California’s tech company bubble may soon burst

Joe Guzzardi
February 27, 2015
As seen in:
Lodi News-Sentinel

California’s economy has always been boom or bust broken up by occasional stable periods. Starting with the Gold Rush era in the 1850s to California’s aerospace industry surge a century later to today’s tech bonanza, people have rushed to California — mainly Los Angeles and the Bay Area — to make their fortunes and then spend their money as if there were no tomorrow.

Now economists are concerned that California’s revival from the subprime mortgage meltdown era that began in 2006 and resulted in homeowners losing billions in equity may be on the verge of collapse. They point to preposterously inflated housing prices and the funny money spending patterns of Silicon Valley’ high tech industries as alarm bells that should be heeded.

Harvard- and MIT-educated financial analyst Wade Roush, who writes for the online publication Xconomy, warns that the bubble may be about to burst. Pointing to Facebook — which recently spent $19 billion in cash, stock and restricted stock units to purchase the 5-year-old, $20 million in revenues startup WhatsApp and also laid out an additional $2 billion to buy another startup, Oculus, that hasn’t even introduced its product to the market — conditions are teetering on the edge.

To put $19 billion in perspective, Roush notes that the sum is greater than the gross domestic product of Honduras, Jamaica, Iceland, Nicaragua and 80 other nations, exceeds the annual revenues of 355 of the Fortune 500 companies, and equals the net worth of hedge fund multibillionaire George Soros, who’s wealthier than all but 29 people in the world.

For wealthy Silicon Valley residents, money is no object — especially when it comes to real estate that’s seen a huge price surge even in the smallest houses, some no bigger than detached garages.

One 900-square-foot Palo Alto house with two bedrooms and one bathroom sold recently for $3 million, above the 2014 $1.7 million median price in Palo Alto for homes with less than 1,000 square feet. Even at those stratospheric prices, Palo Alto listings are few. During one week last month, there were only 11 homes on the market, five priced $4.9 million or higher with the cheapest, a 1,100-square-foot house, asking $2 million.

Although Silicon Valley’s high fliers like Facebook’s Mark Zuckerberg — net worth $35 billion — are raking in fortunes and can easily pay the going real estate rates, many of his neighbors are struggling to pay their monthly bills.

In its series about California’s working class, KQED reported that according to the nonprofit Joint Venture Silicon Valley index, which gauges the area’s living standards, the valley has the state’s widest income gap. Joint Venture breaks the workforce into tiers: high-skilled, high-wage jobs where median earnings are $119,000 a year, and low-skilled, low-wage jobs where the median is $27,000. More than 30 percent of Silicon Valley lives below the federal self-sufficiency level.

An economic bust can have several variables that might ignite it. A shift in Wall Street attitudes, a Middle Eastern war or a terrorist attack within the U.S. could set the wheels of decline in motion toward collapse.

One thing is for sure: The cyclical nature of the California economy and its real estate values have repeatedly proven that what goes up, must come down.

Joe Guzzardi is a retired Wall Street investment banker who lived in Lodi for 25 years. He is currently a senior writing fellow for Californians for Population Stabilization. Contact Joe at [email protected].