Everybody is getting pumped about the new wave of tech IPOs. These SF Bay Area tech IPOs include Uber, Lyft, Airbnb, Slack, Pinterest, and more. Although some had a hard start initially, all tech IPOs have pumped billions into the SF Bay Area economy.
The default assumption is that these tech IPOs will bring in huge demand and drive SF Bay Area real estate prices up. After all, these companies are worth billions and employ tens of thousands of sub-35 year-old-employees looking to establish roots.
If you ask most real estate agents in the Bay Area what they think about the future of real estate, one of the first things they will mention is the upcoming tech IPO tsunami. They'll say things like,
“You better buy now before the lockup periods are over!”
“Buy now or get priced out forever!” <- all-time classic line
If you're a real estate agent, it's always a good time to buy or sell property since they make money on transactions. No problem as that’s just business.
But I have a feeling the industry is overestimating the impact tech IPOs will have on real estate prices and underestimating the impact tech IPOs will have on a homeowner's desire to sell.
Remember, to get rich, you often need to challenge yourself to think differently. Herds can sometimes get slaughtered. There are very few “no-brainers” in this world. If there were, we'd all be financially free well before our expiration dates.
Overall, I assign a 30% chance the tech IPO boom causes SF Bay Area prices to fall, meaning there's a 70% chance the tech IPO boom is neutral or beneficial to the real estate market.
Overrated: Demand Surge From Tech IPOs
There are now headlines saying “Thousands Of New Millionaires Are About To Eat SF Alive,” quoting people who think the average home price in SF will soon be $5 million.
As with any wild assumptions, it's good to do some analysis using real numbers instead of hyperbole. Let's go through an exercise to ascertain what the realistic incremental demand is for housing from tech IPOs.
- The median home price in San Francisco is about $1.5 million. In the SF Bay Area, the median ranges from around $800K in the East Bay up to $3.1 million in places like Palo Alto.
- To feel wealthy enough to buy an above average/median home and have money left over to pay for life, let's assume a $1 million after-tax windfall from the IPO.
- 99% of the employees are not highly-comped execs, but 35 and under employees making less than $300,000 a year all-in, a middle class lifestyle for the Bay Area.
- The average employee has been with the company for two years.
- Given the average startup employee is underpaid on salary due to stock compensation, the average startup employee does not already have a 20% downpayment for a median-priced home.
- The average employee's option strike price is higher than zero since the vast majority of employees didn't join at the beginning.
- The tax rate on the exercise of options after the IPO lockup period will be approximately 50% total to account for state and federal taxes. For them to become windfall millionaires, they would have to sell at least $2M in options. Of those with this optionality, I suspect only a small percentage will enter the housing market. Let me explain.
Let’s say the company IPOs at a $20B valuation. To get $2M in proceeds the employee must liquidate 0.01% (1 basis point) ownership in the company.
Now let’s go back to our assumptions. If they’ve been there two years at IPO time and they want their money within a year of IPO, they’ll only have vested 3/4 of their initial 4-year grant, which means they must have been granted 1.33 basis points ownership.
Further, given their strike price isn't zero, even with ballistic growth since joining two years ago, they'll need an even higher grant than 1.33 bp. Let's call it 1.5 bp (0.015%).
The employee option pool size at this stage is typically around 15%. And of course, they’re not distributed evenly. At a $20B company there are probably 500 – 1000 employees who could end up owning 1-1.5bp on average.
So at a $20 billion valuation post IPO, if its value holds in time for employees to sell usually 6 months after IPO, the IPO may yield 1,000 eligible buyers with $2-3 million gross / $1-1.5 million after-tax, assuming they sell ALL their stock.
Now multiply these 1,000 people by the percentage of how many will actually enter the real estate market with this money in the ensuing year. If 50% want to buy property, that's 500 eligible buyers. If 20% want to buy property, that's only 200 eligible buyers.
The intent to buy percentage is certainly not 70% – 100% since some already have property, some don't want the hassle of owning property, some think property prices are too expensive, and some want to pocket their gains and move away from the Bay Area.
A total of $100B in valuation with the same math would produce roughly 5,000 potential buyers with $1-$1.5 million after tax. If we use a 20% intent to buy percentage, we'd yield 1,000 true buyers or 2,500 true buyers using a 50% intent to buy percentage.
Total New Demand From Tech IPOs
If we add up the total projected public values of Uber, Lyft, Airbnb, Palantir, Pinterest, and Slack, we're talking about a total public value of roughly $200B from 2019 – 2020.
Therefore, one can make an educated guess there will be roughly 10,000 eligible buyers and anywhere between 2,000 – 5,000 high intent buyers,resulting from all these IPOs over a two year period.
These 2,000 – 5,000 high intent buyers with $1 – $1.5 million in cash after tax are therefore looking for properties worth between $1 million – $7.5 million based on a 20% – 100% downpayment.
But how does 2,000 – 5,000 new buyers compare to supply? Ah hah! This is the missing part of the equation people don't seem to account for when projecting home prices.
SF Bay Area Supply Could Surge
The SF Bay Area real estate market finally cooled off in 2018. Some tech companies like Nvidia, Facebook, and Apple lost 20% – 40% of their value, even though the S&P 500 was only down about 6.4%.
A correction was bound to happen as price growth outstripped wage growth for so many years.
Check out this price chart by Compass, the largest real estate broker in SF. Notice how the median price peaked in early 2018 and is down 11.5%.
At any given time, there are between 6,000 – 8,000 homes for sale in the San Francisco Bay Area. In March 2019 there were 7,792 homes for sale in the Bay Area, up from 6,233 a year before according to Zillow, +25% YoY.
In the San Jose sub area, there were 3,011 homes for sale in March 2019, up from 2,102 the same time a year before. That's an almost 50% YoY increase in inventory folks.
Check out this chart below that shows how the inventory of homes for sale is spiking in the Bay Area. We're at 7-year highs, and the number looks to be going higher as sellers try to cash in.
What on Earth is going on with the supply surge? It's actually pretty simple to explain.
2019 marks the 10th year of a bull market in the S&P 500. Meanwhile, real estate prices are up 80% – 100%+ since 2012. The SF Bay Area population is aging and the area is becoming congested, homogenous, and unaffordable, even for most tech workers.
Further, there is a demographic shift away from the SF Bay Area to the heartland of America because costs there are much lower.
When you can live in a 2,500 square foot single family home for less than $2,000 a month compared to paying $4,500 a month for a 1,000 square foot two bedroom apartment, while earning a similar amount, the pull to leave is strong.
Google, for example, announced in February 2019, it is spending $13 billion to expand into the heartland. Their blog post writes, “These new investments will give us the capacity to hire tens of thousands of employees, and enable the creation of more than 10,000 new construction jobs in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina and Virginia.”
If Google, one of the wealthiest companies today, is finding it cost ineffective to pay its engineers $300,000+ because it costs over $3 million to buy a median-priced home in Palo Alto, you know other companies are expanding into the heartland as well.
Underrated: Real Estate Seller FOMO
Imagine you're a homeowner who is up 100% in the past 10 years. Your 20% down payment is up 500%. By all comparisons, you're rich! And if you owned more than one property during this time period, you're really feeling lucky.
You wanted to sell in 2017 but held off. Then you wanted to sell in 2018, but tech was crashing and the real estate market was weak.
With the upcoming new tech IPOs, now is finally your chance to sell to a lucky newly-minted millionaire in 2019 or 2020. You're praying the IPO surge will lift prices back to all-time highs and then some.
Sure, all these new tech company IPOs over the next couple years employ ~35,000 people (Uber ~13K, Airbnb ~11K, Lyft 2K, Palantir ~3K, Slack ~1K, Pinterest ~1K, etc), some of whom will want to buy real estate.
But the SF Bay Area has 7.6 million residents, some of whom will want to take advantage of the new tech IPOs and sell their real estate.
Let's say only 20% of the 7.6 million people own their homes since ~15% of the population are kids and there are dual adult households. That's still 1.52 million homeowners who might want to consider cashing out versus 35,000 new tech IPO employees who might be able to buy.
In other words, the ratio of potential sellers to potential buyers is 43:1 in this scenario (1.52M to 35K).
Even if we more conservatively assume only 10% of the 7.6 million Bay Area residents own their homes, and there are 100,000 tech company IPO employees all living in the Bay Area, the ratio of potential sellers to potential buyers is still 7.6:1 (760K to 100K).
We can drill down further and estimate the high intent to sell sellers out of the 760,000 – 1,520,000 estimated homeowners in the SF Bay Area, which is already a conservative figure.
Even if just an additional 5% of SF Bay Area homeowners decide to list their homes over the next couple of years, that's an extra 38,000 – 76,000 in new supply flooding the market compared to 2,000 – 5,000 high intent buyers based on $200 billion worth of tech company IPO value.
Therefore, the ratio of potential sellers to potential buyers still ranges from 7.6:1 to 38:1. Even if we double the high intent buyer count to 10,000, supply still far outweighs demand.
Supply > Demand Scenario
Given the lopsided ratios, one could easily conclude a surge in inventory will more than offset the uptick in demand from tech IPO employees. Instead of seeing a step up function in home prices, we could very well see a step function down after the initial frenzy is over.
If you still can't see or believe how prices could go down based on the numbers, here's a classic Supply / Demand chart to illustrate the point along with my commentary.
The initial price point equilibrium is where S1 (supply) intersects D2 (demand) to get P1 (price). With all the tech company IPO hoopla, the default assumption is that demand shifts up from D1 to D2. As a result, real estate prices increase in the short-run to P2 as FOMO buyers go all-in at or close to the peak of the market. Time frame: next 12 months
But as prices rise, supply rises to match demand as more homeowners get tempted to cash in. With more listings on the market, S1 shifts down to S2 and prices temporarily get back to even. Time frame: in 12-24 months
However, what I'm arguing is that there's a good chance the tech IPO hoopla will awaken a slumbering bear of 760,000 – 1,520,000 homeowners in the SF Bay Area who flood the market with new supply. In such a scenario, the supply curve shifts from S1 to S3. Time frame: in 12 – 30 months
When D2 intersects S3, real estate prices end up lower than during the initial D1 and S1 intersection equilibrium.
But things could get even worse given how slowly it usually takes for homeowners to read headlines, contact an agent, prepare their home for sale, and then list their home on the Multiple Listing Service.
The Johnny-come-latelies would create even more supply past the new equilibrium, thoroughly overwhelming demand. As the inventory of homes piles up, more price cuts are an inevitability.
As prices decline to P4, homeowners, home sellers, and the mass media start to panic, causing even more pricing pressure. This is how real estate cycles form, and partly why a recession might appear by 2021. Time frame: in 20 – 36 months.
Just like how there is FOMO for buying, there is FOMO for selling. To not cash out when you had the opportunity might be the worst feeling ever. During the 2000 dotcom bubble, there were plenty of paper millionaires who lost everything because they refused to take profits.
During the 2008-2010 housing crisis, SF Bay Area real estate did fall between 20% – 30%, with many examples of people losing their homes to foreclosure or short-sales. Surely, many who've held on are considering their second chance.
When it comes to forecasting where real estate prices are heading, determining supply could be much more important than determining demand.
Buy Real Estate For Life, Invest For Income
At the end of the day, you should buy a property to live in and enjoy life first. Run the numbers. If you foresee owning your home for at least five years and the cost makes sense after putting at least 20% down, then go ahead and buy.
Just know that real estate is seasonal. If you are reading this article in the spring, you will witness the strongest period of demand as buyers get paid their bonuses and commit to their new year's resolutions.
The people who lose their minds, and sometimes their shirts are often buying during the spring. The buying frenzy fades in the summer, picks up again in the fall, and dies down during the winter. Winter is always the best time to buy.
Even if the tech company IPOs don't help boost real estate prices, they should at least provide a floor of no more than a 20% decline from peak to trough. These tech IPOs are raising new funding that will likely keep the party going for longer e.g. $1.4 billion in new funding for Pinterest.
Just be careful thinking that you just can't lose buying Bay Area real estate today. As 2007-2010 showed and 2018 showed again, prices do come down from time to time.
Please pay attention to monthly inventory numbers. They are already at 7-year highs. The higher supply goes, the stronger the downward pricing pressure. It doesn't matter how great a property is. If the house two doors down is also trying to sell, your hope for a bidding war is gone.
Diversify Your Real Estate Holdings
If you want to invest in real estate once you own your primary residence, it's better to invest outside of the SF Bay Area where cap rates are 3-5X higher, and valuations are 50% – 80% lower.
I truly believe investing in noncoastal city real estate through real estate crowdfunding or specialty REITS are going to be a multi-decade positive trend. Thanks to telecommuting, video chat, the internet, mobile phones, and new online tools, both companies and employees are moving to cheaper areas of the country.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
SF Bay Area Real Estate In 2021
I'm always going to look for real estate bargains in San Francisco. The city is just too dynamic with so many high paying jobs it's hard to bet against the SF Bay Area real estate market over the long term.
In fact, I'm now bullish on San Francisco Bay Area real estate in 2021 and beyond. There will be a rush of people back to big cities once there is herd immunity. Therefore, I also recommend people buy big city real estate before the herd comes back.
The biggest opportunity I see is buying panoramic ocean view properties in areas like Golden Gate Heights, Sunset, Parkside, or the Richmond district. Ocean view properties in every other international city in the world trades at a huge premium except for in San Francisco. I expect this valuation differential to narrow tremendously over the coming years.
Luckily, the real estate sector has roared back post pandemic. I don't think the housing market will crash any time soon. In fact, San Francisco real estate is one of the best values in the country now.
The error in this article is that tech workers prefer to buy in southeast San Francisco neighborhoods not the east bay not Marin. So this massive supply doesn’t exist. Not all neighborhoods command 40% over asking all cash but those are the neighborhoods these IPOs will look at. And there is a finite number of homes for sale in those areas.
Don’t think so. The smart tech workers who see value are buying single family homes in the Sunset and Parkside neighborhoods. And the really savvy tech workers are looking at Golden Gate Heights, where you can get ocean views.
Ridesharing makes commuting cheap now. And these neighborhoods will forever change and increase in value.
Hi! Loved the article. Would love your opinion on this little dilemma. I own a nice little 1br up on twin peaks that I rent out. I’d like to sell just to get a bigger place in the east bay, but have no idea how to time it with all this going on. The scenario above aside, if things continue like this for a few years, will my place in SF appreciate more than a place in the EB? If there’s some months after my sale will I see much slippage in my buying power in the EB? And finally, one thing sticks in my mind which is that prices are so hyperextended now, even if new lower-end millionaires can afford it, do they want to, and would their financial advisor recommended it as a good investment? IOW, mine being a starter home, might kids looking for a starter home search elsewhere for better value? Thanks so much for your thoroughness!
HI Hoops, no one can tell the future, you can only day within a certain degree of certainty that due to inflationary pressures the real estate markets across the US will trend upwards in the long run, If you take a look at places like Dublin and Newark you will see that they are still getting 4% – 8% population growth year over year which is a strong indicator of property appreciation, You simply want to place yourself in the growth path. But emotional factors that you are talking about are important too because these people are very intelligent and don’t want to get caught on the wrong side of a currently up trending market. So until the lack of inventory in the population growth paths starts applying pressure back inwards, the more reliable investments are going to be within 20 – 30 miles of these hot zones were prices have started to cap off and slow down. Where as the properties just out side these areas are trying to catch up. I would suggest purchasing a property in the East Bay if that will make you happy, living situation wise, and in my personal opinion ( not a financial advisor ) I think you should be getting a relatively close appreciation rate no matter where you purchase in this area. If you need any assistance let me know ccantoniocc@gmail.com i’m hosting investor meetups and learning from the best active investors right now and joining a brokerage in these next few weeks so I would love to help you look at the options when it comes to selling.
An excellent post: I appreciated the demand-side analysis where you put a number on the potential buyers arising from the IPO’s. When the Tax Cuts and Jobs Act was passed in 2017, it seemed to me obvious that the effect of the SALT and mortgage-interest limitations would have a huge effect on Bay Area real estate. However, lower demand didn’t manifest until the fall of 2018.
How to do a rent vs buy analysis is well known, with people comparing the after-tax cost of each scenario. For decades the Bay Area analysis has favored “rent”, but prices have continued to rise, I think because of the non-monetary benefits of ownership plus the price appreciation. Now that the balance has shifted decisively toward rental instead of buying (because most of the outlay for property taxes and debt service is non-deductible in an owner-occupied property), I think the IPO’s at best will result in a bounce in a bear market.
Longer term, I expect that rents will rise, prices will fall, and more investors will dip their toe in to Bay Area rental real estate.
I’ll close with this story: a CPA buddy (I’m a retired CPA) used to joke back in the 1980’s that we should buy each other’s houses and rent them to each other. The owner/landlord could deduct in full (and still can!) mortgage interest and property taxes AND depreciate the building portion. (In 2018 and later the owner/landlord could very probably claim the QBI deduction, too.) The after-tax cost of the property expenses would enable a comparatively low rent to be charged to break even on the cash flow. Making the arrangement legal would be complicated to allow for one party to exit the relationship, especially to retain the upside for the property he lived in but did not own. We both agreed that a) the arrangement wouldn’t be ethical and b) with the reward of ownership inuring to the tenant the IRS could argue this was a tax-avoidance scheme. So we could never do this ourselves or recommend it to our clients….
Interesting article and comments. A few people I know (including us) are seriously thinking of moving abroad and working remotely in the next couple of years. We have a multi-family property in the East Bay and we are really unsure about whether to sell or rent out all the units and hold on to it. If we sell, we could pull out about $1m equity, buy a cheap place for cash to live in elsewhere and invest the rest. If we rent our place out, we’ll make about $1,700 a month (after all costs including earthquake insurance and ridiculously high property tax) and have no cash, but if we can hold on to it long term, the mortgage will gradually get paid off and it could be a nice little nest egg.
The way I see it is that if you have property in a desirable location (like London, SF or NY), if you can ride out the lower points, it will always go up gradually over time. The high points are usually higher than the last high and the low points are usually higher than the last low. I’m still unsure though! I think prices won’t rise too much in the next few years.
First time hearing this contrarian view. Great breakdown and analysis. Many people I know are looking to leave the Bay Area, many already have to Seattle, Austin, and some even to NYC as a transfer from big tech in a proper city instead of Menlo Park or Mountain View.
Downside is that SF has the concentration of interesting business I’d want to work for (scalable and making ambitious impact on the world). Big Companies in many other places are not that interesting to me.
Interesting analysis, but I do think a few other factors we should consider. (Biased as I just get into the SF market again with majority chunk of my cash after sitting on the sideline for last 2 years). I am just talking about buy/sell/flip situation in San Francisco, not about income/rental property or outside the city.
1: If you look at those companies, other than Palantir(their IPO is still pretty far away) and Zoom, they are all HQ in San Francisco, if you add a couple of upcoming smaller IPOs (PagerDuty/Cloudflare) and a few best performing tech IPOs in the last couple of years (Twilio, Okta, etc), they are all HQ in San Francisco.
2: People want to live in the city and that’s why those company started in SF in the first place.
Even the young couple who are starting a family, they want to stay in the city longer and compared to the south bay, SF is actually cheaper. The whole better school district thing only makes senses economically if you want to have at least two kids, but a lot those young tech workers don’t even want to have one to start with.
3: East Bay is really all the young tech workers are moving to. However, most of them still prefer to live in SF if they can. (But unless you worked at a successful company, that’s just an aspiration).
Given 1/2/3, I think SF can still see a 15 to 20% upside in the next few years.
I think your analysis is very helpful to think which price category will get the biggest boost.
A lot of people think the most contended category in the city will go from $1M-$2M to $2M-$3M, I can kind of see that but average price 5M is just BS IMHO. The cash windfall is a one-time thing unless you hit 5M+ or something, you are still a w2 earner with a guaranteed income of ~250K.
I think that’s a highly probable scenario of 2,000,000 to 3,000,000 as the sweet spot from 1,000,000 to 2,000,000.
The scenario I paint in this article is it a unlikely scenario that has probably 35% chance of happening. The likely and result is continued high demand for housing and continued our board appreciation.
I just want people to be aware of the downside scenarios before investing such massive amounts of money when prices are ready so high, including myself.
I think this article is making a lot of assumptions about supply I’m not sure hold true.
Half the houses we go see are estate sales after the homeowners die….the sad reality is that prop 13 discourages moving from one home to another in an appreciating market. Anyone that bought in 2012 can’t really sell for a profit and move across the street or to another neighborhood because those gains won’t really be gains – they’ll have to completely exit the bay area & California. Same for anyone that bought before the recession.
Basically, the only people that sell homes are those that are moving out of the area completely or to another coastal city. Most of the people moving aren’t people that own homes and are moving…they’re young people giving up on real estate here.
Sure inventory might go up a bit as a result of newly minted buyers, and I do think prices are coming down a bit, but that’s more of a result of tax changes as people realize their deductions are going away, home loans above 750k lose tax benefits, and everyone’s “rent vs buy” calculator is shifting more to rent due to losses in the tax benefits for SALT deductions in high COL places like California.
Add in rising rents, and if you bought in 2012, 1990, or 2004, there’s really no reason to sell unless you’re FORCED to sell. Why sell? even if you leave? You can rent out your place to cover your mortgage. This is evident when you can rent a home for 3k that would have a mortgage of 6k – the rental market in most areas is so much cheaper than a mortgage, which just means everyone is renting their homes out rather than selling.
So, while I don’t disagree there may be some spike in inventory, some level of decline in prices…I just think it’s going to take a situation where people are FORCED to sell to actually cause the supply and demand shift you’re proposing. Why would I ever sell a property I bought in 2012 when the rent generated exceeds the mortgage? I think you’re assuming lots of people want to sell and move away. And you’re right about moving away – but it’s not the people that own homes.
Homeowners here are
1. Locked in because theyve lived here for 20+ years and don’t move because of huge property tax shifts. They have a life here, so they’re generally not moving to the heartland just to retire cheaply.
2. Young families with lots of money saving for 5-7 years before buying a small place. They can’t afford to move.
3. Rich families where they bought their kids houses and didn’t have to concern themselves with the market.
4. Middle class people who are supplementing their income with rents because their 2.5k mortgage place is being rented out for 3.5k a month.
5. People that are sitting and waiting to sell at the right time to leave the area and cash out.
After leaving here for 5 years, I think you’re overstating #5. The people leaving aren’t usually homeowners with roots here.
Who knows, maybe I’ll be wrong. To be honest, If I can find a place thats 30% of our income and I can rent out the basement ADU, I’ll hop on it regardless of price because I think the long term fundamentals are good. At the end of the day, the same advice seems to be true no matter what..Almost every place in America I would say….don’t buy unless you’re sticking around for 5+ years……
But if you can afford it, you like it, and you want to live there. Then you shouldn’t be trying to time the market for a 10% deals. Gains? Losses? It doesn’t really mean anything for your primary residence. Oh you lost 10% of your equity? Well if you didn’t lose your job it’ll recover. Oh you gained 10% of home value? Unless you’re moving it doesn’t really matter.
Would I be INVESTING in real estate to rent out here? Fuck no. Like we’ve already established, the rent market is well below mortgage costs because everyone bought up 8 years ago and those are being rented out to cover those low mortgages. But if you want to live here? Hell yes. The supply issues are never going to go away. The fires will keep the contractors busy, the earthquake will keep the contractors busy, the regulations will keep you from building up, etc. There’s no more space.
Hey RyGuy, if you happen to notice this, this is a copy/paste of a comment I just posted hoping Samurai might answer, but you seem to be speaking to exactly what I’m asking about, and I also couldn’t make sense of wiki’s explanation of Prop 13, so if you don’t mind, insights? One thing, I own it outright:
‘Would love your opinion on this little dilemma. I own a nice little 1br up on twin peaks, small but updated with killer view, that I rent out. I’d like to sell just to get a bigger place in the east bay, but have no idea how to time it with all this going on. The scenario above aside, if things continue like this for a few years, will my place in SF appreciate more than a place in the EB? If some months pass after my sale will I see much slippage in my buying power in the EB? And finally, one thing sticks in my mind which is that prices are so hyperextended now, even if new lower-end millionaires can afford it, do they want to, and would their financial advisor recommended it as a good investment? IOW, mine being a starter home, might the new kids looking for a starter home search elsewhere for better value?’
But you also raised the specter of prop 13, which I don’t understand. I’m not trying to ‘flip’ for profit, per se, just flip for upgrade, although I wouldn’t mind shaving a little off the top. But is this not a good idea either?
You said, “…the sad reality is that prop 13 discourages moving from one home to another in an appreciating market…Anyone that bought in 2012 can’t really sell for a profit and move across the street or to another neighborhood because those gains won’t really be gains – they’ll have to completely exit the bay area & California. Same for anyone that bought before the recession.” I bought in exactly 2012, but it was all cash. Is this still me?
Thanks ahead of time, Ry
Great Article!
I own a condo in the south bay(paid off). I’m debating whether to rent it out or sell it now and make investments elsewhere. are there any guidelines you recommend for making the right decision?
Thanks!
Jason
Sam:
A few years ago you wrote a couple posts, one outlining how SF was very cheap compared to other “international” cities, and another about how interest rates are likely going to be low (at least relatively) for decades.
Have you backed off of either of these views? Or, if not, are they already baked into your analysis here?
I still think SF is one of the cheapest international cities in the world and that interest rates will be low for our life time. In fact, I just locked in a 10/1 ARM to refinance my 5/1 ARM expiring this summer. I was going to pay the ARM off before it reset to 4.5% from 2.5%. But now, at 3%, I think I’ll just keep it. Check out LendingTree for some competitive bids, and then go to your relationship bank and ask them to match.
This scenario of tech IPOs hurting SF real estate prices in 2-3 years is a minority possibility of happening. I would ascribe this scenario as having a 30% chance of happening. It is 70% likely that the tech IPOs will keep prices high and help push prices up at the margin.
Great analysis Sam! Just a thought, are you sure about the assumption of 5% homeowners might sell? It feels like fewer than that. Tech workers who are in their 30s, 40s and just bought in the few years are staying for the long term. All cash buyers from China who bought do not see the need to cash out. People who are reaching retirement age already sold and moved few years ago. Like you said, it’s all about the supply, what if that 5% assumption is wrong?
This are assumptions
Most of housing stock is owned by older, longer term homeowners.
Interesting analysis.
Now that tax season is coming to an end, most salaried people in high cost areas are realizing they are screwed with the new tax law. Expect increased selling.
Interesting analysis, Sam. This time next year you can do a follow-up and see how your prediction fared. Of course, you may still be in Hawaii and not care! (I sure wouldn’t…)
This analysis is very interesting but I don’t fully agree with you on the supply side increasing. The reason is that a lot of Bay area owners are the older generation – who have been through a couple (or atleast one) recession and have seen their property values go down and back up, which reiterates their belief that the Bay area is unique, apart from being the best place to live (weather etc, that others have listed) and hence don’t want to leave. Also most of these older home owners are holding on to their properties to pass on to the next generation, sometimes multiple properties for their children, so that is FAR better than cashing out. Also another big reason is Prop 13. Unless Prop 13 goes away nothing will change. And the chances of that happening are very slim. (For full disclosure: I’m a renter and looking to buy a primary residence in the last 5 years)
This analysis is very interesting but I’m not sure I agree with you entirely on the supply side of the equation. As a couple of commenters have already said, the Bay Area homeowners who have benefitted the most from their properties are the older ones who have been through a couple of recessions (or Atleast one) and strongly believe that holding on to their properties no matter what is the best decision – most of them are holding on to it for reasons to pass on to the next generation (sometimes multiple properties as well, one for each kid). Another big reason is Prop 13. None of these homeowners want it to go away (for obvious reasons) and unless that goes away or there is a massive recession or eathquake they will never sell. For full disclosure : I’m a renter and have been looking to buy in the last 5 years.
PS – kqed show this morning (March 14) discussing this topic. Tune in folks!
Wondering how this affects the 2 nd home buyers . We have a property in Santa Cruz and we are hoping with the winter blues coming to an end and these IPOs getting ready to happen will our market come back . It’s been crazy for years but has slowed since September. And yes we have location steps to the surf .
Hi Sam,
I was thinking about your analysis and thinking about SF Real Estate thru Supply and Demand and it was really insightful.
After thinking about it for sometime, I believe a similar real world example would be the invention of Fracking and Crude Oil. Before Fracking, Crude oil locked in rocks was not economical to extract, but once demand for oil increased enough, bringing up the price, the oil now was worth the cost to extract in his manner, unleashing a new wave of supply.
I know it’s not 1:1 comparison to real estate, but for me it helps to think of IPO/Real Estate and Fracking/Crude Oil prices.
Howdy Sam, it seems like this is the kind of data that informs shorting the SF housing market? Or the housing market in general in about 12 months during the big uptick?
I read that “Thousands Of New Millionaires Are About To Eat SF Alive” article. Glad I’m not the only one who was highly skeptical!
My company in SF recently was acquired. Although we got a good price for our options (about a 10x return based on the latest strike price), my impression was not that most people were able to go out and buy a $2M house, even without a lockup.
Everything you predicted was true.
Many employees do not understand their equity awards and how to minimize taxes. I believe most were taxed 45-50% on their payouts. Most current employees were here 2 years or less.
Many former employees had forfeited their options.
The majority of the payout money went to the founders and the VCs (>95%).
There were maybe 12 employees (non-founders) who made multiple millions (before tax) out of several thousand stockholders (not including optionholders).
I heard a few people bought houses, but in the East Bay, or elsewhere in the US.
Also, the new $10k limit on property tax really hurt us in the high-tax and housing price states.
Thank you for sharing your story. Taxes hurt, especially when one receives a large windfall. Tax is always one of the biggest “surprises.” You always get less than you think thanks to dilution and taxes.
Are you a homeowner in the Bay Area? If not, do you plan to buy? What do you think about the surge in inventory?
I am already a homeowner in the East Bay and bought our starter home in 2016. We were already planning to get a nicer house within the next 5 years. With my “windfall”, we have more flexibility with timing- when to liquidate and when the right property comes along.
I’ve already noticed price cuts and increase in inventory around us. I’ll actually be glad if prices come down a bit more since we’re planning to keep our current home for rent.
Oh, another thing the NYT article got wrong that only SF houses will be affected. I ride BART everyday and the train is standing room only by the 2nd stop on the line, with everyone exiting in SF. About 1/2 of the people at work are parents and the average age is about 34. We don’t all just want condos in SF. I personally like the East Bay for lower prices, more room, and access to San Jose/ Peninsula job markets.
Cool. I wonder why the mass media doesn’t focus on the actual data more regarding price cuts and massive inventory? Anybody search can see and notice the surge in inventory and homes sitting.
GL!
The fact that >95% is owned by VC and founders, and many employees forfeited their options, mean that this startup unfortunately did not perform well. Either the founders were too greedy, the execution or business model did not go well, or both.
If you look at S1 filings typically startup reserves much more in the employee stock pool. The most important capital is human capital. Without proper employee incentives the startup can hardly succeed.
As for housing price cuts there are always ripples in any market. I’m not sure where the location is, e.g. commute distance to SF and school district. But when you see BART is completely full everyday you know the housing demand is there.
In an analogy, the housing market is like a giant pot with lots of water. It will take a lot of fuel to boil the water. But if you can isolate a portion of the water, create a “pot in the pot”, you can boil that small pot with much less fuel. The pressure in the pot will increase dramatically when that small pot of water vaporizes.
Basically you only need capital formation that is enough to jump above the potential well, to reach the critical point, for a portion of the population to cause the housing market to explode. Here is why an across-the-board wealth distribution will not do it. Ten thousand dollar bonuses for everyone in a company will do little to the housing market. But big successful IPOs will, since they will enable such capital formation for many of the employees.
Thousands of additional millionaires are not going to make anything cheaper in the bay area. That’s like putting your money into CD’s then telling everyone you’re slicing through money’s mysteries.
I hope not. As I am Long San Francisco real estate. And I do think a lot of people like yourself will ignore the supply side of the equation, especially since this post is very long and supply is harder to calculate.
The key for homeowners and multi property homeowners is to take advantage of the frenzy. It’s the one of the best ways to get rich, Just like many did in 2000 and 2007.
Why do you ignore the supply side of the equation? Do you not realize supplies up 20% to 50% you over here and going higher?
Very good contrarian analysis. However I think it makes more sense to use total capital commitment instead of guessing the number of potential buyers and average prices to buy.
Let’s use the $200B total startup market cap assumption. Assuming 15% employee share the value is $30B. I don’t think it is useful to guess the stock option strike price, because it varies a lot. Many companies switch to RSU when option prices become too high, which means the stock cost is zero.
For the $30B let’s assume after tax income is $15B, although I believe the number should be at least slightly higher, because the higher tax brackets are marginal rates. How much of the money will be used to buy homes? Your 20% assumption seems too low. My guess is at least 60% when you count all levels of the market: condos, town homes and SFH. Most of these young guys don’t own a home and eagerly want to buy. So I’d say roughly $10B is committed to the housing market. With a leverage ratio of 2.5 the total capital injection into housing is $25B, for the next two years.
Now since these startups are concentrated in San Fran and Palo Alto, it is fair to say that interest in houses south of San Jose, e.g. Morgan Hill, or Far East, e.g. San Ramon, is small. Most of the intention will be around San Fran, down to Palo Alto, east to Berkely, etc. How many houses are there?
If my impression is correct the total number of houses sold, including condos, etc., in San Fran, San Mateo, and Santa Clara county, is around 20 thousand last year. If you trade South San Jose with Berkeley, etc., we can assume the total addressable market is still 20 thousand transactions per year, probably less, because San Jose and South is a huge market that should be discounted.
Assuming average sale is $1M, since the transactions include condos, the total transaction volume is $20B per year, or $40B for two years.
For a two-year $40B market a $25B capital injection will be gigantic.
Sounds good. What type of property are you targeting to buy or have you bought in anticipation for the uptick in prices?
I’m not in the market on either side in the near future.
My analysis has flaws too. First, it is unlikely employees will dump all in two years. More like 70-80% of their holdings. Secondly it is difficult to predict how these stocks will perform. Some may do well, some badly. The tech bubble will bust someday. The chances that the bust in “shared economy” will happen in next two years is, in my view, quite high. Thirdly there are so many tech behemoths in Bay Area. While the percentage of their employees wanting to buy houses is relatively low, sort of like “low grade ore”, the base is huge. Any significant fluctuation on tech stocks can cause the demand to go up or down dramatically that dwarfs the additional demand generated from IPO money.
So in summary I think predicting the housing market is fun but of little use in terms of planning for one’s own actions.
Bay Area has great weather, great food, great access to mountains and oceans, great access to Asia, and a culture of casual, egalitarian and open mind. These characters exist before tech, and will hopefully continue for a very long time. Who doesn’t want to try their best to live here?
I actually have skin in the game and I am trying to highlight the other side of the equation that there could be some downside pricing risk.
With no skin in the game, are you OK with renting during this time period? I’d love to get the perspective of renters with the IPL hype. How old are you anyway? Thanks
Facebook IPO alone was $105bn. Add in the other 2012-13 IPOs and you get similar or higher figures for liquidity.
How key cities behaved then into a bottoming market probably is a high growth rate example.
How it plays out later in the cycle with more homeowners willing to take profit? Hard to say but this isn’t unprecedented liquidity.
I have to believe the bottom of the market in 2012 had way more to do with the price rise than FB going public.
I tried to sell my house in 2012 after FB went public, and I got no takers at $1.7M.
See the following posts. This is one of the beauties of running Financial Samurai since 2009. So much history to go back to!
https://www.financialsamurai.com/should-i-sell-my-house-due-to-the-facebook-effect/
https://www.financialsamurai.com/lessons-learned-from-not-selling-my-house/
Wealthfront CEO did an analysis – closer to Sams view than this one. 6,000 millionaires, about half the number during the 2012 cohort with Facebook.
https://www.forbes.com/sites/bizcarson/2019/03/19/ipos-from-uber-airbnb-pinterest-and-lyft-could-create-a-230-billion-windfall-and-6000-new-millionaires/
is there a like button, with out having to write a comment. Good article Sam. Thanks
Hi Sam. I sold a rental property in Glen Park late last year. I got a great price, made a huge profit and was somewhat happy but also not entirely convinced that it was a great decision to sell. I now believe I made a big mistake. Single Family Homes in good neighborhoods in SF are bullet proof and will only continue to go up. Supply is severely limited and always will be. I think the bigger danger to falling prices is the untenable homeless crisis that is impacting San Francisco and cities like Oakland and Berkeley.
Do you still own property after you sold though? What was your percent or gross profit in what time period?
Nothing is bullet proof!
But I totally get the FOMO.
I almost doubled the price after 13 years. I still own property in SF & OAK. I’m now looking at DC & LA.
Almost double sounds pretty good, along with more property in your portfolio. It’s hard to lose money when you double your money.
Willow – I would avoid the DC area if you are looking for an investment property. The entire metro area has been inundated with Class A luxury apartments and rents are flat at best and falling in many areas. SFH are renting for much less than the monthly mortgage payment if you bought now.
It also appears that we have reached a critical demographic breaking point. For the past decade, inner ring DC has had a net migration gain of millennials. That came to a screeching halt in 2018 and DC proper only gained population from new births. As a parent of two young children, the prospects for raising a family in the area are NOT GOOD. Basically, the gains from young professionals with babies is going to evaporate within the next 5 years as the entire family of four decamps to lower cost of living areas of the country and there aren’t any new arrivals to replace them. My theory is that very hard times are going to be falling on every major city in the country over the next 5-15 years.
I sold last year as well and since I wanted out I feel totally happy with more or less selling nearish of what I think is the top. Very hard to time it perfectly!
I was thinking something similar, thank you for putting numbers on it.
Can’t wait to hear what all the people you talk to in the next 20-36 months have to say.
Assuming that 5% of homeowners want to cash out and leave the bay area seems very high. I agree that there are a lot of folks wanting to leave the bay area, but these are mostly renters and low income workers. Homeowners on the other hand are less inclined to leave.
The only FOMO homeowners I see who wants to cash out and leave the bay area are:
Recent homeowners who is fed up with the bay area and wants to relocate:
– these are probably first time homeowners who bought 3 – 5 years with some equity and can sell with some slight profit
– for longer term or seasoned homeowners, these are folk who are locked in with low interest rates and lower property taxes, they probably also have a family or recently started a family and it would be more difficult for them to leave
Retirees who wants to cash out and live like a king
– these folks typically don’t time the market, they will just sell when they are ready to retire since they already have so much equity in their house
Also, within these 2 groups, we are only counting the ones that are trying to time the market and have FOMO. All non FOMO folks are just regular seasonal sellers as you will always have folks who are fed up with the bay area or folks that retire.
Sure. But what about the thousands of multi property homeowners who would like to reduce risk and at least sell one property? I know so many investors who are de-risking right now and locking In gains.
A lot of these multi-property owners are sitting on positive cash flow properties. These properties are probably purchased many years ago with lower interest rates and property taxes. If they sell, are they able to buy back another property which is cash flowing (even when the market heads back up)? I’m guessing most mom and pop investors would just “set it and forget it”. So we are only talking about seasoned investors who are planning to sell and purchase elsewhere or invest into some other types of investments. Do these add up to anything significant?
Cool. Definitely most people will just hold onto their assets for the long term, which is why I used conservative numbers for increased supply.
What are some rental properties you own in the San Francisco Bay area that have allowed you to set it and forget it? What are some strategies you have for maintaining your properties? Thanks
I have a couple SFH properties in the east bay and they are cash flowing really well. If I sell these, it would be very difficult to find a replacement RE in the bay area with even a positive cash flow. I’ve looked into out of state, but I’ve talked to many investors who has done that and are have eventually sold and looking back in the bay area. The main reason is the quality of tenants are much lower in other areas and eviction rates are higher. Also, if you need to replace anything major, it wipes out all your gains for a year or more (i.e. an AC replacement may be 2 – 3 months of rent here whereas in other areas, it may be 1 – 2 years of rent).
The strategy for maintaining properties is really to find good tenants. I do property management myself so I can pick the tenant I want. This is another reason I can’t do out of state. I keep the condition of the property in excellent condition and I charge slightly lower rent. This way I can pick the right tenants and ask the tenants to do some of the repairs/maintenance themselves.
Hi Sam,
What do you think of the Placer County area? Is it overvalued, undervalued or valued just right?
I believe the recent NYT article on this subject argued that not all Bay Area real estate prices would rise, but that San Francisco prices might, as many of the large IPO companies are located in SF, and their employees prefer to live close by.
Part of your article addresses current prices and supply in San Francisco (and San Jose), but other parts of your analysis relate to the Bay Area in general. I’d be curious to know if you think it will play out differently in different Bay Area cities.
What are your thoughts on why the NY Times Style section article didn’t do a deep dive analysis on supply and run the numbers? I’m trying to ascertain whether it’s better to write articles without analysis, or with analysis as a blogger.
It’s much easier to latch on to catchy headlines and one-liners without analysis. But I feel bad if some folks leverage to the hilt now and the market rolls over as it has before. What would you do?
I sure wouldn’t jump in on the basis of a NYT article! While I’ve been fortunate with some RE investments, I realize that could easily change. Not looking to buy anything more.
Still, I was curious if you thought there would be any variation in the potential downturn in price depending upon more local factors, rather than the Bay Area as a whole.
This is a really solid analysis. It’s been a few years since I lived on the coast, and I forgot how crazy it is out there for you guys. I’m in a relatively large city in the midwest now, and we already have Facebook, Google and Apple building a decent footprint. Nothing from Amazon yet , but I’m sure it’s only a matter of time. Unless you count the local Whole Foods of course…..
It’s always easy to see the best side of wherever you call home, but I agree that one of the big trends over the next decade is going to relocation to the Midwest. There are 20+ awesome cities with great research universities that are working hard to support startups and rolling out the red carpet for investment from big tech. Add in the crazy spectacle that happened with Amazon in NYC and expensive coastal cities start looking a whole lot less appealing.
For sure Joshua. Coastal city real estate money is coming for the Midwest, and I want to ride the multi-decade wave.
Related: Focus On Trends: Why I’m Investing In The Heartland Of America
Sam, you may have some interesting insights, but your facts are so wrong that it calls into question your entire article.
You say “At any given time, there are between 6,000 – 8,000 homes for sale in San Francisco. One day in March 2019 there were 7,792 homes for sale in San Francisco, up from 6,233 a year before according to Zillow, +25% YoY.”
This information is wildly incorrect. Currently here are the number of San Francisco homes listed for sale on various websites:
Zillow – 974 homes
Realtor.com – 1,174 homes
Trulia – 965 homes
Redfin – 650 homes
Socketsite – says current inventory is 620 homes
Sure, these sites do not list each and every home for sale (such as condos available in new buildings in SOMA). But still . . . what is your source for these figures?
Curious
San Francisco Bay Area. For San Francisco alone usually around 500 to 1000 properties are for sale depending on the day of the year.
Agreed. The “google investing billions” in the heartland comment got me. They are investing in data centers not office space. This article is cherry picking data. Wa wa wa…..
Glad I got you. Not sure who will fill these offices. Maybe Google is lying about their plan to hire tens of thousands of new employees in the heartland.
https://www.google.com/amp/s/www.blog.google/inside-google/company-announcements/investing-13-billion-2019/amp/
“Today we’re announcing over $13 billion in investments throughout 2019 in data centers and offices across the U.S., with major expansions in 14 states. These new investments will give us the capacity to hire tens of thousands of employees, and enable the creation of more than 10,000 new construction jobs in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina and Virginia. With this new investment, Google will now have a home in 24 total states, including data centers in 13 communities. 2019 marks the second year in a row we’ll be growing faster outside of the Bay Area than in it.”
I wonder if one of the reasons why it’s so easy to get ahead as because some people are either too stupid or too lazy or too ignorant to understand fax? Clearly, Google is going to hire a tens of thousands of new employees in the heartland. For this guy to ignore this fact makes me wonder how many other people don’t realize this fact as well?
Should we feel sorry for these people who do not understand? Or should we educate them?
Not sure. Maybe we already have made up beliefs and simply look for data to reinforce our beliefs. Cognitive bias?
Supply is an obviously important metric in determining demand. It’s half of the market.
I think it’s up to those who have the knowledge to share knowledge to help others. But if after sharing the knowledge, folks still refuse to see the whole picture, then it’s up to us to take advantage of ignorance and lack of preparation for the good of our family.
I have to point out that it says “….enable the creation of more than 10,000 new construction jobs”, not google employees….
I apologize if i have overlooked something else.
Why ignore the line before?
“These new investments will give us the capacity to hire tens of thousands of employees, and enable the creation of more than 10,000 new construction jobs in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina and Virginia.”
Employees = Google employees since this is taken from Google’s blog post.
Come on now. What else could it mean?
Such a timely analysis! Here’s what I hope will happen:
a. Many of them will use the money to pay back their student debt from expensive schools. Ivy League degrees are everywhere in these companies.
b. Many tech employees will decide to Retire Early and bring their windfall to LCOL states or invest in startups. No point continuing to optimize button colors on a website when you’re over $1M net worth.
c. Sellers go through massive FOMO or just decide that they’re fed up with insane property taxes. When you’re older, paying just property taxes here on a $1.5M home is more than rent elsewhere.
The price gain from IPOs will be at most temporary. It’s not like permanent jobs are added to the area. Maybe this means I’ll actually have a chance at owning a home in the Bay Area after all!
yes i think there are a lot of young millennials that are sick of living like a pauper and ready to settle down, and just waiting to leave.
Sam:
You mention “These 2,000 – 5,000 high intent buyers with $1 – $1.5 million in cash…” but how many people do you think will now all of the sudden have $300,000-$500,000 cash and, when combined with their salary and bonus, have enough for a down payment? Do you think that segment will push-up the 1BR/2BR condo market in SF or the SFH market in the rest of the Bay Area? Or do you project *even more* supply coming on in those segments in the same manner that you outline for SFHs?
Perhaps 30% of the 35K tech company IPO employees will have $300-$500K after taxes after selling all their stock. So another ~10,000. Now you’ve got to figure out what percentage want to buy and compare that to supply.
Inventory is surging, and the condo market is weakening. Just look at the comps and hit the Sunday open houses. The data is there, but for some reason, the inventory numbers aren’t a big focus b/c it’s sexier to talk about demand.
My impression is that the recent weakening has to do with rates being a little higher and people on the margins having to put in lower bids based on lower DTIs. And also a bit from tightened money export controls in China. But it’s not from overall reduction in demand of people wanting to own here if they could.
Everything you’re saying about supply/demand works is true, but I think you’re way overestimating the upcoming supply situation from the Tech IPOs. To be fair, I think you’re just trying to highlight a risk, not saying it will happen for certain. And it’s always prudent to be aware of downside risks. But regular folk know that once they sell here, they won’t be able to buy back into the area except in a major recession, and they better have the cash and job then when they do!
I think the supply risk you highlight is more likely to come about in a global recession when people need to sell and cash in gains just to get by day to day when they lose their jobs. Or if rates were to increase a couple percent (not likely) to cash out gains in fear of further price reductions.
It’ll be fun to see what happens and check back. I do wish I listened to your Golden Gate Heights advice years ago when you first published it (I was a reader then too).
Cool. Yeah, GGH has had a great run. I wish I bought two houses instead of one.
But I’m pretty sure inventory is going to continue going up. Do you feel otherwise?
yoink
I do. I think rates are going up which inhibits buying so less snatching -up, and people who want out are finally feeling like this is the top. there might be homes going on market out of greed for the price and fear that they cant get out later.
Homeowners will get the memo about the 2018 slowing – AND see the IPO opportunity and say, shoot this is my last chance.
This is in the midst of national slowing which they will also see.
Great analysis. One other factor to consider is political. Major efforts are happening across California (and other places, like Oregon, Minneapolis, etc) to upzone and reduce building restrictions, in the name of environmentalism and increasing affordability. In California, SB50 is just one bill working its way through Sacramento – it could double density in major swathes of SF (and LA, and SD).
Restricted supply in the face of job growth has been a primary driver of housing price appreciation in the Bay Area, and loosening this up could have major impacts. Seattle is an example of a tech-rocked market where supply is looser – they permit/build roughly double SF per year, and prices are significantly lower (and now falling).
Even if supply doesn’t immediately come online (which it won’t), a major upzone could weigh on psychology and affect prices immediately.
True. Seattle is the perfect example of a city that saw a rocket up in prices, and now a drop b/c of a surge in supply.
It is an inevitability there will be more legislation passed to increase density in the SF Bay Area.
And with the Bay Area already packed as it is, I want to leave after being here since 2001. Many others want to as well.
I think city planners and infrastructure builders have finally wised up to the idea that density is the only solution to commute times. Suburbs create commutes. More roads don’t solve that issue.
It’ll be really interesting to see how much flex time and telecommuting becomes the norm. It comes with some costs that many employers aren’t willing to bear.
Robert – You are a very naive man. Infrastructure builders, auto makers, oil companies, and the gov’t always knew how incredibly inefficient low density is. That is point. How can you sell everyone a gas powered vehicle and build millions of miles of roads if everyone can walk or ride their bike to work? YOU CAN’T!
Don’t forget real estate and stock prices. – Evil illuminati getting a fresh baby blood IV thinks “If we have highly restrictive zoning, we can dramatically inflate the price of real estate and stocks while forcing everyone to pay 25% of their paycheck to drive two gasoline powered vehicles to work and bury themselves in a massive mortgage on a single family shack house.”
The goal is to enslave everyone in debt so that they are forced to work full time jobs.
The media plays a huge role in the hype machine. The media is the hype machine!
When you have a journalist who is not a real estate expert or business expert put in charge of real estate or business, you will often end up seeing fluff pieces with no rigorous analysis.
Thank you for this article! You might just save thousands of people from losing their shirts at the top of the cycle!
There are more than 20% of the 7.6 million population who own homes, and there are also residents who own multiple homes as well. They might not sell their primary, but they sure as hell are considering selling their rental properties in this market.
I love contrarian view articles like this. Like the majority of people, I presume, I thought that the next wave of IPOs in any tech city would mean a boom in real estate prices and those homeowners could exit and make out like a bandit.
Your analysis does have great backing that this likely is not going to be the case. Although I am sure a few lucky homeowners will still make out because of it.
How much hype is caused by the media?
Feels like I read an article a day about the growing homeless population and drug problems in San Francisco. My industry had a trade show in SF and again stories were about executives having to step over human feces.
I have never been to San Francisco, is this overblown hype by the media or do you see it being something that could impact prices?
Not sure. Check out this article with some very detailed analysis.
Bay area resident here and I will say this – If human excrement in the streets is a deal breaker for you, then the deal is broke sir!
Crazy, goes in the supply increase column for me. I can deal with congested, homogenous, and unaffordable. Human excrement and I am moving the next day.
it has continued to skyrocket to being the most expensive city in the us: many people willing to ignore excrement to become multi millionaires
Google planning to build a huge campus downtown San Jose. Adobe adding an additional tower. Apple planning a new campus in San Jose too.
There’s another variable to consider. Capital flight from Asia. Especially if RMB devalues. Even with cap controls, money still leaks out.
or wealthy Asians wanting to go home to start a family? How many tech workers have been waiting to cash out to leave SF
You KNOW how delighted I would be if you’re right, Sam…. ;)
I bet you’d be a hoot in consulting firm interviews trying to solve case problems.
I agree with your assessment about supply overcoming demand to push prices lower in the coming years. Most assume the newly-minted millionaires will immediately invest their windfalls in property.
Some will, make no mistake. But much like lottery winners, athletes who signed their first contract, or investment bankers who made a great annual bonus, the proclivity to do something less-than-financially prudent is high.
I wouldn’t suspect the vast majority have the sudden urge to make the prudent financial decision of considering homeownership. In fact, I think some might see the windfall as reason to leave the Bay Area and make that lump sum last longer somewhere else.
I did research in grad school about this very dynamic in rural Pennsylvania dairy farmers. At the time, the Marcellus Shale has just been opened up for wide-scale drilling across the state, with 3 counties seeing widespread drilling activity.
These counties also happened to be the most-active for the dairy farming industry. We noted as the amounts received from drilling royalty bonuses increased, the farmers didn’t use the funds to reinvest in their business- rather, they sold and LEFT!
They saw the opportunity to take the money and run. Their costs were increasing, milk prices were floundering at the time, and a huge influx of cash came their way. Many took the money and never returned to dairy farming there. Our report concluded, “Millionaires don’t milk cows.”
Maybe now, Tech IPO millionaires don’t call SF home? Time will tell. I’m hoping prices crater, but that’s for selfish reasons.
Wow, that’s some serious analysis. You should have sold that to local real estate folks first. Or perhaps you’re angling to sell yourself as a consultant to them if it comes true.
We have Amazon HQ2 coming here in Northern VA and they just canceled Brooklyn. Maybe I’ll hire you to tell me how much my house will or won’t go up :)
real estate folks only want to sell people up up up!
Hi Sam,
Very interesting read! Great insights!!
I think you’re really on to something here! Makes so much sense to think about supply, especially after looking at that S&D chart. I can totally see more and more people leaving the Bay Area and moving to more lower cost of living areas, especially as more tech companies are opening locations in the Heartland and other lower cost areas of the country. Thanks for shedding light on this!