Tale of Two Residential Real Estate Markets

"...it was a tale of two cities" wrote Charles Dickens about Paris prior to the revolution. Today in the United States, it is a tale of two very different residential real estate worlds and the wide disparity in supply and demand should not surprise any one. It is all about jobs (and job quality) and supply. At one end of the spectrum is a market with negative job growth and plenty of buildable land (pockets of Michigan). On the other end you have markets with growth in both jobs and wages and no meaningful increase in housing supply (Manhattan, San Francisco, Atherton, Ca). In between you have things like Fort Meyers (no jobs, but it is nice a couple months a year), and markets like Las Vegas and Phoenix. In these markets you have momentum on job growth but lots of space and little restriction on building.

Main stream media will continue to sell dramatic headlines to us. The reality is that any one who is awake can not be surprised at the numbers in their local markets. At the same time we have 400 properties auctioned in Orlando, we have record prices in premium neighborhoods in San Francisco and New York City.

Dotcom bubble back. Yahoo throwing money away?

Good article by the International Herald Tribune. Focus is on Yahoo's (YHOO) acquisition of Right Media and fact that Yahoo initially invested at a $200 million valuation and then 6 months later paid $850 million for entire company. Are you valuation services companies paying attention to this? That is either quite a control premium, a really discounted prior deal, or as the article suggests, another sign that these public companies - Yahoo, Google, eBay have currencies (their stock) that needs to be used to go out and try to buy growth. As we saw recently with eBay/Skype the deals are probably too generous and there probably needs to be more carrot with management as part of the deal.

The Right Media founder offers a surprisingly candid quote:
"I have to say I giggled," O'Kelley, 30, said of Yahoo's acquisition, which earned him $25 million. "There is no way we quadrupled the value of the company in six months."

http://www.iht.com/articles/2007/10/16/business/bubble.php

Silicon Valley Leadership Group Pres Carl Guardino aka "spaceacer"

Who is Carl Guardino? Well, this is how he described himself on his organization's website (warning, it goes on and on):

Carl Guardino, one of Silicon Valley’s most distinguished business and community leaders, is the President and CEO of the Silicon Valley Leadership Group, a public policy trade association that represents more than 200 of Silicon Valley’s most respected companies.

In February 2007, Governor Arnold Schwarzenegger appointed Guardino to a four-year term on the California Transportation Commission. He also serves on numerous other boards and is actively involved in a wide range of community organizations and projects. In 2000, the San Jose Mercury News named Guardino one of the “Five Most Powerful” people in Silicon Valley in a once-per-decade study.

Guardino has been the chief executive of the Leadership Group since 1997. He previously served as a vice president with the organization between 1991 and 1995. In between, he held an executive position in governmental affairs with Hewlett Packard. Earlier, Guardino spent six years on the staff of Central Valley Assemblyman Rusty Areias, the last three as his chief assistant.

Known throughout the region as a consensus builder, Guardino has championed a number of important issues, especially in the areas of transportation and housing.

His transportation leadership includes successful management of ballot Measures A & B in 1996 that funded 19 key road and rail improvements with $1.4 billion; and co-management of a 2000 traffic relief initiative that will generate some $5.5 billion in local funds to bring BART to Santa Clara County, improve CalTrain and other transit improvements. The American Public Transit Association recently honored him as the national “Businessman of the Year,” only the second person to ever receive the award.

As a housing advocate, he co-created the Housing Trust Fund, which has helped 6,200 families afford homes in high-cost Silicon Valley by raising more than $32 million in voluntary contributions; co-managed Prop. 46, the statewide Housing Bond, in 2002, generating $2.1 billion to provide 137,000 affordable housing opportunities for California families; and co-chaired Prop. 1-C, the November 2006 statewide Housing Bond, which generated an additional $2.85 billion for affordable homes.

Guardino is the chair of City Year San Jose Silicon Valley and the founder and race director of the annual Thanksgiving Day “Applied Materials Silicon Valley Turkey Trot.” In addition, he serves on the boards for Girls for a Change, the San Jose Metropolitan YMCA, the Second Harvest Food Bank, the Housing Trust of Santa Clara County, the Leukemia & Lymphoma Society and the State Superintendent of Public Instruction’s “P-16 Council” to improve California’s education system.

Guardino was born and raised in San Jose and received his Bachelor of Arts degree in political science from San Jose State University, where he is a Distinguished Alumnus. The California Junior Chamber of Commerce named him one of the “Five Outstanding Young Californians,” and he is a member of Junior Achievement’s “Silicon Valley Business Hall of Fame,” and a recipient of the “Lifetime Achievement Award” from City Year.

Carl is married to Leslee Guardino. In their spare time, they compete in marathons and Ironman-distance triathlons. They have a daughter, Jessica, who has wrapped Carl around her little finger.

Okay, what I thought you might like is that here you have this important corporate/public interest representative that is at a minimum odd and at worst pretty offensive and insensitive comments for a politician. I read a comment he left on a Chronicle article and when I clicked on his username, all his other comments showed up. Read them all and you get his angle. He left his name and title at the bottom of one of his comments as you can see here and that is how I found out the identity of this Killelea like commenter called "spaceacer". The quote that struck me as unusual for someone who is supposed to be concerned about housing in the bay area:

"...I will be seeing some of you in the soup kitchen... sorry to see you lost your home..."

He goes on to make comments aimed at working professionals in the bay area, suggesting that Silicon Valley employers are anxious to cut labor costs. He types: "Why pay someone 100K if you can cheaper skilled workers with 40% decline in Texas or Washington." What's up with that Carl Guardino? Does not exactly what I would expect from one of Silicon Valley's "most distinguished business and community leaders".

Bay area housing bubble bloggers still frustrated

Folks who understand just a little about economics and can read through the "news" could see a few things in developing in residential real estate in this decade:
1. Individuals investors looking for investment alternatives outside of stocks and bonds.
2. A very liquid mortgage market and an appraisal system that has been, let's just say, imperfect.
3. Homebuilders with capital and available land (or space) in certain markets like Las Vegas, Phoenix, Florida, San Diego, etc.
4. Employment and wage data, while noisy quarter to quarter and carrying significant variances from region to region, that has been overall quite stable and relatively strong. Certainly in the major job center markets, labor has been tight.
5. Relative to jobs and wages, there has not been an oversupply of residential real estate (whether for rent or for sale) in major employment centers like San Francisco, Silicon Valley, and Manhattan.

The most famed bloggers focused on housing, are hosted and "led" by Mr. Patrick Killelea who, according to an article by the San Francisco Chronical reportedly rents a 3 bedroom in Menlo Park. The article says that Killelea works as a contractor and takes a substantial time away from work which, all else equal, must make it difficult for Mr. Killelea to obtain the same type of mortgage financing available to comparably skilled workers who collect a W2. Mr. Killelea and the other bubble watchers do not view consuming housing the same as they view consuming a car or a cup of coffee, which is fair enough. Housing is a big investment for most people and it is absolutely fine to attempt to quantify and separate consumption features from opportunity cost features for housing.

But what is wrong with the bubble bloggers? With all this blood in the streets, why are they still blogging? Reportedly, Killelea spends most of his time on his blog and it generates about $1,000 per month in advertising - this seems like a relatively low return on investment if we are to believe that the man earns $100 per hour. Maybe these bloggers are still blogging because they live in the bay area. By their arguments, these bloggers imply a personal conflict between not being able to afford the properties that they really aspire to live in and the simultaneous refusal to live in a community where houses are so cheap that it costs less to own them then to rent.

Is this the top for Venture Debt?

It has been kind of fun watching this subprime mortgage meltdown and finding out who the guys were that were actually behind the funny money. Me and my cohorts are all for free money when our companies are taking advantage of it. Should we have some concern for endowments, pension plans and for ourselves to the degree that we have some financial exposure to banks who are giddy about lending to startups? Rather than post a diatribe, let me just put a few questions down here:
1. Does anyone remember Comdisco? They were the first ones and the last ones to price venture debt at 1 or 2 over prime with 2% or 3% warrant coverage. For the rest of the market, even going to 5% warrant coverage was too thin and a bad path to go down.
2. Are any financial sponsors questioning the pricing and underwriting that is going on at venture debt firms?
3. Is any one thinking about the pricing and the mortality rate of startups? If 3% warrant coverage is sufficient, why not 2%? How about 1%.

Who are the players and how can you profit from a downturn in venture debt portfolios? Study Comerica, Silicon Valley Bank, Western Technology, Hercules Growth, Lighthouse Capital and Eastward Capital to name a few. First get a term sheet from a venture capitalist, then call a few of these firms and look at their terms sheets. This money is easy and we know the fate of easy money.

Peter Thiel of Facebook to CNBC: "People are one of the most important things in the world."

Video clip link:

CNBC asks Peter Thiel is explain the end game for social networking.

Here is the story: CNBC had been hyping having Peter Thiel on as a guest in San Francisco. I have never met Peter. I do have some common friends and was naturally interested to see and listen about why he had been invited to one of my friend's party and why CNBC wanted to interview him. With all due respect for Peter, I was disappointed. Aside from the fact that his answers were peppered with "umms" and pauses, there really was little to no substance. There is nothing that I know now that I did not know before watching the interview except that Peter thinks that "People are one of the most important things in the world." This was his answer to the question "Is social networking a fad?"

Another comment I might tag as "curious" if not "questionable" was Peter Thiel's assertion that valuations for companies that produce "social networking" services are, in the aggregate, not too high to provide an attractive risk adjusted payoff for investors. Bill Griffith asked Peter Thiel if there is a bubble in the market for web 2.0 and social networking companies. Notes, his line of questioning was: ‘is social networking a fad?’ and ‘what is the next Google?’. In response, Peter Thiel uttered “Facebook” although Griffith had not asked about any specific companies, then he offered four reasons why there is not a bubble as it relates to [private venture equity capital] investments companies that offer web 2.0 and social networking services. Peter Thiel said [this is not from a transcript, just my notes from the interview and my sarcastic comments are in [bracktets]]:

1) There are "no IPOs" for these companies. [Did you know bubbles are defined by whether or not the public can invest directly instead of indirectly? I did not.]

2. MBAs are going to private equity not coming to Silicon Valley [Mr. Thiel added, and I am not making this up, that ‘this was what was going on a year ago’. So his reasons are not even forward looking, they are backward looking, and at least a year old. This one is too easy. No, MBAs are not coming to Silicon Valley, they are dropping out of undergrad and moving to Silicon Valley - they don't have time for an MBA when there is also this tagging and networking and mashing up to do! : ) ]

3. And this was perhaps the most interesting reason why valuations are supposedly not too high: "...it takes far less cash to get these companies off the ground". [Peter Thiel is such a genius that people like you and me can not even follow his logic.]

4. People in the late 90s were swapping out old economy investments for new economy investments. [Well, that was true...therefore your little widget code must be worth $5M pre, right?]

I have an economic interest in the web content economy as do many people that I care about. Peter made a reference to the importance of enabling human communication globally and that was appropriate. Much of the rest sounded like cheerleading and the explanations were not exactly what I would expect from someone who is probably Mensa material. Facebook is obviously thinking IPO. If publishers like Anthony Noto or Mary Meeker are going to explain Facebook to the likes of Bill Miller or Will Danoff, I guarantee that these will not be the four bullet points they use to justify the valuation. Fidelity is a "build it" shop, so they probably won't let Noto or Meeker "poke" or "nudge" or "wink" at Danoff or the other managers using Facebook when the initiation report is ready.