The FaceBook Hype Machine

Facebook. The little web site with that friendly little blue logo. You know, the logo with a lowercase letter just to let you know how unassuming and modest they are. Nothing more than a guy in his dorm room (sorry HP, changing the world from your garage is just a little trite at this point) with an idea and some code and, well, you know the rest…

Everyone loves to talk about the Facebook IPO, and how it is driving real estate prices in San Francisco off the charts. You’d think that before Facebook announced plans to go public, there had never been multiple offers on San Francisco homes at the end of the first open house, or homes going for six figures over the asking price, or non-contingent all-cash offers with 10 day closings. If you believe this is all new phenomena, I’d like to remind you of how the market in SF was from, oh roughly speaking, 2002 to 2006.

FaceBook IPO 'Likes' San Francisco Real Estate?

The San Francisco market has gone from a 2011 in which volume was slow and the deals that did happen were often painfully protracted processes where buyers and sellers could often get close to an agreement, but frequently couldn’t. Sellers thought there was more value in their homes than buyers saw and that worst was behind us in terms of price decreases. Buyers were generally worried about their employment security and even though interest rates were low, buyers weren’t convinced that even if the market had hit bottom it made sense to invest in a home. The uncertainty wasn’t just about prices, but more about economic security.

Then something happened in late December/early January and suddenly buyers jumped back into the market. Interest rates didn’t change dramatically, but buyer’s expectations and feelings about the economy did change. Suddenly investing six very large figures for a 2 bedroom 1 bath home didn’t seem like quite such a crazy idea. Interest rates remain low, the national economic indicators are sluggishly moving in the right direction, and for someone with a background, education or experience in technology the employment prospects are very, very good. And all of the hiring in tech has an effect on the industries and people that design marketing materials, or provide managerial consulting, or cater corporate events. Tech is a part of the puzzle, but just a part.

So buyers took a deep breath in early 2012 and relaxed a little bit, the logic going a bit like this: Prices are down from the peak, I feel more secure in my job, and even if I’m wrong about being more secure in my job, if I sign on the dotted line to repay hundreds of thousands of dollars, I’ll be able to get a job as good if not better than my current job quickly enough that I feel comfortable buying a home given current prices and interest rates.

Sellers, however, after spending the past two years fighting for every dollar their home was worth pulled back a little. Even if they wanted to move up, underwriting standards for home loans have gotten ridiculously detail obsessed. In 2007 you needed a pulse to buy a home. In 2012, not only do you need a pulse, but the grocery store, dry cleaning, and dog-walking receipts for the past 12 months, as well as a note from your mother, your best 2nd grade artwork project, and a paper trail that would impress even the IRS. 2007 financing with ridiculously easy. 2012 financing is feasible mainly for the most obsessively-compulsively organized. So some sellers just decided to rent their homes instead of selling. The rental market has been insanely strong for the past several years because all those folks that can’t qualify for a home loan still have to live somewhere. So they rented.

This perfect storm of buyer optimism and seller exhaustion resulted in a ton of buyers competing for a very small pool of available properties. The chart below nicely illustrates how dramatically Days on Market (DOM) plunged from about 100 days in December of 2011 to about 40 days by March of 2012. In the chart below, the olive-green line tracks days on market for tenancies-in-common (TIC). The khaki line is for condos/coops/lofts (CCL), while the dark blue line shows days on market for single family homes (SFR).

Days on Market Plummets in early 2012. Data Source: SFARMLS

 

The perfect storm of buyer optimism and seller fatigue from weathering two years of a tough market to be a seller in has very little to do with Facebook going public, and a lot more to do with a mismatch in buyer and seller psychology. The bay area is home to numerous tech companies that have generated enormous amounts of equity for their shareholders and employees. Think of how well Apple stock has done in the past few years. Google, the formerly-gentle-giant that would have you believe it does not evil has been doing just fine, disastrous forays into social media not withstanding. LinkedIn went public and plenty of employees did quite nicely back in 2011. Zynga, for better or worse, went public in December.  Yelp went public recently. And the list goes on…

Would you like that house for over, at asking, or under? Data Source: Zephyr Sales Meetings

Writing about Facebook is sexy. Everybody loves to write about Facebook. Is there plenty of tech money in San Francisco? Absolutely! But the money has been around for the past few years. The market we are experiencing right now isn’t about Facebook going public in the near future. There has always been an incredible amount of money in the bay area, much of it generated by the tech industry. Much of that money has been on the sideline for the past few years for reasons that have nothing to do with Facebook and its IPO.

It’s about buyers – looking forward – interpreting the latest economic news and deciding to get into the market at roughly the same that sellers – looking backwards – decided they’d had enough of buyers coming through their home every Sunday afternoon only to bring an offer that was going to make them cry (and not in a good way).

 

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