Although home prices in many parts of the country have exceeded their precrash peak, this is not, by most definitions, a traditional real estate bubble. Banks are far more careful about whom they lend money to, and, in fact, homeownership is at all-time lows. But there might be another bubble inflating around us that, if popped, could affect the mortgaged homes beneath it.
What happens if the booming tech market is a bubble—and it bursts?
Is it or isn’t it?
Not everyone agrees that we’re actually in a high-tech bubble at all. But there are some unmistakable similarities to the dot-com boom-and-bust cycle of the late ’90s—remember that one? The one that caused widespread bankruptcies, company liquidations, mass layoffs, and as much as $10 trillion in losses? Yeah, that’s the one.
Perhaps the eeriest similarity is the multitude of “unicorns”: tech startups that are valued at at least $1 billion, without their companies making enough profit, or in some cases any profit, to justify that valuation. By some estimates there are at least 100 unicorns operating today. An increasing number of them fall into the rarefied (or is it scarefied?) territory of “decacorns,” worth $10 billion or more.
“As a group, these startups aren’t as overvalued as AOL was, but some of them are truly overvalued,” Harry Dent, author of “The Demographic Cliff” and editor of the free newsletter Economy & Markets, said. “You’re seeing it more and more: You sell a $30 billion IPO, and all of a sudden it’s worth nothing.”
Dent is definitely in the “we’re in a bubble” camp, and there is no shortage of financial analysts, venture capitalists, and hedge fund owners who agree, to varying extents.
So if the tide starts turning against some of today’s hottest tech companies, will homes go underwater?
Tech boom has inflated some housing markets
Certainly it’s indisputable that some of the nation’s tech hubs would feel some of the pain. You may have noticed that the areas with the strongest tech sectors have the highest prices. One study shows that for every 1% increase in tech workers, home prices rose 0.49%. For example, Denver, one of the newest and hottest tech hubs, was the only city with double-digit price increases in June.
The Brookings Institution’s mapping project, America’s Advanced Industries, shows the places in the country where salaries, and home prices, are the highest; almost all of them are tech hubs.
“It’s created a lot of wealth here,” Chris Isaacson, president of the Silicon Valley Association of Realtors®, said. “If you’ve got an IPO and a bunch of new billionaires, you’ll see a corresponding housing bounce as soon as they get their hands on the money.”
“The hottest markets this year do have a tech sector relationship,” Jonathan Smoke, our chief economist, said. “In places like San Francisco, San Jose, and Denver, prices have been supported by higher-paying jobs and resulting higher household incomes.”
Even towns with an up-and-coming tech sector such as Lincoln, NE, part of Silicon Prairie, are seeing a home-price boost; they’ve risen 14% there since 2012. Rentals are affected, too. The hottest ZIP code in Madison, WI, is the home of Epic software, employing multitudes of millennials just out of college, who are living in expensive, newly built apartments, Smoke said. “They don’t mind the higher rents.”
In short, highly paid tech workers can afford these increasingly unaffordable (for the regular guy) homes—for now. The average salary of Silicon Valley tech is $211,000; the average home price in valley hot spots like Mountain View is $1.25 million.
But here’s the problem: “These prices are just not sustainable,” Smoke said.
So what happens if it all goes bust?
When the tech industry deflated in the late ’90s, employment in Silicon Valley high-tech industries declined about 17%, according to the Bureau of Labor Statistics. That translated to a loss of slightly more than 85,000 jobs—and home prices went down with them.
“We saw 25% declines across the board back then,”Isaacson said.
Nick Bilton, a New York Times reporter covering the tech sector, said there is less risk now than there was in the speculation-crazed late ’90s, although he’s quick to note some of the negative impact already being felt in some regions. In San Francisco, for example, many longtime residents have been driven out due to the insanely high prices. “This bubble has already affected people,” he said. “It’s just prepop.”
And while he remains cautiously optimistic about the tech industry as a whole, he said a tech industry meltdown, if it does happen, could have a particularly widespread effect this time around.
“If a startup that employs thousands of people in the sharing economy—a car service like Uber or Lyft or delivery startup—fails, then those thousands of people will lose their jobs.That’s a different tech model, and it could have a wide-ranging impact.”
How bad would it be?
But even if there is a bubble, and even if it does explode, we likely won’t see a repeat of 2007: a heap of foreclosures rippling out to the rest of the economy. In 2006, Americans were literally banking on the equity in their homes. That’s why the collapse of home values affected the entire economy.
Most urban economies are suitably diversified that a tech bust won’t take them down completely. But that’s not the case in the nation’s most expensive markets.
“Silicon Valley is one of the markets that has the least amount of economic diversity,” Smoke said. If tech implodes there, the housing market will feel it.
Harry Dent feels certain that the local impact will be strong. After a burst bubble, “there’s no way real estate’s going to hold up, especially in Silicon Valley,” he said. “A lot of people are going to lose money. People who bought $3 million homes at the peak are going to watch them drop 30, 40, 50%.”
Could this mean opportunity for home buyers?
But it turns out this might not be a bad thing. There may be less competition and fewer bidding wars. Hey, maybe prices would even go down!
“If the [tech] sector were to suffer a significant decline, you would see diminished demand and less of the frenzy we have seen this year,” Smoke said. “In markets heavily concentrated in tech hubs like San Jose, the potential impact to prices could be more severe.”
Even as we hope for a more level housing field, don’t worry too much about Silicon Valley and San Francisco foreclosures. According to data provided by Black Knight Financial Services, the average combined loan-to-value ratio (the ratio of total mortgages and equity lines of credit on a home to the home’s value) for active loans in San Francisco and Silicon Valley is approximately 43%—because prices are rising so fast and so high, their loans are a smaller percentage of the homes’ worth. Nationwide, CLTV is 59%. In the Bay Area, the negative equity/underwater borrower rate—when a loan is between 91% and 100% of a home’s value—is a very low 1.95%.
The thing that makes Silicon Valley and San Francisco so unaffordable is also their greatest protection: There just aren’t that many homes to occupy.
“The low inventory is always going to be a moderating factor,” Isaacson said. Even now, he said, with uncertainty in the stock market, the usual seasonal slowdown in home sales, and the looming Fed decision on interest rates, “somebody puts a house on the market and they still get 10 offers.”
“If these homeowners do go underwater, there will be someone waiting in the wings to take their place,” Smoke said.