Perhaps you have heard that tech initial public offerings are blooming like wildflowers this spring. Lyft, Pinterest, Uber, Zoom, Slack and more are coming, almost all of them headquartered in the San Francisco Bay Area, which is already among the least-affordable places in the country. A lot of early employees of these companies are about to make a bunch of money on their stock options.
In a place where the median home price is $830,000, what’s all that wealth going to do to housing prices? Host Molly Wood talked with Glenn Kelman, CEO of Redfin, a real estate company that offers both brokerage services and data. She asked him what kind of data he has about what’s coming. The following is an edited transcript of their conversation.
Glenn Kelman: Redfin agents are working with some of these people who are borrowing money against stock that’s still locked up to be able to buy that house. We’re starting to see lenders say, “Even if you can’t sell the stock because you have to wait six months after an IPO, we’re willing to loan you the money because we think that bet is going to pay off.” Those are some of the numbers we look at. We think the ultimate effect on prices is going to be probably a three point acceleration in home prices. If you look at when Facebook, Twitter and LinkedIn went public a few years ago, take the normal price appreciation and add about three points to it. It’s not overwhelming. It’s not as if home prices are going to double in one year, but it is a significant effect.
Molly Wood: Obviously, this is not normal. It’s sort of a combination of the number of companies concentrated in one area, the valuations and the way these companies pay their employees.
Kelman: Normally you wouldn’t see so many companies go public all in one place. I think the way most economists look at housing is they measure its affordability by looking at the ratio of the home price to wages, but that has completely been unhinged in the Bay Area. The reason that place breaks all the laws of physics is because it doesn’t matter what your salary is, you’re using your stock to buy a house, and that stock is shooting through the roof.
Wood: It sounds like normally if there were a bunch of tech IPOs, there would be a sort of sense of euphoria maybe among real estate agents in San Francisco, let’s say. But it sounds like you’re saying that may not be the case here.
Kelman: Yes, I think that stockbrokers and jewelers and people who sell expensive cars are very excited about this, but real estate agents feel maybe a sense of dread, that the bidding wars we’ve become accustomed to are going to go to a whole new level. The reason that’s so is because you can make more jewels and cars, but houses, there are only a limited number of single-family homes in San Francisco. People are commuting two hours to teach at a school, to perform some other middle-class job, and we’re not building the housing to let those people live near where they work.
Wood: Forgive me if this sounds a little bit like wishful thinking as a renter in the Bay Area, but to what extent is this cyclical? Will San Francisco or even Oakland eventually have to become more affordable by default?
Kelman: The laws of supply and demand are already at work. That’s why people are renting U-Hauls and driving to Oregon. I do think that at some point, when houses get too expensive, price increases will ameliorate. I think in some ways, whenever there’s a huge tech rally, you always have some curmudgeon saying, “Wow, that bubble is going to burst.” I think some of the people who are advocates for affordable housing, for middle-class housing, are leading the charge this time. I don’t know if I want to characterize myself as a curmudgeon, but I left San Francisco to run Redfin 14 years ago, and I always planned to come back. One of my kids the other day said, “If we ever came back, do you think we could afford it?” I don’t know, man. I don’t know. If I’m worried about it, everybody else must be, too.
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Data released earlier this week found that housing prices in San Francisco fell 0.1% last month, the first drop in prices since 2012, and who knows, possibly the last one for another seven years.
The city of San Francisco’s Budget and Legislative Analyst’s office is even more pessimistic than Glenn Kelman, on home prices anyway. It estimates more like an 11% increase in prices resulting from all the IPOs. A separate real estate agent and data analyst said that if all the companies about to go public stay successful and keep bringing in new employees and paying them well, that prices could double over the next five to 10 years. That’s assuming, of course, that everyone doesn’t just move away.
Meanwhile, it’s not like the tech economy is suffering. Bay Area-based Twitter and Facebook turned in strong earnings reports this week, and Apple beat estimates, too, despite its lower iPhone sales. Alphabet, the parent company of Google and Square, was the only disappointment. But I’m not talking the kind of disappointment that leads to mass layoffs and thousands of people no longer having to commute to Mountain View. And nobody thinks Google is going out of business. No, no, for Bay Area residents, it’s all just too much of a good thing.