|Palo Alto Online Real Estate
Uploaded: Thursday, April 19, 2012, 4:33 PM
Psyching out the 'Facebook effect'
Sellers reticent to list, buyers hesitant to enter the fray
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|The rumors are flying: Once Facebook goes public, scarce housing will become even scarcer; prices will go sky high. Best to hold onto your house and list it after May, when Facebook's initial public offering is expected; best to buy now before the hordes enter the fray. We're doomed.
While some folks are digging in, postponing selling to take advantage of the upcoming Facebook millionaire's club, local Realtors are pointing out the obvious: Inventory has traditionally been low in Palo Alto and surrounding communities, and people still move only when they have to: marriage, birth, divorce, re-marriage, job transfer, retirement, death.
Realistically, not that many of the 20-somethings suddenly getting a potload of money will want to live in Palo Alto, pointed out Bob Taylor of Taylor Properties, Palo Alto. "They're young; they don't have families. It's not the demographic for those buying houses in Palo Alto or Menlo Park."
When a company goes public, it's common to bring in more mature management, he added, and those people might be looking.
Keri Nicholas, of Coldwell Banker, Menlo Park, is already seeing the effects of the impending IPO.
"Clearly Facebook has an impact. It has an impact right now," she said in late February, soon after the announced IPO. "A lot of people are somewhat panicked that it's coming."
But Nicholas pointed out that 16 companies between San Jose and San Francisco are going public in the next nine months, and that too will have an impact on local markets.
"The average age of a Facebook employee is 26. They're going to want to be in the City. They want more of a community, not a $20 million house.
"If they have families, they want to be in Menlo Park, not on a 2-acre parcel," she said, noting that all aspects of the real-estate market are being affected, not just the high-end.
The minute Facebook announced its IPO, "You feel like everyone sort of thinks, 'Should we wait nine months to put our house on the market?' You don't want everyone to go on at the same time.
"There's some anticipation as to who's going to be buying. (But) they're buying right now," she said.
Nicholas, who's currently working with Facebook and Accel employees, said those at the higher end have already purchased homes, borrowing in the secondary marketplace through private banks, if necessary. She, too, sees the greater market impacts in San Francisco, Menlo Park and Palo Alto, "based on the fact that they're young. That may change in five years when they get older."
"It's the talk of the Valley -- and on the minds of every buyer and seller," Tom LeMieux, of Tom LeMieux Associates, Menlo Park, said.
He recalls similar conversations in 2004 when Google went public.
"Oftentimes the expectation does not match the reality. I firmly believe the halo effect is a positive trend for our real estate market; what gets forgotten is these things play out over a longer time than people want to believe," he said.
A year after Google's IPO (after any lock-up period preventing early sale of stock), Atherton values declined by 5 percent. Yet Menlo Park had a strong market that year.
"I spend a fair bit of my day trying to dampen down the over-excitement about this. I do think it's positive, but not an overnight phenomenon," he said.
"A lot of sellers who are in a position to pick their time certainly are balancing whether now is the right time -- and I think it's a very good time for sellers. It begs the question: Will a year from now be better? No one can answer," LeMieux said, adding his speculation that the market will be the same or better a year from now.
"I'd like to believe that our market is driven by many more fundamentals than one or two high-profile IPOs -- by NASDAQ, how well firms are doing in the Valley," he said. That's what leads to the optimism his clients are feeling now.
LeMieux is seeing the most action in Palo Alto in the under $2.5 million range, along with a resurgence at the higher end. "Atherton had two sales above $10 million in 2010" but had nine last year and already one so far this year, he added.
But other things besides Facebook's hoopla are impacting prices, mainly low inventory, Taylor said. On a sunny day in February, there were only 30 properties on the market in Palo Alto, with even less in Menlo Park. He pointed to the difficulty in qualifying for loans, especially if they're looking to move from a $2 million house to a $3 million house.
"It's a painful process. (People say) rather than go through that, I just won't move," he said.
Those brave enough to test the market are finding a fast-paced atmosphere.
Nicholas said she's seeing "multiple offers on most properties," noting that she's seeing a large increase in off-market sales "getting tremendous prices." Of 14 sales to date, eight were off-market, she added.
And that competitive environment comes right back to lack of inventory.
"We traditionally have had an undersupplied market here; there are no more large tracts of land to add to the supply, LeMieux said.
"We also have an area that people like to stay in. If you sell, where are you going to go?" he added.
Nicholas is in total agreement. "I don't foresee that much more inventory coming -- more, but not to levels that we're used to. A lot of people are unsure of where to go," she said, noting that the area doesn't have a lot of senior housing. She contrasted this to 20 years ago when people would hit a certain age and move.
"(Lack of inventory is) causing everyone to go, 'Uh oh, are we going to get in?' The market has always been strong," she added.
LeMieux agreed that inventory was the biggest obstacle to sales. "Over the last 10-15 years it's been harder to be a buyer than a seller," he said. In 2008-09, the "playing field leveled a little bit; now that seems to be tipping again toward the sellers," he added.
Some may be encountering challenges in financing, but LeMieux pointed to the "higher-quality buyer where financing is not a problem."
Taylor noted that he's been seeing many more cash sales -- one way to get around the financing difficulties.
"Now it's all income and credit; equity is irrelevant," Taylor said. "If you're downsizing, as long as you don't need a loan, you're fine."
"We do have a fair number of cash buyers," LeMieux said, but noted that, "One buyer could pay all cash but is almost incentivized to finance because of a mortgage subsidy (offered) through his company as part of his relocation package."
But the cost of borrowing is "attractive. Even though lenders are scrutinizing buyers more closely, we have the type of buyers here lenders want to lend to," he said.
LeMieux sees a gradual improvement in the market this year. "All of that is creating a scenario where buyers are more confident in their jobs, stock positions, their income, how their companies are doing. If you don't have confidence in that, you're not going to go out and buy a home," he said.
Bob Taylor believes the bigger "Facebook effect" will kick in down the road, long after restrictions on employees' sale of stock are lifted, which could easily extend from six months to a year after the IPO.
"Psychologically, it's there immediately, but we really won't see it for a year or more," he said.
Other factors will be impacting home sales, such as how many companies are hiring in the Valley and the general revival of the tech sector and rising rents that "will eventually push people to buy," he added.
But he keeps coming back to local reality. "There's pent-up demand," he said.
Looking down the line, Taylor sees the "Facebook effect" having a potential large impact not so much because of the instant millionaires but because the company projects hiring 9,000 people in the next few years.
"Where are they going to live? They want people to live nearby," Taylor said, pointing to Google's college-like campus and recent rezoning of nearby Mountain View properties that can be used for housing.
"It's a company-town model: If they're successful, it'll have a spillover effect on real estate," he said.
And he sees an even bigger effect in the years to come when Facebook starts buying other companies. "Then a group of employees will get instant money," he said.
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Posted by jack, a resident of the Charleston Gardens neighborhood, on May 19, 2012 at 6:44 pm
Well the stock will tank these next weeks. And then there will be flood of houses coming onto th emarket as people realise that prices will not keep on going from where they have left off these crazy 4 months!
The over exuberance, the daily pumping up by Ken Deleon, the agents pushing their clients to bid 25 percent over asking price will all stop.
Facebook tanking will have a huge psychological downer. All teh social companies will be running scared.
And those guys cannot cash out for 6 months! Thats Christmas folks, by which time the stock price will be around 5 dollars where it should be.
So all those new millionaires will be instead have 250,000 for a downpayment.
Posted by wrong, a resident of the Greendell/Walnut Grove neighborhood, on May 19, 2012 at 8:57 pm
Jack - you're just so wrong, it's like your head is in the sand.
Will it be insane and crazy on the market? no... but will there be lots of extra buyers wanting to buy houses in the PA/MP area? Absolutely.
I don't anticipate an increase in the inventory available, meaning that the 25% over asking is actually something that may become common.
Of course, if the market takes off, it may be enough of an incentive for people to list their houses, even though they had not planned on doing so.
Posted by talk to Meg, a resident of the College Terrace neighborhood, on May 20, 2012 at 10:58 am
35,000 fired HP employees should put a big damper on local home prices
Posted by wrong, a resident of the Greendell/Walnut Grove neighborhood, on May 20, 2012 at 11:45 am
"talk to Meg" - you think the 35,000 fired HP employees have stock options coming due in 6 months worth millions upon millions of $$$?
HP fired a lot of the worker bees, some middle managers, and an occasional highly paid staffer who I'm sure will land on their feet, if they haven't already.