San Francisco’s IPO Panic Is All Hype

Will SF’s Housing Market Actually Get More Expensive, or Could It Keep Cooling Off?

The actual number of millionaires, post-tax, is one thing to consider?—?then there’s how many will have enough money left over to be able (and want to) buy a home in SF.

The assumption is, of course, that new tech IPOs will result in an overwhelming demand for real estate and drive prices up?—?new momentum promised for a city that has seen home prices cooling off over the past year. The current line from a lot of realtors: buy now or be priced out forever. But what if the industry is overestimating the demand and underestimating the increase in housing supply that will take place in SF? That’s exactly what Sam Dogen, founder of Financial Samurai, is afraid of.

While the IPOs could have some amount of impact on raising prices, they also very well couldn’t—in fact, there’s a plausible scenario where real estate keeps cooling off, Dogen warned.

 San Franciscos IPO Panic Is All Hype

Given that the median home price is about $1.5 million in San Francisco and that most employees have been at their company for less than two years, are under 35 and make less than $200,000 annually, they probably don’t already have a 20 percent downpayment saved up. So in order to purchase a home in or above the median price range and still have a healthy budget for other expenses and be able to pay taxes, he estimates that they would have to sell at least $2 million in options.

Of those who could pull that off, he suspects that only a small percentage will want to. Then, there’s the issue of spending that much money to buy instead of rent or move elsewhere to make their money go further. After all, millennials, as everyone loves to point out, love spending their cash on experiences more than things. And many are wising up to whether SF is really the best place in which to invest in real estate.

Aside from the issue of demand, there’s the issue of supply.

The SF Bay Area real estate market has been dipping since mid-2018. Part of the reason: the inventory of homes for sale has been consistently growing and is now at a seven-year high?—?a fact that’s often overlooked. Why such a surge? Dogen credits that to many factors, including an aging population, increased congestion and general unaffordability. “There is a demographic shift away from SF to lower-cost places,” he said.

“There’s a good chance the tech-IPO hoopla will awaken a slumbering bear of homeowners in the SF Bay Area who flood the market with new supply.”

Dogen thinks that supply number will only grow as more sellers try to cash in over the next two years. A lot of homeowners, he believes, are sitting pretty but are waiting for the right time to sell, having chosen to hold off in 2017 and even 2018 as the real estate market became weaker. Many are now thinking that 2019 and 2020 are the ideal times to sell, when, they are being told, an IPO surge will lift prices back to an all-time high.

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But what happens when they all try to sell within the same time frame in an underwhelming market? The greater surge of supply could potentially even outweigh demand, resulting in a decrease in prices instead of an increase when the IPO rush is said and done.

“There’s a good chance the tech-IPO hoopla will awaken a slumbering bear of homeowners in the SF Bay Area who flood the market with new supply,” Dogen writes in his piece “How New Tech IPOs Could Cause SF Bay Area Real Estate Prices to Fall Further.” “But things could get even worse given how slowly it usually takes for homeowners to read headlines, contact an agent and prepare their home for sale. The Johnny-come-latelies would create even more supply past the new equilibrium, thoroughly overwhelming demand.”

That is, of course, just one scenario. But it is a plausible scenario.

When the Hype has Real Consequences

Nearly everyone I spoke to worried about the overconfidence in this year’s IPO rush and its consequences, whether that means people betting too much on stocks, deciding to buy a home before they’re financially ready, deciding not to sell when they should or something else.

“It’s been 10 years of boom, so we have a group of 35-and-under people who have never experienced a bust?—?there’s a feeling that they can’t lose,” said Dogen. “I worry people are getting caught up in the mania, in a sexy headline being shared around, so they are acting in ways that will put them at financial risk.”

Speculators use things like the IPOs and take advantage of industry booms to drive up prices and drive out long-term tenants.

And those aren’t the only effects. One particularly compelling part of the NYT piece mentions a meeting of housing-rights activists in the Mission district, quoting Sarah “Fred” Sherburn-Zimmer, the executive director of the Housing Rights Committee of San Francisco, as saying, “It’s going to mean mass displacement,” about “the coming wealth influx.”

But Sherburn-Zimmer says that quote wasn’t the full picture of what she was saying—it didn’t include the context of real estate speculation. The IPOs may or may not wildly impact housing prices, she said, but the hype around them certainly will. Speculators use things like IPOs and take advantage of industry booms to drive up prices or drive out long-term tenants. Representatives should be doing more to protect tenants from these threats on an ongoing basis, she says.

“It’s a cycle: they create speculation, which gets reported on, which feeds the fire, which causes landlords to start saying they can get twice as much money to pressure tenants out,” she said. “No matter whether this wave ends up being big or small, average folks lose.”

In a sense, that’s what it comes down to. What we’re seeing is a self-fulfilling prophecy not just in the NYT but across media, real estate and the tech sectors: creating hype without giving thought to other, less dramatic scenarios based on facts, or what the very real impact of that in and of itself may be on our city.

San Francisco has a lot of very real issues now. People are struggling now. That’s not to say that unaffordability might not get worse. It very well might. Thinking and planning for the future is one thing; wasting energy by panicking about a doomsday scenario is another. Let’s focus on creating a city that can better withstand tech’s ebbs and flows. One we can and want to live in now.

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