Not all U.S real estate markets are the same. Some regions—like much of the Midwest and Deep South—are still distressed. Some are returning to fair value.
And some—like California’s Silicon Valley—are overvalued to the extreme.
In the piece below from Tom’s Confidential, you’ll learn how Tom used indicators from one market (real estate) to book his subscribers a quick 200% gain in another (big tech).
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From Tom Dyson in Tom’s Confidential: There are now at least 99 private U.S. startup companies valued at over $1 billion… and most of them are Silicon Valley companies.
“Tech Mania” is causing massive inflation in real estate prices around Silicon Valley (San Francisco Bay Area). It’s reminiscent of the “tech bubble” that burst at the end of the 20th century.
So much money concentrated in just one area has sent real estate prices soaring.
Fifteen of the 30 cities in the U.S. with the highest rent are in the Bay Area.
Palo Alto, the heart of Silicon Valley, tops the list. The median home value in Palo Alto is $2.36 million, according to Zillow. The median home value in the U.S. is $178,000.
Palo Alto homes are 13 times more expensive than the average U.S. home.
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What’s worse, the “2015 Silicon Valley Index” reported residents’ incomes aren’t keeping pace with housing prices. Income gains needed to be 50% higher just to keep pace with home price increases over the last three years.
This has led to significant financial stress among residents in the Bay Area.
Over 30% of Silicon Valley homeowners have significant housing burdens—housing costs exceeding more than 35% of income. Renters have a housing burden of 40%.
But Palo Alto isn’t just expensive based on real estate. Silicon Valley Business Journal reports it has the highest concentration of plastic surgeons. It ranks second in luxury-car dealerships and expensive clothing (brand-name) stores. And third in expensive jewelry stores.
Neighboring cities that fill out Silicon Valley (and border it) round out most of the top 10.
The takeaway: This real estate market is unsustainable. It’s an indicator of a major excess in the tech space. Technology companies—private and public alike—will fail. Their values will drop substantially, if they don’t go out of business altogether. Real estate will reverse its trend, as well.
Reeves’ Note: In the June issue, Tom went on to analyze some of the biggest “media darlings” in the tech space. He recommended his Tom’s Confidential subscribers buy put options on a portfolio of “overvalued tech” as a simple way to play a drop in the sector. One of these was tech firm Yelp.
On Wednesday, Yelp announced negative earnings for the quarter. Shares plummeted 17% in one day. Subscribers who followed Tom’s recommendation bagged a 200% winner in 33 days.
All Infinity subscribers can click here to review the put options portfolio inside Tom’s Confidential. And all PBRG readers can learn more about the upcoming Silicon Valley crash, for free, right here.