We know you have heard the news: a number of SF-based tech companies are projected to go public this year (Lyft, Airbnb, Slack, Pinterest) and the housing market is likely to be flooded with thousands of new millionaires overnight. We also know that you’ve likely heard that past behavior is the best indicator of future conduct, so we did some digging and pulled some data on how past IPO wealth has impacted local housing. Here is what we found:
Working Paper: “Cash To Spend: IPO Wealth & House Prices”
Presented at an academic conference less than two months ago, this report analyzed 725 IPOs by California companies from 1993-2017 and indexed home prices within 1,5 and 10 miles of each company’s headquarters. The indexed home prices were viewed three months before and three months after these 3 key dates: the date the company filed for the IPO, the IPO date (when it sold shares to the public) and the end of the lockup period, when employees are free to sell their stock.
| After filing, average home prices within a 10-mile radius rose by 1% more than home prices throughout the same county. Once the company went public, the index rose an additional 0.8%.
| No additional gains were noted after the lock-up expired, surprisingly. The authors of the study believe that this suggests that pre-IPO shareholders “change their housing demand when their wealth changes,” not when their liquidity increases ”and that they “can finance their home purchases based on their illiquid wealth.”
| Larger IPOs had a bigger impact on housing than smaller ones. Younger companies going public had a bigger impact on home prices than older ones of the same size. One co-author of the study calculated that managers & workers for young firms live closer to work than employees of older companies; a company in the top 25% by age and top 25% by value amount could have raised home prices 3.7% within a 10-mile radius of headquarters (compared to 1.8% for a company of average age & value).
Zillow Research: “Post-IPO, Home Values Grew Faster in Areas Home to Lots of Facebook Employees”
This report, released in February 2019 as well, utilized data from the Census Longitudinal Employer-Household Dynamics program to identify the 1,360 census tracts that were home to employees who lived in the four census blocks containing Facebook’s offices at the time of the IPO.
| Every 10 Facebook employees living in a given census tract at the time of Facebook’s IPO in May 2012 were associated with an additional 1.6 percentage points of home value increase over that year.
| Between March 2012 and March 2013, home values around likely Facebook employees climbed 21 percent, compared to 17 percent in all other Bay Area census tracts.
| This faster growth translated into an extra $29,800 in appreciation for the typical home in these Facebook-employee-heavy areas compared to homes in the rest of the Bay Area.
| Author/Economist Jeff Tucker projects that 6-9 months after a company IPOs, the Bay Area will see a lot more buyers in the market. He believes inventory will be pulled down a bit – not to levels we saw last year, but that a drop is imminent. Tucker also anticipates a halt in the moderation of home prices that the region has seen.
In news just this week, TechCrunch released their own projections on what the IPO wave of 2019 could mean for Silicon Valley real estate. With a more conservative outlook than some of the other reports, TechCrunch denoted that while the IPOs are happening in San Francisco, their impact is likely to diffuse throughout the Bay Area (as opposed to a limited radius range suggested by other sources). They also anticipate a reinforcement of current housing trends – likened to pressure on a gas pedal.
The calculation of the companies going public sits around $200 billion dollars amidst a combined San Francisco workforce of 10,000-15,000 employees. However, TechCrunch points out that of this wealth, the employee share is only a fraction compared to investors, founders and key executives. In example, only 17% of Uber shares were owned by employees as of late 2017. Furthermore, recipients of the ‘windfall’ may also fall into the population of individuals who would have purchased a home in the next few years regardless of IPO status – making the actual impact of IPO cash more relevant to the value of the home purchased rather than the reason for a home purchase.
Whew! We know that this is a lot of data to take in, and that it leaves many questions as to what it means for you. We will cover some of the considerations next week, and we have included links in full to the articles used this week below should you wish to dive in further yourself.
Until next time,
Mark & Jason
Resources Used:
SF Chronicle: Finally, Some Insight On The Impact Of IPOs On Home Prices
Forbes: How Upcoming Tech IPOs Could Affect The Bay Area Housing Market
Zillow: Post-IPO, Home Values Grew Faster In Areas Home To Lots Of Facebook Employees
Techcrunch: The IPO Wave Of 2019 Won’t Upend The Bay Area Housing Market