Tag Archives: US

“It won’t last. It just prepares the way for the bust. It forces out real businesses. And it drives out people who find themselves financially unable to live here any longer.”

When reading this article, Vancouverites may want to play spot-the-differences/spot-the-similarities. – ed.

How the Surge of Hot Money Pushes San Francisco to the Brink
Wolf Richter, wolfstreet.com, 22 July 2014 [also reprinted at zerohedge]

The median home price in my beloved and crazy San Francisco – that’s for a no-view two-bedroom apartment in an older building in a so-so area – after rising 13.3% from a year ago, hit an ultra-cool, slick $1,000,000.

It made a splash in our conversations. People figured that nothing could to take down the housing market. Yet, as before, there will be a devastating event: the moment when the billions from all over the world suddenly stop raining down on San Francisco.

Every real-estate data provider has its own numbers. The Case-Shiller placed the peak of the prior bubble in “San Francisco” in June 2006 with an index value of 218, well above the current index value of 191. Though named “San Francisco,” the index covers five Bay Area counties that include cities like Oakland and Richmond where home prices, though soaring, haven’t gone back to previous bubble peaks.

The $1,000,000 that DataQuick, now part of CoreLogic, came up with is for the actual city of San Francisco. In the data series, San Francisco’s prior housing bubble peaked in November 2007 when the median home price hit $814,750. People thought this would go on forever, that San Francisco was special, that the national housing bust would pass it by. A month later, the median home price plunged 10%.

It was the beginning of a terrible bust – the moment when money from all over the world stopped raining down on San Francisco. Real estate here lives and dies with the periodic storm surges of moolah from venture capital investors, IPOs, and corporate buyouts.

Now we’re in another storm surge. The Twitter IPO transferred billions from around the world to Twitter investors and employees in the city and the Bay Area. When Facebook acquired Whatsapp for $19 billion, its 55 employees and some investors started plowing some of this money into the local economy, money that didn’t come from heaven but indirectly from Facebook shareholders. In the current climate, hundreds of transactions, large and small, take place every month, including a slew of IPOs. That’s the great hot-money-transfer machine. And San Francisco sits at the receiving end.

There are some drawbacks, however. Number one, it won’t last. It just prepares the way for the next bust. Number two (and in the interim), it forces out real businesses with real revenues and profits. And it drives out people who find themselves – though well-employed – financially unable to live here any longer.

Take the story of Bloodhound that was catapulted into the limelight by ValleyWag. In January 2013, a Series A round brought its total funding to $4.8 million, based on its conference app, an “ambitious vision to fundamentally change how buyers meet sellers,” as TechCrunch put it. “Its hardcore dedication to product and the fact that it can reuse everything it builds puts it leagues ahead of….” Etc. etc. The article was dripping with startup hype.

Companies like Bloodhound are flush with money from investors and have no need to make revenues or profits, and they have no clue how to manage expenses, or that expenses even need to be managed, and there’s nothing to constrain them in any way and force them to be prudent with investors’ money. Armed to the teeth this way, they dive into the local real estate market.

As the startup bubble in San Francisco was coming to a boil, and billions started showing up in bits and pieces, landlords began lusting after this money. And so in October 2012, the Million Fishes Art Collective – “an incubation program” for artists – was not able to renew its lease on a 10,000 square-foot space on Bryant Street at 23rd Street, in the Mission, which had been an iffy area and therefore affordable. After ten years, Million Fishes was gone, and so were the artists and the shows that had been open to the public. It reportedly had been paying over $13,000 per month.

The space was prepared for a startup armed with hype, hoopla, and Series-A money piped in from VC-fund investors around the world. Along come Bloodhound with whatever remained of its $4.8 million in funding. It signed a 5-year lease for $31,667 a month in rent and $564 in fees, or nearly 150% more than Million Fishes had paid. The neighborhood wasn’t amused, but hey, big money rules, and it was a done deal.

So Bloodhound was blowing $387,000 a year on rent, and it didn’t care because expenses were no objective because profits weren’t even on the horizon. It was just building a thingy that would forever change the world. But now Bloodhound is gone as well. Stopped paying rent, ran out of money, just packed up and disappeared. ValleyWag reported:

When emailed for comment, Bloodhound co-founder Anthony Krumeich simply stated “We moved out of the office. No longer fit our needs.” However court documents indicate Bloodhound has gone AWOL and abandoned their office. The landlord’s attorney has not been able to issue the company or its founders a summons….

Bloodhound didn’t change the world. But its hot money changed San Francisco. It helped drive up rents. Each transaction impacts a number of future transactions via the multiplier effect. This scenario is repeated over and over. Enterprises with real cash flows are pushed out because they can’t compete with the hot money that briefly comes into town looking to multiply itself.

But occasionally, it goes too far, even for San Francisco. A little while ago, Pinterest jumped into the fray. It has raised $800 million so far, and sports a valuation of $5 billion, but has no noticeable revenues, doesn’t even dream of profits, and has no idea how to control expenses – and no need to. Armed with this distorted attitude and hundreds of millions of dollars in global hot money, it set its sights on the beautiful, historic 600,000 square-foot San Francisco Design Center at 2 Henry Adams St., where 77 design businesses were plying their trade the hard way by generating the cash flow necessary to sustain themselves.

The Design Center’s owner, according to the SFGate, “had sought to take advantage of a city zoning ordinance that allows owners of designated historic landmarks to change zoning from so-called PDR – production, distribution and repair – to traditional office space. That would have allowed Pinterest to locate its offices there.” The tenants would have been booted out in favor of a company that had no reason to care about how much money it blew on office space. Alas, after an uproar, the Board of Supervisors Land Use & Economic Development Committee voted to table the matter indefinitely.

The ratchet effect continues as each transaction impacts future transactions, pumped up by hot money that doesn’t care about actual expenses and profits. And the space Million Fishes had leased for $13,000 a month, and that Bloodhound had leased for $31,667 a month, went back on the market, ValleyWag reported, at $37,500 a month.

This too is happening to homes where one sale price of one home impacts the price on average of 60 others via the multiplier effect [How Wall Street Manipulates The Buy-to-Rent Housing Racket]. That’s how the median home price of $1,000,000 came about: powered by hot money that follows hope and hype about the next big thingy that will change the world. As before, someday the hot money will suddenly evaporate, with devastating effect. To pinpoint that moment, we just have to watch the IPO market. When it blows off its top, so will San Francisco.

UBS is already preparing for that moment. The world’s largest wealth manager is “very worried” about “the lack of liquidity” that could wreak havoc during the expected sell-off. So UBS reduces risk “over the full spectrum of assets.”

“I just visited Manhattan for a week, and happened to snap some real estate ads on both the Upper West and Upper East sides of the island. Compare to Vancouver. It simply doesn’t compute.”

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“I just visited Manhattan for a week, and happened to snap some real estate ads on both the Upper West and Upper East sides of the island (both very affluent areas). Compare these prices for these apartments, located in the heart of the one of the world’s most important metropolises with all the employment opportunities that go along with it…. to how far one’s money goes in Burnaby, Downtown, etc. It simply doesn’t compute.”
– from ‘L’, via e-mail to VREAA, 8 Apr 2013

“Talked to a Vancouver man who sold all his assets in Vancouver. He told me he bought a newer house in Arizona for $105K that has a renter that pays $850 a month.”

“I went to a real estate seminar in Phoenix and the prices to rent ratios were awesome for investors. Talked to a Vancouver man who sold all his assets in Vancouver. He told me he bought a newer house in Surprise Arizona for $105,000 that has a renter that pays $850 a month. I guess Canadians have higher incomes for higher price real estate.”
happy renter at greaterfool.ca 4 Mar 2013

High Paid Vancouver Workers Choosing To Live In The U.S. – “The cost of housing is four to five times what they are accustomed to; He did not want to move because he can have his $400,000 mansion in the U.S., versus getting a little home for $1-million in Vancouver; There are other really pretty places out there.”

Eric Murray is chief executive officer of growing clean-tech company Tantalus Systems, based in Burnaby, B.C. Mr. Murray, however, lives in Raleigh, N.C., where he owns a 3,500-square-foot house and puts his three kids through private school.

He is a Canadian, with several family members in Vancouver. But when his career trajectory sent him to Raleigh, he decided to stay put. Mr. Murray is one of a growing number of workers in the Lower Mainland who live in the U.S. You could call them cross-border jobbers.

“My father’s entire family is in Vancouver, so for our relationship, it would be great if I lived there,” he says in a phone interview. “But for me to pick up and move from Raleigh, where I have a fully wooded lot, and a very nice home, and I can send my kids to private school, this sort of stuff – to do that in Vancouver, I just can’t swing it economically. When we looked at this whole thing, we knew we would have to compromise on housing.

“Absolutely, I would live in Vancouver if I could afford it.”

Technology is the third-largest contributor to B.C.’s gross domestic product, says Bill Tam, president of the B.C. Technology Industry Association. He says there is demand for about 4,000 more employees in the industry, and the majority of qualified people come from the U.S.

“Especially in the Vancouver area, technology has been one of the faster growing industries,” he says. “So when companies have had to expand and recruit managers to come here from the U.S., some have relocated to places like Blaine, Wash., close enough to commute on a daily basis. That’s the level of creativity they’ve had to resort to.”

Others, he says, fly in from more distant U.S. locations, like Mr. Murray. Mr. Murray used to fly into Vancouver every other week. These days, he’s flying in every third week.

“When they come across and recognize the cost of housing is four to five times what they are accustomed to, they end up being commuters,” says Mr. Tam.

Sierra Wireless CEO Jason Cohenour, who was travelling and couldn’t be reached for comment, works in Burnaby and lives in the U.S. Tom Ligocki, CEO of Richmond-based Clevest, says he has several employees who live in a golf course community at Semiahmoo Resort, near Blaine. One of his engineers, Jeremy Westbrook, commutes from his home near Blaine to work in Richmond. It takes them about 30 to 40 minutes to make the drive.

“None of the folks in the U.S. want to move to Vancouver,” he says. “The simple example that I heard from one gentleman is that he did not want to move because he can have his $400,000 mansion in the U.S., versus getting a little home for $1-million in Vancouver.” …

“There’s no point in even talking about the Vancouver market. We are just talking to them about directly moving to the Semiahmoo resort,” he says, on the phone from a conference in New Orleans. “If you can’t bring them to Vancouver, that’s the only option we have.

“And they do certainly make very good wages,” he adds. “These are high-end experts that we are hiring.

“But all these folks are used to living in a house. They are used to American comforts, and they are well paid, and they can afford to have a nice luxury home wherever in the U.S.”

“I get into this discussion all the time with guys. Vancouver is great. The mountains and ocean are super. I get that. I would love to live there. I have a lot of family there. But I don’t see how the economics would work for a young person trying to do both of those things, unless they had a similar opportunity in another really pretty place.

“And I have been in a bunch of different countries and there are other really pretty places out there.”

- from ‘Some Vancouver workers have been priced right out of the country’, Kerry Gold, Globe and Mail, 22 Feb 2013 [hat-tip Aldus Huxtable]

Smart business people know: Vancouver RE is woefully overpriced.
– vreaa

Property Price Fluctuation In A Highly Desirable City

nyc csmonitor

Example 1:
Refuses offer of $80M in 2008; Accepts offer of $37M in 2009

“After shlomo Ben-Haim, an Israeli scientist-entrepreneur, made millions selling a medical-device company he’d founded with his brother, a London-based lawyer, he agreed to invest $28.9 million of the proceeds in a nine-room, four-bedroom penthouse on the 40th floor of 15 Central Park West, the Robert A.M. Stern–designed luxury condominium in Manhattan—when it was still just a hole in the ground in 2005. But months after closing, in spring 2008, Ben-Haim put it back on the market—priced at a whopping $80 million.
With its private elevator landing, 14-foot ceilings, and sweeping Hudson River and Central Park views, the apartment quickly attracted a buyer, but the threat of a huge tax bite for selling less than a year after buying convinced Ben-Haim to spurn the offer. When Lehman Brothers filed for bankruptcy that fall, Ben-Haim took his penthouse off the market. Finally, in February 2009, it was offered again at the recession-reduced price of $47.5 million, and was soon sold for $37 million to a limited liability company named after the Russian city Novgorod.”

Example 2:
10% nominal loss over 40 years

“Steinberg’s presence at 740 was first noted in The New York Times in 1981, 12 years after he bought his 37-room duplex there for $225,000 —$25,000 less than it cost new in 1929— and then went unmentioned until 1994, the same year Kravis made noise, too, for moving to a new ballroom-equipped apartment at 625 Park, purchased for $15 million. His tenure at 740 had gone unreported until he moved out.”

- from ‘Where the Money Lives: New York Real Estate Today’, Michael Gross, Newsweek, 14 Jan 2013

Even in highly desirable cities, RE prices can fall.
And, coming off an historic bubble, prices can take decades to recover.
– vreaa

“I have homes in Canada and the US. I have a paper loss in Florida but still have a home.”

“I have homes in Canada and the US. Here in Florida there was a massive “correction” which led to total bankruptcy of a lot of people, huge losses by banks and a huge mess. I am not too sympathetic with people who borrow over their heads but Canada is far better off as it is than here. Fortunately both my houses were bought with cash I actually worked for and saved so I have a paper loss in Florida but still have a home. Others are not so lucky.”
– Skitty commenting at G&M, January 12, 2013 10:45 AM

This individual is not leveraged, and it seems they will be able to sit tight through any price fluctuation, if they wish.
But we know there are Canadians who have used HELOCs against their Canadian properties to buy US RE, and we wonder how many will be pushed to the brink by the very large price drops we anticipate in Canadian RE.
– vreaa

Local Realtor “Cautiously Optimistic”

mike stewart

“Now Andrew had a couple of questions about the Vancouver real estate market… In the media he’d been reading that the Vancouver real estate market had seen a significant drop in the last little while, and he wanted to know what the real situation was.” …
“We’ve seen a lot of changes in the economy in China, so there’s a lot less people coming over from China. We’ve also seen changes in mortgage rules which has also reduced a lot of demand for property here in Vancouver.” …
“What are my predictions for the next six months?.. Our major trading partners (US, China) have been having some issues but their economies seem to be turning the corner. So I’m cautiously optimistic. … In terms of changes to mortgage rules, they came in 3 to 4 months ago, we’re feeling the effect now, in the past after mortgage changes, you get about 3 to 6 months where things soften up, then things begin to pick up. So, you know, I’m cautiously optimistic.”

– excerpts from Mike Stewart, local realtor, self posted youtube video, 20 Nov 2012 [hat-tip Anon]

Whenever a speculative mania tops and begins its deflation, participants who don’t understand the fabric of bubbles, and who haven’t seen the mania for what it is, will search for extraneous factors to blame. Sure, some external factors may shape the path of the price descent, but the real cause for the resultant implosion is the fact of the mania.
– vreaa

Quotes from above added to the “It’s Only A Flesh Wound” sidebar post.