There's Gold in Them Thar (San Francisco) Hills

(WSJ image)

Brokers, sellers, lenders, and others in the real estate industry are anticipating a wave of newly minted buyers resulting from Bay Area 2019 initial public offerings, e.g., Uber, Lyft, Pinterest, Slack, Postmates and Peloton.

Most of the companies are headquartered in San Francisco, and when demand from cash-rich option holders meets the City's limited supply of homes, prices are almost sure to rise. [bold added]

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.

To be sure, some analysts say that the IPO's effect on real estate has been greatly over-hyped:

(Graph from financialsamurai.com)

there’s a good chance the tech IPO hoopla will awaken a slumbering bear of 760,000 – 1,520,000 homeowners in the SF Bay Area who flood the market with new supply. In such a scenario, the supply curve shifts from S1 to S3. Time frame: in 12 – 30 months. When D2 intersects S3, real estate prices end up lower than during the initial D1 and S1 intersection equilibrium.

IMHO, the skeptics are more likely to be correct. We've already mentioned how the Tax Cuts and Jobs Act has a far greater negative impact on pricey real estate than analysts initially predicted. Any IPO-related housing price increases will eventually be seen as a bounce in a bear market.

Longer term, we believe that declining prices and the favorable tax treatment of rental real estate (full deductibility of property taxes and mortgage interest, plus the QBI deduction) will finally make rental real estate a viable proposition for investors who will not have to rely on big price increases to earn a reasonable return.

Real estate investors, wait for the market to come in, and keep your powder dry.