Pacific heights, etc.) of San Francisco do not follow the trends. Marin county, with the exception of Novato, do not follow the trends.
I know a thing about tech, lawyers, and banking. You're talking about misconceptions about tech while feeding misconceptions about law and banking.
In reality, most people in all three industries don't make $200K salaries. A big chunk (but by no means all) of Bay-area FANG engineers, New York bankers and Biglaw lawyers get this type of remuneration. Should be said too that most (not all) of these are pulling off insane, crazy-making hours as well.
If you think lawyers are rolling in it you have not been paying attention to what's happened to the profession over the past decade. Simply anachronistic. If you're going to generalize, it's a much better time to be an engineer than a lawyer in 2016.
All three of these professions have massive disparities in remuneration.
For all this talk about how engineers "might" get laid off, this completely ignores the massive contraction of the legal market that has already happened.
Outside of a few specific areas of law, and a few high powered law firms, lawyers don't make that much money.
My ex, a nationally renowned family lawyer in literally the richest area of the country doesn't make more money than i do (and she runs her own firm, so it's not like she is being kept down by partners).
Maybe I'm being irrational, but I suspect that the drops won't be proportional and the housing isse in SF will just get worse.
In the rental market a big driver of the landlord decision cycle is needing, at a minimum, to have a reputable tenant and to cover the cost of carry of the asset (mortgage, etc). In many cases if their cost of carry is met (and that's often a low bar....many landlords in both NYC and SF own their apartments outright, or are paying tiny monthlies on a refinanced mortgage that was originated in the 90's), then the priority is getting a reputable tenant who won't destroy the place or create drama.
If the above paragraph is confusing, basically what I am trying to say is that a landlord often prefers, for example, $3000/month from a tenant who they think is 98% likely to be an "easy tenant" to $3500/month from one who they think is 80% likely to be the same. In other words, there's a market premium on reliable tenants, especially in places like SF that have aggressive tenant-protection laws which make landlords even more antsy.
As layoffs start happening (as they did in the nine months before we signed our lease back in '09) landlords of reliably-paying, drama-free tenants start getting antsy about keeping their current tenant or finding a suitable replacement.
As such, what drives prices in markets like NY/SF isn't just supply-demand equilibrium; there's also a significant behavioral economics angle aspect to it as well, as landlords are willing to pay a premium for peace of mind.
Therefore, I would expect a significant drop in SF rents if layoffs start coming.
I would much rather have someone who pays less, but is financially and mentally stable. So yeah, rents will drop pretty fast once the market softens.
SF in particular is a unique market because you have one population that is hell bent on staying here, and another that is primarily here for work opportunities. The latter population will clear out pretty quick once the work starts to dry up.
So yeah ask. And be prepared to move. If you aren't prepared to move, you're not ready to save.
It also depends on the kind of property taxes prevalent in the states. e.g. in California, property taxes are set at the time of purchase, while in Texas they are reassessed every year. So, my landlord (in Texas) basically increases the rent to cover for the increase in property taxes.
I was able to do the same thing when re-signing the lease for my NYC (East Village) apartment in June 2009. My roommates and I drafted a letter requesting a 10% reduction, citing decreased rents 1) in the neighborhood and 2) in the rest of the city - specifically in the financial district where "luxury" buildings were giving away multiple months of free rent as a signing bonus - and the management company accepted it without a word.
Landlords are scared to death of deadbeat tenants like this, it costs a lot of legal fees to get rid of them, and they're freeloading while you're walking through the necessary legal processes.
Every time the apartment goes onto the market they're rolling the dice again - so the value of an existing pleasant tenant is substantial vs. the risk of a tenant of unknown quality.
Which isn't to say you can just get your rent slashed whenever you want, but it's part of the negotiation, and coupled with a recession it can be a powerful argument.
Vast majority of rentals in NYC if you asked the super for a discount in rent you'd be requested not to let the door hit your ass on the way out.
If we made $200k+ each, or if even just one of us did, $4k wouldn't even be worth thinking about.
[1] by "afford" I mean that there is money left at the end of the month.
Meanwhile, the average American couple would have less than $3.5k before paying, regardless of what their rent is.
We also save a lot (and are healthier and save time) by cooking at home instead of going out to eat.
So, really, we get to both live in downtown SF, and travel pretty much whenever we feel like it.
I ask because I'm a remote worker for an SF startup, home base in a low cost of living area, but I travel frequently as well (but the home was purchased somewhere where the house is paid in full already and the monthly upkeep is ~$500/month).
Two reasons why I choose to stay here: 1) building said network so I can go back to proper nomading easier, and 2) access to the startup lottery; nobody gives shares/options to remote workers and/or independent consultants/freelancers
Lottery is a nice potential upside with next to zero downside as an engineer
I received equity as part of my remote worker compensation (my entire team is remote though).
Also, anecdotally, in 2008 some of those fired were expensive new hires. "The bottom 25%" might be defined as those fired but otherwise I don't think there is a definition of "bottom" those who get fired all fit. Say, if a project or a department is terminated, often everyone is let go, instead of trying to keep "the best" and replacing "worse" people elsewhere with them, etc.
To some extent, it is easier for the Chinese to defend the on-shore yuan market (CNY) through capital controls. It is harder to defend in the off-shore yuan market (CNH). Great discussion from a few days ago here: https://news.ycombinator.com/item?id=11008872
I personally have tremendous admiration and respect for managers of the Chinese economy and I think betting against the Chinese government is just a money-losing, dumb idea.
IMHO, the big threat continues to be oil. Cheap dollar funding has pumped up global supply to well past demand. This is crushing the economies of oil-exporting nations through currency devaluation. Ruble, CAD$, Nigerian Naira, Krone, Bolivar, etc. have gotten crushed.
Developed Market banks and investors have poured a lot of money in emerging markets in the past decade. Some of that investment is going to be lost.
It is an open question whether we are working up to an event that is similar to the 1997 Asian financial crisis, 1998 Russian default, the 2012 European debt crisis, the 2008 Global financial crisis, or something milder, or something much worse.
If they do it again then they lose all credibility with the rest of the world. And how the world responded would change China's trajectory.
So its interesting to see what they do.
[1] https://www.washingtonpost.com/news/wonk/wp/2015/08/11/china...
And by expecting, you mean investing accordingly?
Hopefully that will turn out to be a gloomy forecast, but it's best to prepare for the worst.
Actually, it's not. Being right at the wrong time is arguably the worst kind of "wrong" you can be. It doesn't pay to be the only sane guy in the asylum.
I could definitely see a decline in engineer salary, which could be significant in certain markets. But who knows.
The readjustment of the market to reality is going to be a big issue, especially when one looks at just how many companies are operating at huge losses. Most people already know that it can’t continue like this.
The good thing is, real estate values will decrease like the pay, so people can rent at cheaper rates in the bay areas.
The bad thing is, those who have bought a house are f~~~~~d.
We’ll probably see a lot of tech giants like Twitter (no income? really?) tumble, and others take a small hit (like Google).
This needs to happen. We need to see housing as more a consumption item than an investment item. The more people see it as an investment, the more the NIMBY policies we see to increase home values to levels which price young and low earners out of the market.
I could see them operating with 100-200 employees.
What do you mean by no income? Twitter makes billions in revenue...
If there is a problem, the Fed will drop interest rates, maybe even go negative, and that will cause bond rates and conceivably mortgage rates to drop as well.
The Fed wants inflation, and most importantly home price inflation. They will do whatever it takes to stop deflation, they've already said this. Bernanke said he would drop bags of money out of helicopters, obviously an exaggeration, but basically this is how critical the Fed views the fight against deflation.
The Fed has very little room to drop interest rates and won't do so to prop up the NASDAQ while the economy continues to grow and add jobs.
And they can go negative interest rates which would be crazy, but it's happened before, and currently going on in Japan.
They've bubbled up again not only in SF, but also in most every single area with job growth - SoCal, the whole I95 megalopolis, Denver, SE Florida, Dallas and Austin, Minneapolis, and the Pacific Northwest.
In fact, only parts in the rust belt, South, and Midwest remain affordable, based on historic standards. Unfortunately, the majority of job growth is not in these areas.
I do not see how homes can retain their value when Boomers begin dying and down sizing, as they own the majority of wealth in real estate and the next generation is loaded in debt already and not forming large households at the historic rate.
The "helicopter" thing is a metaphor, not to be taken internally. The is a related action to be taken but it's not nearly as exciting as helicopters :)
I hope very much that you are correct, but I'm kinda droopy about the prospects, frankly.
It's a poor business founded on poor assumptions
A strange game.. the only way to win is not to play...
I've been a software engineer for going on 20 years now. Have a plan, just in case, even if you're good at programming (I am.)
In short, if you just bought a big chunk of San Francisco real estate on the basis that you pay it off in a few years when you cash out the options in your hyped up tech startup... well good luck with that.
I don't dispute your gloom, but I challenge your %s.
- "Well Funded Startups" have a >1 correlation to the overall stock market. (Market moves 10%, they move higher than 10%) So if we see a several year 30-40% decline in the S&P, this will cause more than 30% of the "well-funded" startups to go bust. Anyone who can't switch to cash flow positive would have a high likelihood of going under.
- Real Estate values tend to move slower than stock market prices. (People can ride the market out, and just not sell the house) It would take a very sustained market hit to cut real estate by 30%. Also, much of the money fleeing China is coming to the Bay Area. (This isn't to say that it couldn't happen, but you'd need to see 5+ years of a depressed stock market) The reason it tanked so much in 2008 was that the bubble was in the financing mechanism.
- I think if you count equity, the market rate pay for engineers would get hit worse. Options that on-paper are worth 500K can quickly go to zero in a down round. Other variable comp will get hit too. Not sure about base salaries. Even in an enormous down market, most of the world will still be short engineers. In 2001 the folks who got crushed were the Marketing majors posing as Web Engineers.
You didn't mention my big hope though... A 30-50% reduction in Bay Area commute times! :-)
One bright side to a crash - it is better to start a company where good talent is plentiful and cash is scarce, than the other way around.
With regards to VCs and Unicorn investing, we really only saw institutional money get serious about investing in tech startups after 07/08 when the markets shifted and traditional asset classes didn't return as much as they used to. It's easy to look at startups, see the ones that survive and their high ROI and think it's a great place to invest without seeing all the other ones that morph into lifestyle businesses and don't go anywhere or flame out. Throwing near limitless amounts of institutional money into a very noisy market leads to the rise of cheap capital and the ability for anyone to get funding regardless of the extent of their business plan. I think we will see a retraction of available capital which will lead to an increase in bootstrapping and an increase in vetting by serious VCs who need to improve the hit/miss ratio since capital will be tighter.
I need to drum up more capital to invest. Best time to buy and hold is in a major downswing. You get durable assets for cheap!
I tend to look for things that are strong on fundamentals and get murdered because of market sentiment and not because of business performance.
So I'm kind of curious to hear any anecdotes from users here profiting in 2008...
You don't have to time anything right or pick any winners with this strategy, because you'll invest all the way down and all the way back up. You might not have made money from Jan 1 2008 through Dec 31 2008, but that money would have made a killing subsequently.
Of course if you were out of work in 2008 that is easier said than done.
OTOH If you try to make a killing by shorting, there's an infinite number of ways to end up broke by getting the timing wrong. If you bet everything on picking bottom, you can miss the boat or miss the bottom. Not nearly as risky as shorting, but certainly not as reliable as staying the course.
I'd love to hear how people timed the upswing from 2008.
Now I believe we're going down. I'm shorting through options to get some bigger action. 3x from SQQQ not good enough- so buying 6-12 month puts on Cloud companies and QQQ. Didn't get in it at the top - started at about 10% below the top.
Care to share how you did that?
Bubble bursts always start in the public markets. Next, VC-backed "unicorns" with ludicrous multiples will soon find themselves unable to raise cash at even half their previous valuations. Then those companies will have to tighten their spending which means layoffs and smaller revenue growth which is a vicious cycle towards even lower valuations, bankruptcies and ultimately a much worse job market for tech workers.
I'm expecting a 30-40% decline in S&P 500, 30% decline in bay area real estate values, 30% of bay area "well-funded" startups going bust, and 25% reduction in market rate pay for software engineers over the next 2 years. Hopefully that will turn out to be a gloomy forecast, but it's best to prepare for the worst.