Softening Real Estate Markets in Prime West Coast Cities: Does China Trump IPOs?

It’s intriguing to see that real estate prices in the toniest West Coast markets have been sloppy for a while, and experts anticipate this trend will continue. The reason for using the word “intriguing” is that I know some owners of prime San Francisco property who were hoping that prices for homes like theirs would double based on the tsunami of unicorn IPOs slotted for this year, and newly minted millionaires looking to park their money in suitable digs.

Now admittedly, in the cases where the IPO has fallen below its initial offering price (we’re looking at you, Uber, along with Lyft and Pinterest), others like Beyond Meat and Crowdstrike traded up nicely. Remember that only a portion of a company’s shares are sold in an IPO; insiders cashing out fully is very bad form, as well as bearish-looking, so even employees who got in early and got a nice chuck of change in the IPO might be a wee bit chastened by the aftermarket wobbles. Even so, most of the remaining 2019 IPOs are on track, save for AirBnB due to mounting legal challenges not making for the best investor story.

Yet despite all this new liquidity flowing largely into West Coast hands, the Wall Street Journal reports that on what looks to be a broad basis, urban West Coast real estate is languishing. If this were one city, you could attribute it to local factors, like a spike in residential construction. But that doesn’t seem to be a significant factor. From the Journal:

U.S. home sales slumped in June as home prices for major West Coast cities declined for the first time since 2012, ending the spring selling season with a thud.

Real-estate agents said lower asking prices could eventually attract more buyers, but home values in the Bay Area, Los Angeles and Seattle have roughly doubled over the past seven years. That means prices may have to retreat further before buyers do more than look, economists said.

“Prices have dropped in Silicon Valley and sellers just aren’t used to the concept that [prices] can go down,” said Ken DeLeon, founder of DeLeon Realty in Palo Alto, Calif. “There’s just this malaise buyers had of, ‘I feel like it’s gonna drop further.’”….

The median price of a home fell in San Jose, Seattle and Los Angeles in June, compared with a year earlier, according to real-estate brokerage Redfin. For San Jose, that was the seventh month of annual price declines. The slowdown in the West Coast marketsnow spans all price points, including starter homes, which had been the tightest segment of the market. In San Jose, inventory for homes in the bottom-third price tier nearly doubled in June compared with a year earlier, while prices dropped 3.8%, according to Redfin.

What is striking about this shift is the breadth of the change: it’s hitting so many West Coast cities, and across so many types of homes. The article attributes the price reversal to two factors: that prices have outstripped incomes of even high-end professionals, and the Trump tax reforms have limited the deductibility of property taxes and mortgage interest in high-price, high tax states like California. But if tax changes were the main driver, you’d expect the dampening to be most pronounced in the biggest-ticket properties.

One Journal reader volunteered that first time buyers were knowingly speculating on price appreciation and planning to make relatively quick flips. If this practice is as widespread as he intimates, one wonders how many will be caught out:


Many people (and I’m talking families with modest means, both working parents needing 1000-1500+ sq ft in Santa Clara) is to often start with an interest only loan (e.g. 7/1 ARM) and then try to flip the home in 3-5 years after a 20-30% run up in prices.

Take the gains and use that as a down payment on a more modest home with a traditional mortgage.

The first step in this often rewards those who pick up a larger home than they normally could afford in order to maximize the gain (via leverage).

In the San Jose Metropolitan area, we’re looking at sq ft prices of $500-$800 for homes built decades ago.

Admittedly, in light of the boom in the biggest cities, the slackening this year is just a blip. But when real estate professionals, who are constitutionally optimistic, say that things are likely to get worse before they get better, they are probably right since that view is so out of character.

How does the sharp decline in Chinese investment in the US play into this picture? On the one hand, “Chinese nationals” accounted for only 3% of US housing buys in 2018. But wealthier foreign buyers often use corporations to mask their ownership, so this figure understates the magnitude of Chinese purchases. And Chinese investors like California.

Last week, CNBC reported Foreign purchases of American homes plunge 36% as Chinese buyers flee the market:

The dollar volume of homes purchased by foreign buyers from April 2018 through March 2019 dropped 36% from the previous year, according to the National Association of Realtors. The decline was due to a drop in the number and average price of purchases. Foreigners bought 183,100 properties with a total value of about $77.9 billion, down from 266,800 valued at $121 billion in the previous period.

Notice also that foreign buyers on average pay more than locals, suggesting a combination of typically preferring higher-end properties and overpaying1:

Another data point suggesting that the West Coast well-off may be feeling nervous or even pinched comes in another Journal story, this one on Tesla. Its high-end, as in highest-status cars, aren’t selling well any more:

Sales of Tesla Inc.’s high-end Model S sedan have taken a big hit in the company’s most important U.S. market, California, as the electric auto maker is leaning more heavily on selling the lower-priced Model 3 compact car, new data show.

Falling sales of the Model S—and its sister sport-utility vehicle Model X—threaten Tesla’s growth goals and profit ambitions as it must rely more on its cheaper Model 3 to make up the difference.

Registrations of new Model S sedans in the second quarter plummeted 54% to 1,205 in California, according to the Dominion Cross-Sell report, which compiles data from state motor-vehicle records. The Golden State is a strong indicator of demand as Tesla’s largest U.S. market, representing 40% of Model S registrations in the country last year, according to auto-sales tracker Inc.

The new data from research firm Dominion Enterprises indicates the stylish sedan that arguably changed car buyers’ view of electric cars is losing its luster.

So is the West Coast starting to lose its mojo? Are these wobbles an an early warning that the economy is getting soft? Or is this a sign that air is coming out of the Silicon Valley bubble, and that touches enough people on the Pacific coast to have a bigger impact than you’d expect? Tech titans are finally being depicted as 21st century robber barons. They aren’t used to having their status as Masters of the Universe questioned, let alone having their economic interests targeted.

For instance, the lead story today in all the business press is that the Department of Justice is launching an investigation into whether “online platforms” were hurting competition. It’s easy to depict this as a gambit for the US to get in front of the European Commission’s competition ministry, which is threatening to become more stringent. Recall also that France is threatening to impose a transactions tax that would hit 24 large tech players, many of them American. From the Financial Times:

The US Department of Justice announced a broad antitrust investigation into the leading online platforms, raising the stakes in Washington’s scrutiny of Big Tech’s power over growing parts of the economy.

The agency said it would look into how the platforms had achieved their market power, and whether they were “engaging in practices that have reduced competition, stifled innovation or otherwise harmed consumers”….

The DoJ move comes after the outgoing European Commission signalled it was also looking to become more aggressive in checking the market power of the largest online platform companies. A report issued in April recommended lowering the bar for companies deemed “dominant players”, subjecting them to stricter antitrust rules.

Donald Trump has been critical of the EU’s scrutiny of American tech groups, suggesting it should be US rather than European authorities investigating wrongdoing by the technology sector.

It’s obvious the DoJ intent is to blunt whatever the Europeans might do. But it’s hard to see how that can work. The EU can set the rules for its own market, which is so large that it will impose costs on tech giants, both via reducing their revenues and/or profits, and by requiring them to do business differently. That imposes costs via having to make changes to their systems and procedures and forces them to incur ongoing costs via having more balkanized operations.

Mr. Market took note, with Facebook and Amazon shares falling more than a percent in after-hours trading, while Google recovered from a similar drop. The pink paper described how there have been jurisdictional issues regarding which agency, the Federal Trade Commission or the DoJ, should be taking the lead not just with respect to the general question of anti-trust but also with respect to particular companies.

It’s admittedly a long time before anything happens legally but the presumption of tech virtue is over, and that’s a step in the right direction.


1 Having worked with foreign investors, this is way more common than you’d think. It’s easy for a broker to take a buyer who doesn’t know the city or market to a few wildly overpriced properties, then show them ones only somewhat overpriced to give them the false impression that the latter are a good deal.

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  1. jeremyharrison

    I’m a landlord in SF, so I see what rentals are doing rather than sales – and as far as rental prices go, there’s no slowing down, on my apples-to-apples experience.

    Just re-rented a unit – last rented in the “peak” of early 2015 (rents fell about 5% after that), but it just went for over my 2015 price.

    And the application profiles are similar. 15 applicants from out of town (5 from Europe), 24-26 years old, moving to SF with job offers of over $150k/year in hand – all with tech companies whose names I’d never heard of before.

    Naturally, people who think they can flip a house by remodeling the kitchen and bath and doubling the sales price in 2-3 years are morons (there are brief windows when that actually happens, but by nature, those windows are brief, and unpredictable).

    And the “IPO boom of hundreds of new millionaire buyers!!” seemed like a rumor that lasted 2 days, and was then laughed off by everyone here.

    But to whatever extent that sales prices correlate to underlying rental value, the song remains the same here.

  2. PlutoniumKun

    Some anecdote here – I think Chinese money has had a disproportionate impact on boosting housing markets because most of those investors are seeking a safe haven or a hedge for issues in China, so they’ve been less interested in ‘value’, than just getting the cash into land. A Chinese friend sometimes advises investors and she asks me for ‘local’ insights into the property. In one case I was asked about a particular house. I pointed out that while it was a perfectly ok house, because of its location it had little rental value – for the same money the investor could buy three urban apartments with double or triple the reliable rental income. The investor looked as if this had never actually occurred to him. He was only interested in the capital value. This sort of investment is bound to create a ‘hope price’ for property which pushes it above any logical investment value.

    Another anecdote – while the Chinese have strongly cracked down on financial transfers, I think Chinese money people are getting smarter at finding ways to evade controls. Another Chinese friend who was complaining loudly last year about how she couldn’t get her cash out to buy an apartment she wanted in the UK, is now buying. She was joking about hiding the cash in her babies diapers as she went through the airport, I’m not entirely sure if this is an exaggeration.

    As for the West Coast – for younger IT/start up people I know, its still their Nirvana, but again on anecdote I’ve heard quite a few stories of tech people from SF – both Americans and others who moved there to take advantage – moving out of the US either to work or to set up their own businesses, all complaining that its simply become impossible to live there no matter how much money you earn. This seems particularly so with gaming, which seems more ‘mobile’ than other branches of tech, you can set up an operation pretty much anywhere your designers want to live.

  3. The Rev Kev

    I don’t know how true it is but a Californian newspapers is laying the lame on the fact that California itself has far too many eggs in the basket with the tech sector. Once this sector starts encountering any headwinds, then this slowdown translates itself through the whole economy. The implication of this story is that if you took out the tech sector from the economy, then California’s economy starts to look a bit more ordinary-

    1. Off The Street

      California fiscal policies are volatile as they rely heavily on tech employee income taxes from all those IPOs and stock options. When that tax revenue slows down, Governor Newsom and his unindicted co-conspirators in Sacramento will slash and burn what they can. California is famous for the mandated spending categories (for example, K-12, prisons) that limit budget cutting to tertiary education and some others. Look for those UC and CSU tuitions to spike and for many social pie-in-the-sky programs to be reduced, offset by gallons of op-ed ink and venting of frustrated people. Local governments used to rising property and sales tax revenue sharing will have their moments of doubt and shame.

      It wasn’t pretty last time and will be worse this time.

      1. Summer

        That is always the mantra, right?

        Laregely due to an exaltation of a form of logic that neatly eschews accountability for the past as well as learning from it…

      2. RenoRich

        > It’s different this time

        I hope not!

        California has reinvented itelf numerous times (Gold, Oil, Real Estate, Aerospace, Hardware Tech, Software Tech, Social Media).

        What’s next? I don’t know, but I’ll be looking on with interest.

    2. Summer

      I’m also reminded of the spate of stories (true or not) about young people retiring or planning to retire early. I factor in that these types of people have parents that are secure, even though it is rarely mentioned as a major factor in their planning!
      They’re basing their 40-50 year future on a 10 year hype.

    3. Oregoncharles

      Oregon actually got hit with that in the recession-before-last (they’re starting to blend together a bit): highest unemployment in the country. The state commission that promotes development (should be abolished, IMHO) had promoted almost entirely electronics, so the state had all its eggs in the one basket. Bad policy.

  4. Aaron Layman

    Reading through the latest NAR report on profiles of international purchases, it seems pretty clear that we need to reform the laws on foreign purchases of residential homes here in the U.S. I’m a bit of an odd duck in the sense that I am both a practicing broker, but also a former teacher. Not a fan of the established narrative, and particularly housing policy for the last few decades. The laws, taxes on foreign speculation and rental purchases are way too lenient.
    When such a huge percentage of foreign buyers are purchasing property for speculation, rentals (dare I say money laundering) etc, this is flawed housing policy plain and simple. It’s no wonder we have a housing affordability problem in the U.S. We’ve put greed and profit ahead of any other priorities for years on end. It’s very sad to watch, and it needs to change.

  5. Divadab

    Pricing occurs at the margins- if you take out 1% of the buyer-side money (36% of the Chinese 3% of the market), this affects prices more than a little.

    Anyway it’s a bubble – among many – sustained by super low interest rates – and adjustments will happen , downwards IMHO, and prices will be doldrumish for a long time as in the nineties. Buying now is foolish.

  6. sgr2

    Hahaha! Real estate prices in the Bay Area … what a joke! I grew up in Los Altos Hills, a small little town located in the rolling hills behind Stanford U. In 1957 my parents purchased a brand new house in a new development for about $40,000. It was a nice house, 4 bedroom, 3 bath, with a great view. Today I saw a listing where its current estimated value is $8,243,000.

  7. Tangled up in Texas

    Not just the west coast…housing appears to be softening in Austin and its ‘burbs.

  8. Cal2

    Wealthy techies, mostly outsiders, are now starting to have children. This means San Francisco real estate is going to plummet because the city, while attractive as a young renter, is not a place any sane parent would raise a child. They will go back home to Iowa to have kids, unless they want to keep their jobs here.

    In surrounding counties with excellent schools, lack of inventory is a problem even if one is uber rich. If one sells their house to a techie and has a fortune, then where do they live? Few who have grown up in the S.F. Bay Area can stomach living where it’s really hot in the summer and freezing cold in the winter. We are spoiled. So we stay put.

    How about taking your housing sale fortune and moving to Northern California, Oregon or Washington where weather is similar?
    People know that the pacific Northwest is primed for absolute disaster,

    Used to be one could “move down” and buy a starter home, or live in an unusual location like a garage when they are young and thus save money. With pressure from immigration population growth, those places are gone and one has to buy at a higher level and pay a higher price.

    “One way[to afford housing] was to get other families, or friends, or strangers, to move in and split the rent. Depending on the number of people sharing a home, this might mean a less-comfortable living situation; it might even mean one that is unhealthy. But decisions about health and comfort are best made by the individual people who bear the costs and reap the benefits. Unfortunately today the decisions are made ahead of time by city governments through zoning laws that prohibit or restrict sharing a home among people not related by blood or marriage, and building codes that limit the number of residents in a building.”

    While this site has the smell of libertarianism about it, it is interesting:

    1. Late Introvert

      Ha. I lived in SF from ’90 to ’03, working for the tech industry for about half of that time. Cashed my options out right before the original Dot Com collapse (none of my co-workers did, and all were surprised that I did). Eventually moved back to Iowa and bought a house and had a kid.

      Have visited friends since leaving. Gawd, it’s just unlivable. And yes, you have to leave before you get old. I’ll take cold winters any day. Hot summers, not so much.

    2. Jack Parsons

      With pressure from immigration population growth

      I hope you are not implying that this is all because of The Browns Moving In. Jeez.

      It’s because of high salaried programmers (you and me) driving out everyone else. And… Proposition 13’s massive warping of home prices. Property taxes don’t go up when house prices rise, so there’s no “oh shit i’m being taxed out of here” downward pressure on housing.

      1. Cal2

        “I hope you are not implying that this is all because of The Browns Moving In.”

        I’m not a programmer. Retired civil servant/military. Family has paid 90 years plus of property taxes where we live. That money was worth a lot more back then even though it was lower nominal value.

        The facts speak for themselves. Maybe you can burn reality at the stake because it’s “racist”?

        “Of the 50 cities studied, San Jose also had the second-highest share of foreign-born residents, nearly 39 percent, which includes naturalized citizens, permanent residents, visa holders and undocumented migrants. [Only] A third of the city’s native born residents are homeowners.”

        1. Late Introvert

          Family has paid 90 years plus of property taxes where we live. That money was worth a lot more back then even though it was lower nominal value.

          Um, those were for ongoing expenses at the time. No future benefits guaranteed.

          And also? Cali is a destination spot. Not just for Midwesterners, but all over this world. Sorry!

          Glad I moved away. Not sure why those who benefited from the earlier days still feel so privileged. Don’t move to Iowa City! It sucks here.

    3. Yves Smith Post author

      Um, I know people who did raise children in San Francisco. They also sent them to private schools.

      People raise children in Manhattan. There were even kids in my old 65 unit former apt. building, enough that some would visit ones from other families.

  9. orange cats

    I live in a townhouse in a 7 unit complex in San Mateo, 20 minutes from SF. In March 2018 one of the 2br2ba sold for 1,180,000 which was almost 300k over asking. Buyers were a Chinese couple with 2 children. In October an almost identical unit with even more updating went to a Chinese woman for 1,030,000. The sale took an unusually long time because HSBC suddenly put further restrictions on capital flight–the buyer had to have 4 different sources for the amount instead of one.

    Wolf Street had an article recently about how IPOs do not raise real estate prices.

  10. JBird4049

    some owners of prime San Francisco property who were hoping that prices for homes like theirs would double based on the tsunami of unicorn IPOs slotted for this year, and newly minted millionaires looking to park their money in suitable digs.

    Holy sh—! Double? The Bay Area used to be a very mixed economy with everything from fruit orchards to manufacturing as well as mixed economic classes with the middle of the middle down to the working class dominate. As well as the ultra conservatives to the extreme left socially.

    IIRC even into the 80s that was mostly the case, but since about 1970 it has slowly changed into something like a third world or neo-colonial country. The extractive wealth is the tech industry where the ideas are what’s grown and shipped out. The Oligarchy of venture capitalists and tech companies CEOs rule the governments along with the well paid servant class (and they really kinda do). Then the small middle class are the management and senior workers in their companies with the ignored increasingly poor and growing peon class scrambling for the crumbs.

    More and more of us Bay Areans really cannot afford housing. Saying that one is anticipating house prices to double also means expecting apartment prices to go up similarly. Something will have to give. Soon and saying that all the homeless and near homeless are all lazy is idiotic. Thinking one should charge $3,000 for a one bedroom apartment is just greed talking.

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