Economists: Is a deflating ‘bubble' better than one that bursts?

- The Bay Area has seen great growth in recent years from jobs to housing prices, but some economists say the tech industry is due for an economic correction.  Some are going as far to say the tech bubble is about to burst.

In 1999, Britney Spears topped the charts and Silicon Valley was on the verge of the Dot-Com Bust.

It was a day of lavish parties and IPO’s, but when that bubble burst, the Bay Area lost 20 percent of its jobs, the rental market dropped 30 percent and housing prices dipped 10 percent. Fast-forward to today and some say we are on the verge of another slowdown.

"It does remind me of the Dot-Com Boom," said Cynthia Kroll, the Chief Economist of the Association of Bay Area Governments, about the recent boom in technology.
"I didn't want to use the word ‘bubble’ but the valuations got so extreme over the last couple of years that it is bubble-like again," said Kenneth Rosen, Chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

Rosen says unlike the year 2000, companies now have business plans and have shown profitability. However, the problem lies in investors pouring so much money in that some tech companies are way overvalued and due for a correction.

They've been dubbed "unicorns" which are private companies valued at $1 billion or more.  A few years ago it was rare to have a private company valued at that much, but today there are about 154 so-called “unicorn” companies, including Uber, Airbnb and Pinterest.

"If you ask most investors they'll tell you 'No, No. No bubble here. Everything is just fine thank you very much. Can you invest in my startup over here?'” said entrepreneur Steve Blank.  Blank is behind eight startups and teaches entrepreneurship as a Consulting Associate Professor at Stanford University.

"Nice part about this bubble it's kind of deflating rather than popping and unlike the bubble at the turn of the century, this isn't going to hurt your grandmother in Nebraska," said Blank.

So what would a modern bubble burst mean?

Rosen says the Bay Area's high-end housing market is already softening.

He says in the next three years, home prices and rents could drop up to 15 percent and many jobs could disappear.

"So I wouldn't be surprised to lose 20,000, 30,000 jobs or 40,000 jobs over the next three years at some point.  We're not there yet," said Rosen.

But Stephen Levy, the Director of the Center for Continuing Study of the California Economy, disagrees with that prediction.

"I don't think so," said Stephen Levy.

He says the Bay Area's economy is strong.  Companies like Apple are expanding, unemployment is lower than almost anywhere in the nation and tourism and airports setting records. And while people are leaving the Bay Area, more people from other areas are moving in.

"All of the experts thought everyone would leave, the companies would leave, the people would leave and it hasn't happened," said Levy.

Silicon Valley Tech Analyst and President of Creative Strategies, Tim Bajarin, has watched the industry for 30 years.

"I’ve heard this story over and over again.  Silicon Valley is dead,” said Bajarin. “Yeah we're not going to go anywhere.  The bottom line is they just don't understand the fact part of this is cyclical"

Kroll with the Association of Bay Area Governments also agrees a cyclical shakeout is coming.

"In the Bay Area it means at a minimum slower growth and possibly a downturn in jobs but when that will happen is hard to say," said Kroll.

Everyone we spoke with agreed the biggest crisis for the Bay Area is affordable housing.

"I can't tell you how many people I know personally, who I work with, who are thinking ‘You know what, I can't afford to live here,’” said Rosen.

If there is a downturn, history shows Silicon Valley has done well in the recovery. Experts say despite high housing prices, taxes and traffic; it's still a place where people want to live.

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