Silicon Valley real estate

[RuleNumberOne]

If the browbeaten Fed has lost its spine and will continue to let the markets inflate, the way to participate in "tech" IPOs or tech in general with low downside may be real estate in Silicon Valley:

 

https://www.bloomberg.com/graphics/2019-silicon-valley-real-estate-boom/

 

But what scares me is we have crazy momentum in the European bond market. Professional investors have to pay ever-higher prices for bonds in the hope of flipping it later to a greater-fool. I guess if professionals don't keep buying bonds at ever-negative yields they will lose their jobs by the end of the quarter. They are forced to keep driving without brakes.

 

What do people think? Strangely, real estate has deflated here over the last year even as tech stocks (that don't have a P/E) are booming.

[John Hjorth]

... But what scares me is we have crazy momentum in the European bond market. ...

 

The day you tell us which European banks you're short I'll start considering brewing a reply to you, which most likely will be to absolutely no avail.

[RuleNumberOne]

@John I wouldn't invest in any European bank - either long or short. The ECB and regulators/Eurocrats can cover things up forever. In 2008 many American banks failed. But I haven't heard any European bank fail yet.

 

Would people on this board invest in Silicon Valley real estate irrespective of the blowback from the eventual unwinding of the bond bubble? I think if the US stock market and tech IPOs keep going for another 2 years, there can be some great risk-adjusted returns in Silicon Valley real estate as employees buy homes with IPO proceeds.

 

Any unwinding of the bond bubble would hit US stocks. But the hit may not be enough to cause a bear-market/recession. Residential real estate in the best neighborhoods in SiliconValley stayed flat during even the 2008 bust.

 

What do people think?

[alpha]

Have you ever been to Silicon Valley? It is an economic power house but the high real estate prices are driven by nutty local politics restricting housing supply. Lots of people got burned buying at the height of the last RE bubble.

[RuleNumberOne]

IMO, the size and number of the IPOs this year is so huge, it can lift RE in a big way after the lockups expire.

 

The local politics are not nutty, just common sense. Only new entrants want more high-rise apartments built so that they can live 4 per apartment with over-flowing schools and roads. Instead of blaming long-term residents, I think these new entrants should instead look into buying bunk-beds so that 8 of them can fit per apartment. 

 

[John Hjorth]

@John ... In 2008 many American banks failed. But I haven't heard any European bank fail yet. ...

 

Thanks for the reply, RumeNumberOne,

 

You're severely misinformed here, or un-informed here, RuleNumberOne. You have my full respect for opening this topic however. Personally, I'm ignorant in this space particiulary discussed here.

[SHDL]

I’m no real estate expert, but between the high transaction costs and illiquidity, this seems to me like an inefficient way of expressing your short term market views...

 

If I thought a huge market melt up was likely I would just buy some OTM SPX calls or something and call it a day. 

[RuleNumberOne]

The downside with residential RE is limited or non-existent. If there is a bear market, one can sell the RE at a small loss in the worst case and buy stocks at rock-bottom prices.

 

If tech stocks go up X%, I think residential RE can capture a lot of that because there is no vacant buildable land in the central locations.

[SHDL]

The downside with residential RE is limited or non-existent.

 

I wouldn’t be so sure about that...

[John Hjorth]

Thanks SHDL,

 

Again, expressions and/or opinions [all speculative and/or subjective], not in any way backed by data.

[DTEJD1997]

The downside with residential RE is limited or non-existent. If there is a bear market, one can sell the RE at a small loss in the worst case and buy stocks at rock-bottom prices.

 

If tech stocks go up X%, I think residential RE can capture a lot of that because there is no vacant buildable land in the central locations.

 

I thought this was proven false in the crash of 2008?

 

Here in the Detroit area, my father bought a house in 2006 at a decent discount, in a decent neighborhood.  By about 2010, it had gone down by about 60% in value.  Fast forward to today, and it is worth a bit more than he paid.

 

I know some people who actually live in the Detroit city limits who have bought houses that have gone up in price 8X in the last 10 years or so.

 

Of course, Detroit is a weird, wild place.  Prices go up & down (mainly down) over the decades.  At one time, Detroit was a vibrant boom town.  Housing was in short supply, heck, there was even a housing shortage.

 

Obviously, Silicon Valley is different...but will it ALWAYS be a "hot" place?  I wouldn't be so sure of that.

 

[Spekulatius]

@John I wouldn't invest in any European bank - either long or short. The ECB and regulators/Eurocrats can cover things up forever. In 2008 many American banks failed. But I haven't heard any European bank fail yet.

 

Would people on this board invest in Silicon Valley real estate irrespective of the blowback from the eventual unwinding of the bond bubble? I think if the US stock market and tech IPOs keep going for another 2 years, there can be some great risk-adjusted returns in Silicon Valley real estate as employees buy homes with IPO proceeds.

 

Any unwinding of the bond bubble would hit US stocks. But the hit may not be enough to cause a bear-market/recession. Residential real estate in the best neighborhoods in SiliconValley stayed flat during even the 2008 bust.

 

What do people think?

 

In Germany: IKB (Industriekreditbank) and Hypo Real Estate AG were nationalized.

https://en.m.wikipedia.org/wiki/Hypo_Real_Estate

[RuleNumberOne]

Interesting. Reminds us how crazy professional investors can get.

 

On July 25th, Draghi will have to show us how he plans to sustain the insane momentum in the bond market.

 

At some point, it will become clear even to an orang-utan that buying $1 for $1.2 today, $1.22 tomorrow, $1.25 the day after, and so on (i.e. "negative-yield bond") is not sustainable.

 

https://en.wikipedia.org/wiki/IKB_Deutsche_Industriebank

"Only a week earlier the bank had released a statement saying it expected to meet its earnings goals for the year. "Rhinebridge", a structured vehicle operated by IKB, had invested heavily in the U.S. subprime market."

 

 

@John I wouldn't invest in any European bank - either long or short. The ECB and regulators/Eurocrats can cover things up forever. In 2008 many American banks failed. But I haven't heard any European bank fail yet.

 

Would people on this board invest in Silicon Valley real estate irrespective of the blowback from the eventual unwinding of the bond bubble? I think if the US stock market and tech IPOs keep going for another 2 years, there can be some great risk-adjusted returns in Silicon Valley real estate as employees buy homes with IPO proceeds.

 

Any unwinding of the bond bubble would hit US stocks. But the hit may not be enough to cause a bear-market/recession. Residential real estate in the best neighborhoods in SiliconValley stayed flat during even the 2008 bust.

 

What do people think?

 

In Germany: IKB (Industriekreditbank) and Hypo Real Estate AG were nationalized.

https://en.m.wikipedia.org/wiki/Hypo_Real_Estate

[Spekulatius]

Interesting. Reminds us how crazy professional investors can get.

 

On July 25th, Draghi will have to show us how he plans to sustain the insane momentum in the bond market.

 

At some point, it will become clear even to an orang-utan that buying $1 for $1.2 today, $1.22 tomorrow, $1.25 the day after, and so on (i.e. "negative-yield bond") is not sustainable.

 

https://en.wikipedia.org/wiki/IKB_Deutsche_Industriebank

"Only a week earlier the bank had released a statement saying it expected to meet its earnings goals for the year. "Rhinebridge", a structured vehicle operated by IKB, had invested heavily in the U.S. subprime market."

 

 

@John I wouldn't invest in any European bank - either long or short. The ECB and regulators/Eurocrats can cover things up forever. In 2008 many American banks failed. But I haven't heard any European bank fail yet.

 

Would people on this board invest in Silicon Valley real estate irrespective of the blowback from the eventual unwinding of the bond bubble? I think if the US stock market and tech IPOs keep going for another 2 years, there can be some great risk-adjusted returns in Silicon Valley real estate as employees buy homes with IPO proceeds.

 

Any unwinding of the bond bubble would hit US stocks. But the hit may not be enough to cause a bear-market/recession. Residential real estate in the best neighborhoods in SiliconValley stayed flat during even the 2008 bust.

 

What do people think?

 

In Germany: IKB (Industriekreditbank) and Hypo Real Estate AG were nationalized.

https://en.m.wikipedia.org/wiki/Hypo_Real_Estate

 

Yes, that IKB was very strange. The IKB was designed to be a lender to smaller to mid size industrials, but starting in 2005 or so, it couldn’t make a spread any more and started this special investment vehicle in the US, for which it had no mandate to do so and it want disclosed either, as far as I know. I was invested in IKB a long time ago (it was a very sold stock and dividend payer), bit not at the time of the collapse. Same with Depfa, which became part of the Hypo Real empire which later collapsed. It is quite likely in my opinion that European banks looking for ways to generate yield in thenUS bond market right now.

[John Hjorth]

... It is quite likely in my opinion that European banks looking for ways to generate yield in the US bond market right now.

 

That's an interesting thought, Spekulatius,

 

I've just got an invitation from SPKSJF.CPH to a shareholder dialogue meeting in the beginning of September here in Odense, which I'll attend with Lady of the House. I will try to ask that question, if it will be possible [to ask it].