Five years after the bubble: How green is the valley?
During the heady years of the dot-com boom, Kevin Brown of Santa Clara cooked up spreadsheets to calculate his paper profits. "Now, I'd just be happy to get the mortgage out of my house," he says.
How green is the valley?
WEALTH: A LOT OF MONEY LEFT, BUT A LOT OF MONEY STAYED
By Mark Schwanhausser
Mercury News
Posted on Mon, Mar. 07, 2005
Silicon Valley feels a lot poorer today than it did on March 10, 2000, when the Nasdaq stock index, filled with sky-high tech stocks, reached its peak.
In the five years since then, half of the Californians working in technology have left the industry, many enduring long stretches in the unemployment line and taking permanent pay cuts in subsequent jobs. Shares in Silicon Valley's public companies are worth two-thirds less -- $2 trillion less -- than they were back then. Paper millionaires are still wrestling with tax bills from mishandling stock options when the bubble burst.
But if Rip Van Winkle awoke today, he might rub the sleep from his eyes and wonder why so many people here are moping.
As the Google initial public offering reminded workers, Silicon Valley still holds the patent on a wealth-creation machine that can mint hundreds of millionaires, even billionaires like Google co-founders Larry Page and Sergey Brin.
Silicon Valley's per capita income of nearly $52,000 dwarfs the national average of about $32,000. Homeowners still sit on appreciating real estate that defies the law of gravity. And one of four households in Santa Clara County still holds stock options, which continue to generate much of the valley's riches.
By many measures, Silicon Valley remains fundamentally unchanged since it led what famed venture capitalist John Doerr once called ``the single greatest legal creation of wealth in the history of the planet.''
`Crazy wave'
``The problem was not any long-term decline. It was just this one-time crazy wave,'' said Richard Carlson, an economist who runs Spectrum Economics in Palo Alto. ``If you wake up in 2004 and look at the numbers and you don't know what happened in 1999 and 2000, Silicon Valley is doing great. We're right on track.''
If that's so, Karl and Kathy Swartz would say it was a track with all the twists and turns of Disneyland's Space Mountain. As the Nasdaq was peaking, life seemed perfect for the couple. They got engaged, exercised his stock options from Network Appliance and borrowed against their skyrocketing stock to buy a dream house in Los Altos. They married, and before long Kathy learned she was pregnant at age 42.
Their dreams tumbled with the Nasdaq. When tax bills came due in 2001, the Swartzes were staring gape-mouthed at stock that was suddenly worth a fraction of their $2.1 million alternative minimum tax bill, which was based on the paper profits when Karl exercised his high-flying incentive stock options. To pay the tax bill, the newlyweds dumped their stock, sold the dream home they never got to live in and wiped out most of their liquid savings.
`Nothing left'
A stretch of unemployment followed, pushing the couple to the brink of selling their 1,200-square-foot Mountain View house to start anew someplace less expensive.
``We had basically nothing left. It took everything,'' said Kathy, a stay-at-home mom who now uses ``Libby therapy'' -- playtime with their 3 1/2-year-old daughter -- to refocus on what's good in life rather than their financial losses.
Karl is now working for a start-up, and again he's hoping his stock options will pay off. But when interviewed a day after his 44th birthday last month, he said, ``Financially, I'm in a more precarious position than I was in 15 years ago. From that one viewpoint, I've lost a big chunk of my life. It's, `Go back 10 squares.' ''
On the whole, however, the valley has survived the downturn quite well. One reason is that many residents took money -- a ton of money -- off the table when times were good. At the peak of the boom in 2000, Californians cashed out nearly $196 billion from investments and stock options -- and much of it was pocketed here in the valley.
Those investment profits accounted for nearly 40 percent of all personal income in the state that year, three times the amount in 1996. To the initial delight of state lawmakers -- and their later regret when the tap was turned off -- it created a $17.6 billion windfall that accounted for 25 cents of every tax dollar the state collected. Last year, taxes on investment profits and options fell to $5.3 billion.
Home prices soaring
Because little data exists on how much wealth local residents have today, economists say it's not clear what valley residents did with their winnings. A large portion of the cash presumably was poured into new homes, remodelings, vacation getaways and investment real estate that drove up home values despite the downturn.
Some was tucked into savings. Nearly two of three of the Bay Area's 368,200 households with stock options had at least $100,000 in investments other than a home in 2004, according to the 2004 Gallup Poll of Media Use & Consumer Behavior for the San Francisco Market conducted for the Mercury News and other media outlets. That's up from half the households in 2000. More than one-third had at least $250,000 in 2004, a percentage that has held steady despite the bust.
``Silicon Valley is so fortunate it has this accumulated wealth. That's the greatest thing going for the valley now,'' said Steve Cochrane, managing director of Economy.com, an economic-research firm in West Chester, Pa. ``Now the question is, `How will that wealth get used and reinvested?' ''
Wages rocketed 53%
Another big reason Silicon Valley has weathered the bust is that pay shot through the roof during the boom. Median wages vaulted 53 percent in the Bay Area from 1995 to 2000, nearly double the 29 percent rate for the rest of the state, according to the Sphere Institute, a public policy research firm.
San Jose still tops the charts on household income, the basic benchmark by which we measure ourselves against other regions. Although median income in the ``capital'' of Silicon Valley dropped $6,556 from 2000 through 2003, it still topped $70,000, ranking it No. 1 in the nation, according to the Census Bureau. That's nearly $11,000 more than second-place Anchorage, Alaska, $12,000 more than third-ranked San Francisco, and $27,000 more than the national average.
Higher-skilled, higher-paid tech workers tended to fare the best during the bust. The survivors who hung onto their jobs or remained in the tech industry saw their wages actually rise 8 percent to 14 percent from 2000 to 2003, Sphere estimates.
But one of every four tech workers endured a stretch of unemployment that lasted at least three months sometime from 2000 to 2003, Sphere says. When they finally found work, tech workers who settled for non-tech jobs often took pay cuts ranging from 10 percent to 38 percent.
That proved to be too much to take for many tech workers who were drawn to Silicon Valley during the boom like forty-niners during the Gold Rush. When the mother lode ran out, they moved on -- pushing down rents, although not the home prices that are the core investment for many in the Bay Area.
``The ones who stayed had roots in the community, kept their wealth there and kept things going,'' Cochrane said.
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