One of my favorite shows on television was battle star galactica, and it’s theme that the past and future were tied forever in a cycle. As someone who has lived through three busts, the feeling of being a cylon trapped in a cycle of life and death is … familiar. And in each case, the bubble was caused by a drop in interest rates and in each case the end of the bubble came with an increase in interest rates.
Right now traffic is as bad as it was in 1999, in spite of the tremendous infrastructure improvements that were put into place since then. And there is this feeling that this guy wouldn’t be out of place here:
Without any shadow of any doubt the total amount of investment in the bay area has gone crazy. The question is when will it end and was it correlated with an interest rate drop…
And then this shows up (my own annotations):
What the chart shows is how between the start of QE in 2008 and the end of QE the total aggregate investment in Seed rounds grew from under 50ish billion to over 500 billion.
What the chart also shows is how with the end of QE in Q3 of 2014, the total amount of money in seed rounds has collapsed from over 500 billion to less than 200 billion. Twitter commentary from the VC community suggests that there is basis in fact.
Turns out we had a bubble begin with a drop in interest rates (QE Start) and and end with an increase in interest rates (QE End).
Speaking from my own narrow field of view, in early 2014 people were running around getting funded, in late 2014 I heard a lot fewer stories and recruiting pitches to go join the new new thing…
What does this mean? Assume the trend holds…
First of all it means that there is going to be, once again, much better traffic for those who survive the wave after wave of layoff. Many companies will fail and the never ending and increasing investment dollars that allowed for endless seed rounds will disappear creating a large overhang of employees who will, unfortunately, move on to other pastures. Secondly it means if you are in one of those seed companies, you better be figuring out how to get to sustainability faster … and finally it means that the quality of investments will pick up….
Oh and housing prices will drop again…
For folks who have not been here in a similar bust the experience will be traumatic as the go-go atmosphere evaporates. For those of us with more grey hairs, we are reminded of the saying: This time it will not be different….
Any idea on the time horizon for traffic improvement? =)
This all makes a lot of sense… As a potential home buyer in this crazy environment, I don’t really know what to do. Since you wrote this sensible article, housing went up by 10-15% in many parts of the valley. Redwood City, Mountain View, Menlo Park are seeing crazy price hikes. Probably Facebook and Google are driving this and I am not sure how much the startup bust would impact all this. Looks like prices go up every month. Even the rents go up like crazy, which makes me think this is not a bubble like the last time but then I think about town houses going for 1.5M and I get confused.
How about Central Valley. Tracy, Patterson is this a good time to buy?
You make some good points. A few things I wanted to add onto, interests rate are used as a form of incentive or disincentive to grow the economy or shrink it. The decision to increase or decrease overall growth is partly dependent on the business cycle. (Although it isn’t an exact prediction of the economy, it does provide some insight. Generally speaking, the business cycle is measured and tracked in terms of GDP and unemployment – GDP rises and unemployment shrinks. When we see 2 consecutive quarters of declining real GDP that is an indicator that our economy seems to be slowing down. (http://www.investopedia.com/university/macroeconomics/macroeconomics7.asp)
I think you make a great point explaining the different variables that are involved with this process. I find a good way to look at things is through substitutes. Since 90% of startups fail (forbes) we can assume consumers will be forced out of the SF housing market and into more affordable areas.
Also since there is more pressure to relocate, areas that were previously underdeveloped will improve and the cycle will continue.
My perspective on purchasing property is similar to stocks. By low sell high and look at the available substitutes. Make SURE the property is WORTH the value being asked.
If you have anything else to add or additional information, feel free!