{"id":104697,"date":"2017-04-12T10:27:36","date_gmt":"2017-04-12T14:27:36","guid":{"rendered":"http:\/\/countingpips.com\/?p=104697"},"modified":"2017-04-12T06:28:52","modified_gmt":"2017-04-12T10:28:52","slug":"silicon-valley-bubble-about-to-burst","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/04\/silicon-valley-bubble-about-to-burst\/","title":{"rendered":"Silicon Valley Bubble About to Burst"},"content":{"rendered":"
April 12, 2017<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Silicon<\/p>\n

\"LouisIt may be hard to believe, but we\u2019re nearing the 10-year anniversary of the Great Recession.<\/p>\n

And as you know, much of carnage was due to the bursting of a real estate bubble \u2014 fueled by subprime loans.<\/p>\n

In the wake of the crisis, lawmakers swiftly passed the Dodd-Frank Act \u2014 which placed tighter rules on lending and the trading of real estate securities.<\/p>\n

But on the West Coast, another housing bubble has formed in one of America\u2019s most vibrant cities.<\/p>\n

A bubble that not even Dodd-Frank could save.<\/p>

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And as senior analyst Jonathan Rodriguez outlines below, there\u2019s a way for early speculators to capitalize on the downside.<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese
\nChief Investment Strategist, Wall Street Daily<\/em><\/p>\n

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Bay Area Breakdown<\/h2>\n

\"JonathanThe Bay Area of California is home to some of America\u2019s brightest minds and a number of the world\u2019s most valuable tech companies.<\/p>\n

This metropolis includes the cities of San Francisco, Oakland and San Jose and nine counties \u2014 a total population of nearly 8 million people.<\/p>\n

Now, over the last 20 years, the tech-driven economic boom has dramatically improved the economic status of many people who live and work in the area.<\/p>\n

But herein lies the problem\u2026<\/p>\n

Not everyone who lives in San Francisco is a high-paid tech-sector employee.<\/p>\n

And the skyrocketing housing costs are pricing many folks \u2014 like teachers and service workers \u2014 right out of the city.<\/p>\n

Data from the National Association of Realtors show that the median existing home price in the U.S. is $229,900.<\/p>\n

In San Francisco, the median home price is $837,500, according to a study from mortgage research firm HSH.<\/p>\n

That\u2019s more than three times<\/i> the national median. It\u2019s also higher than the peak set for the Bay Area before the last housing crisis.<\/p>\n

The study also showed that a prospective buyer of a house at the median price would need to earn $160,589.84 to afford it \u2014 using a 30-year fixed mortgage rate of 4.1%.<\/p>\n

Unfortunately, the median salary in San Francisco isn\u2019t nearly that high\u2026<\/p>\n

The Struggle Is Real<\/h2>\n

According to the latest figures from the U.S. Census Bureau, the median Bay Area household pulls in just $88,518 annually.<\/p>\n

To be fair, that\u2019s $30,000 higher than the national average. But a dual-earner household, with each member earning the median, spends nearly half<\/i> of their monthly gross pay on housing costs (when you include interest, taxes and insurance).<\/p>\n

Renters don\u2019t have it much better, either.<\/p>\n

The median rent on a one-bedroom apartment in one of American\u2019s 50 largest cities last year was $1,234.43, according to GOBankingRates.<\/p>\n

The median rent for a one-bedroom apartment in San Francisco dwarfs that figure at $3,270, according to data from housing site Zumper.<\/p>\n

That\u2019s down slightly from 2016. But it still represents the second-highest rent among all cities in America \u2014 coming in just behind New York City.<\/p>\n

As you can imagine, tech workers \u2014 the breadwinners of the Bay Area \u2014 can earn far more than the median salary.<\/p>\n

But a \u201cmedian\u201d earner would spend 44% of their gross earnings on a typical single-bedroom apartment in \u2019Frisco.<\/p>\n

A little sobering, no?<\/p>\n

The notion is sinking in for many of the wide-eyed young folks who descend upon the area\u2019s universities and companies \u2014 attempting to claim their share of the red-hot tech market.<\/p>\n

In fact, a recent study of by the Bay Area Council found that nearly half of millennials are considering relocation because of the high cost of living and traffic.<\/p>\n

Prepare Your Portfolio for the Apocalypse<\/h2>\n

What does all this mean for investors?<\/p>\n

Well, for one\u2026 an exodus of young, productive talent would be catastrophic for the Bay Area\u2019s inflated housing market \u2014 especially the rental market.<\/p>\n

And all it could take is a downtrend in the tech sector to set off this ticking time bomb.<\/p>\n

The easiest way to play the bubble burst? Short a residential real estate investment trust (REIT) with holdings in San Francisco.<\/p>\n

AvalonBay Communities Inc. (NYSE: AVB) is one of the nation\u2019s largest apartment REITs, sporting a market cap of $20 billion.<\/p>\n

Sixteen percent of its portfolio is located in the Bay Area. And another 41% of its portfolio consists of units in two other pricey metropolitan areas: New York and Los Angeles.<\/p>\n

Even before factoring in a massive deflation of apartment prices, the fund trades at 40 times forward earnings \u2014 twice the earnings multiple of the S&P 500.<\/p>\n

And as interest rates rise, the fund \u2014 along with other REITs \u2014 will also likely see outflows from income investors who rotate into risk-free bonds.<\/p>\n

Speculators looking for an even larger pop on the downside could even buy puts on the fund, rather than short the REIT outright.<\/p>\n

Bottom line: The high-priced rents in California\u2019s Bay Area aren\u2019t sustainable without massive increases in salaries outside of the tech sector or a drastic increase in rental supply. And shorting a REIT like AvalonBay allows investors to cash in on the downside.<\/p>\n

On the hunt,<\/p>\n

Jonathan Rodriguez
\nSenior Analyst, Wall Street Daily\u00a0<\/i><\/p>\n

The post Silicon Valley Bubble About to Burst<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com It may be hard to believe, but we\u2019re nearing the 10-year anniversary of the Great Recession. And as you know, much of carnage was due to the bursting of a real estate bubble \u2014 fueled by subprime loans. In the wake of the crisis, lawmakers swiftly passed the Dodd-Frank Act \u2014 which placed […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-104697","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104697","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=104697"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104697\/revisions"}],"predecessor-version":[{"id":104706,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104697\/revisions\/104706"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=104697"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=104697"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=104697"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}