San Francisco’s Housing Market Braces For An IPO Millionaire Wave (#GotBitcoin?)
A rush of anticipated public offerings from tech unicorns like Uber and Airbnb could have a major impact on one of the country’s priciest cities. San Francisco’s Housing Market Braces For An IPO Millionaire Wave (#GotBitcoin?)
Real-estate agent Jeffrey Hyland and his team recently trawled Forbes’s wealth ranking and sifted through tech databases to identify the 50 people most likely to strike it megarich from the anticipated public offerings of tech unicorns like Uber, Palantir, Pinterest, Slack, Airbnb and Postmates.
The group then sent each of those 50 people an embossed box jammed full of glossy marketing materials for the property they are peddling: a $110 million parcel of land in Tiburon, just north of San Francisco.
“We’re putting out tentacles,” Mr. Hyland said. “The moment these IPOs take off, that’s when we expect to start getting bites.”
It seems like the makings of a perfect storm for the already pricey Bay Area housing market. Some of the tech world’s best-known companies are going public around the same time, conceivably unleashing billions on the San Francisco-area market.
While prior waves of IPO money have been dispensed mostly to companies based in Silicon Valley, a sprawling peninsula encompassing several cities and counties, these tech companies are largely based in San Francisco, a physically tiny city encompassing just 47 square miles. San Francisco County clocked just 6,420 home sales in the 12 months ending Nov. 15, 2018, according to data from real estate agency Compass, compared with 20,786 in San Mateo and Santa Clara counties combined.
Last month, real estate agency Redfin posted an analysis on the impact that the public offering of ride-sharing company Lyft could have on the market. Based on an IPO price of $72 a share, Redfin estimated that Lyft’s current and former employees would hold about $1.458 billion worth of stock. With that kind of money, they could hypothetically buy all 623 homes listed for sale in San Francisco at that time—and still have $12 million left over, Redfin said. Lyft went public in late March; as of Thursday morning, its shares were trading at around $61 a share.
For buyers and sellers, the pre-IPO buzz has unleashed a lot of consternation. Real-estate agents say buyers are plunging into the market with a renewed sense of urgency, fearful that an influx of newly minted millionaires will set prices on an upward trajectory and make an already tight market even worse. Sellers, worried about missing the height of the wave, wonder if they should hold off listing altogether.
“As an agent, I don’t have a magic mirror. We’re all kind of scratching our heads,” said Cynthia Cummins, founder of Kindred SF Homes, who said numerous clients have reached out to her in recent weeks for direction.
Earlier this month, real-estate agent Carrie Goodman of Sotheby’s International Realty said she closed a deal with a couple who had been searching for a move-in ready home in tony Pacific Heights for two years. Looking down the barrel of the IPO boom, they decided it was time to pull the trigger, settling for a roughly $6 million fixer-upper.
Ms. Goodman said members of her team have also seen a notable uptick in younger buyers looking to purchase in the sub-$2 million price range in recent months. “They are all talking about getting into the market before all this money comes,” she said.
“Buyers are realizing that today might be a better day to buy than tomorrow,” added Gregory Malin, chief executive of Troon Pacific, who said that in the past few months he has seen an uptick in the number of inquiries for his company’s $45 million San Francisco spec house.
On the other side, Keely Ferguson of Vanguard Properties said one of her sellers, who had planned to list a three-unit building in San Francisco’s Nopa neighborhood in late March, cited the IPOs as one reason to delay listing. While the Lyft IPO occurred last month, most of the anticipated offerings won’t take place until later in the year. Once the companies are public, employees are usually stuck in a lockup period for about six months before they can sell their stock.
While the number of listings coming to market traditionally rise from January through March in anticipation of the spring selling season, the number of listings in San Francisco plunged to 1,575 in the first quarter of 2019, 20% less than the comparable period a year earlier, according to chief market analyst Patrick Carlisle of real-estate agency Compass. Mr. Carlisle speculated that sellers were waiting for a hoped-for rush of IPO millionaires to appear.
For agents wooing buyers from companies going public, it isn’t easy making contact. “These companies are resistant to letting folks through the door for those type of pitches,” said Bree Long, a managing director in Compass’s new development division. Representatives for the companies declined or didn’t respond to requests for comment.
So some agencies resort to guerrilla-marketing tactics, like distributing fliers in the neighborhoods around the companies’ offices. When promoting properties on social media, agents are tagging ads with terms like IPO, Pinterest and Uber. One agent said he’d recently resorted to slipping his card to an Airbnb employee he met at a local hair salon.
In prior cycles, agents remembered competitors slinging Krispy Kremes at shuttle stops operated by the tech companies. One said her colleagues opened a taco truck in one of their parking lots.
Carl Shannon of Tishman Speyer, a developer building a condo project named MIRA in downtown San Francisco, said his team has been working with wealth managers to ensure they’re familiar with the project when IPO millionaires reach out. “We want to be top of mind,” he said. Similarly, Related California, which is building a condo tower in the Transbay District, allowed a group of about 50 wealth managers to host a seminar on wealth trends in its sales office earlier this year, according to executive vice president Gino Canori.
The push comes on the back of a tough year for Bay Area sellers, especially on the luxury end. Starting mid-2018, sales dropped dramatically, according to market data from Compass. In San Francisco, median home prices fell 4% in the first quarter of 2019, compared with the same period in 2018. By contrast, median home prices in the first quarter of 2018 rose 23.8% compared with the same period in 2017.
“The question is whether these IPOs are going to be an accelerant to a heating market, or a countervailing factor in a market that’s cooling,” Mr. Carlisle said. “I assume it will add some positive pressure on the market, but is it going to reignite the sort of appreciation rates we saw last year? I find that hard to believe.”
A study by a group that includes UCLA finance professor Barney Hartman-Glaser analyzed IPOs from 1993 to 2017 in California. It concluded that the market experiences a bump in demand in the neighborhoods where these companies are located at every stage of the IPO process, from when a firm files an intent to go public to the date it is listed on a public exchange and the date the insider shares are “unlocked.” The bump, the study said, is most pronounced at the date of filing, when it averages around 2%.
The younger a company is, the larger the bump. “The Uber IPO has been anticipated for many years, and while the IPO will create many new millionaires, these are millionaires that everyone has seen coming, so the effect on prices might be less,” Mr. Hartman-Glaser said.
Some might look to Facebook as a precedent: Its public offering in May 2012 had a tangible effect in Menlo Park, Calif., where it is headquartered. Between March 2012 and March 2013, home values where likely Facebook employees lived grew 20.9%, compared with 16.8% for the rest of the Bay Area, according to a recent analysis by Zillow.
The effects of this new round of IPOs might not be instantaneous. “People are concerned that all this liquidity is about to flood the marketplace, but that might not really happen until 2020,” said Sabrina Lowell of Private Ocean, a local wealth manager.
As for those 50 embossed boxes sent out by Mr. Hyland? So far, he’s gotten no calls.
House Flipping Is Back to Pre-Crisis Levels. Here’s Why It’s Less of a Concern.
Flippers today have much larger profit margins than those at the peak of the previous housing cycle.
House flipping is back to nearly the same level it was around the 2006 peak of the housing boom, when it became a symbol of the rampant speculation that soared before the bubble burst.
But a new analysis from CoreLogic Inc. suggests most of the current flips are less risky than those more than a decade ago, making today’s flippers less likely to cause market volatility if prices decline in the next few years.
Some 10.6% of homes sold in the U.S. in the fourth quarter of 2018 were flips, defined as having been owned for less than two years, according to CoreLogic. That is near the level of the first quarter of 2006, when 11.3% of homes sold were flips, and the highest fourth-quarter level in the two decades since CoreLogic started tracking the data.
The study, however, shows that flippers today have much larger profit margins than flippers at the peak of the previous housing cycle. By one measure, the trades are more than twice as profitable as the flips made in 2006. That offers current flippers more of a cushion if home prices begin to flatten or fall.
Flipping has evolved from the days when cocktail waitresses and cabdrivers lined up to purchase lots in new subdivisions in places like Las Vegas and Phoenix. They hoped to profit from runaway price appreciation, but many became trapped when prices declined.
This time, the market is dominated by professionals who are purchasing older homes that likely need work, appealing to buyers’ desire for a move-in ready home rather than one needing months of renovations. At 39 years old, the median age of a home flipped is the oldest it has been since CoreLogic has been tracking. Flipped homes today are about a decade older than they were in 2006.
“Flippers are very different today than they were in the past,” said CoreLogic Deputy Chief Economist Ralph McLaughlin. “Even though we see hype and hysteria in popular culture, this isn’t necessarily something to worry about.”
Still, the trade is hardly a sure bet. Flippers are vulnerable if the housing market turns and prices begin to decline. Unlike long-term homeowners who can ride out the market, flippers often need to sell quickly to pay off construction loans or raise funds to buy their next property.
Rachel Street, a real-estate agent with a home-flipping company, said there are significant financial risks to buying older properties.
“Every house I’m just going to do a cosmetic rehab. Then you open the wall and you find that every joist is rotted. That is never fun,” she said.
But CoreLogic notes that the flipping market has become more institutionalized. Corporate sellers made up more than 40% of flippers in the fourth quarter of 2018, the highest level in CoreLogic’s data and nearly three times the share of the market they had during the last boom.
Companies like Opendoor and units of Zillow Group Inc. and Redfin Corp. buy from sellers looking to avoid the hassle and uncertainty of listing their homes.
Mr. McLaughlin’s analysis looks at so-called economic profits, or those made above increasing home prices in the market overall. That offers better insight into whether investors are actually adding value to properties. CoreLogic doesn’t know how much investors spent fixing up the property before reselling.
Flippers made a median economic profit of nearly 23% on homes flipped in the fourth quarter, according to CoreLogic. At the peak of the last housing cycle, in the first quarter of 2006, flippers made a median economic profit of 9%.
Professional flippers can be stiff competition for first-time buyers, helping to drive up the price of lower-cost starter homes. They can, however, also help to create more inventory because many younger buyers don’t have the skills or cash needed to fix up older, dilapidated homes.
Flipping is becoming more professionalized at the local level, too, including in Memphis, Tenn., which was the second most popular market for flipping in the fourth quarter behind only Birmingham, Ala. The median economic profit for investors in the Memphis area is nearly 42%.
One Tennessee-based company, Memphis Invest, buys about 1,000 properties a year in Tennessee, Texas, Missouri, Arkansas and Oklahoma. It renovates homes, finds a rental tenant, then resells them to individuals who want to own single-family rental properties. The company often resells to people in the Bay Area or other expensive markets who can’t afford to buy a home where they live and want an investment property instead.
“They’d much rather buy three or four [homes] in the Midwest,” said Chris Clothier, a partner at Memphis Invest.
Philadelphia was the eighth most popular market for flipping in the fourth quarter and the most lucrative, because many homes date to the 19th or early 20th century and have suffered years of neglect. The median economic profit made by flippers in Philadelphia in the fourth quarter of last year was nearly 93%.
Ms. Street, a former professional opera singer who is based in Philadelphia and hosts a television show called Philly Revival, said her most profitable flip was a turn-of-the-century twin in northwest Philadelphia. She eventually sold the home for $370,000 more than she paid.
But the business is getting more difficult. “A year or two ago I could have walked out and found deals all over the place,” Ms. Street said. Today, “there are six other people waiting.”
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