Editor’s note: Glenn Kelman is CEO of Redfin, a technology-powered real estate broker, backed by Greylock Partners and Madrona Venture Group, with more than $7 billion of home sales. He previously co-founded Plumtree Software, which had a 2002 IPO. He writes a quarterly column on Silicon Valley real estate for TechCrunch.
When Michael Arrington calls, you answer. Even if you’re perusing evangelical memorabilia at a South Carolina gas-and-sip.
We talked Friday at 4 p.m., and I was already en route to a Labor-Day vacation. Mike was still on the job. I asked him about his love life and his goat, but Mike wanted to know if Silicon Valley real estate had sagged since “the big IPO bust.”
It’s a good question.
At open houses this spring, Silicon Valley real estate agents often told would-be buyers to make an offer before Facebook set off a new IPO frenzy and a new round of real estate bidding wars. Before the Facebook S1 was even filed, jewelers, luxury-car dealers and real estate agents were already dividing the economy into two phases: BF (Before Facebook) and AF (After Facebook).
And sure enough, starting last year, we saw all sorts of pre-AF shenanigans: One seller, for example, agreed to sell a home for $4.3 million to a Redfin client, only to demand more money a few weeks later on the premise that the Facebook offering would send demand through the roof.
But the IPO frenzy never came to pass. Facebook is one of the greatest consumer Internet companies of our generation, but for the time being the company is trading at half its IPO price. Groupon and Zynga, also titans of the industry, have been in free-fall since their last earnings call, now down more than 80 percent from their peak. $76 billion in wealth disappeared from those three companies alone — enough to buy every home that sold in Silicon Valley this year nine times over.
Of course, when one big guy gets indigestion in the Valley, everyone else in the buffet line puts down her plate. The secondary market for pre-IPO shares in companies like Twitter has mostly followed Facebook’s fortunes. And all the startups that can’t plausibly reach $100 million in revenue are having a harder time raising later-stage rounds of venture capital.
The Only Problem With Silicon Valley Real Estate Is That There’s Not Enough Of It
But how did the real estate market react? Like a bull in a rodeo: in the past three months alone, home prices have increased 4.7 percent in San Mateo County and 2.9 percent in Santa Clara County. Sales volume has mostly been strong, and would have been much stronger if there were more homes to buy.
The number of Silicon Valley listings fell off a cliff: dropping 49.5 percent from August 2011 to August 2012 in San Mateo County, and a whopping 65.7% in Santa Clara County. San Mateo County currently has a 1.6-month supply of homes for sale, and Santa Clara County has 1.1 months of supply. If Silicon Valley owners stopped hanging new yard signs while sales continued apace, all the listings would be gone in six weeks. The typical supply in a healthy market is six months.
Inventory is low elsewhere, too. The problem in a place like Las Vegas or Florida is that would-be sellers owe the bank more than their home is now worth. But in Silicon Valley, home-owners can afford to sell; most just don’t want to.
And why would they? Economists at virtually every major bank, from Goldman Sachs to J.P. Morgan, now agree that the bottom in U.S. housing prices is here. Nationwide, rents are rising faster than at any point in the past five years, and rental vacancies are at a 10-year low, even as interest rates approach 3.5 percent. The rental pinch is even more acute in the Bay Area, where new Redfin engineering recruits struggle to start their jobs on time because they can’t find places to live.
All this makes it pretty attractive to hold onto the home you’re leaving behind, with a tenant paying your mortgage for two years, especially if you believe by then your place will be worth more than it is now.
The limited supply of starter homes squeezes first-time buyers the most, as was the case with this two-bedroom townhouse in downtown Mountain View. It was listed at $946,000 at the end of August, and was under contract to sell 14 days later. Three clients using three different Redfin agents bid on the property, and the winning offer was even higher; we expect it to close for $965,000 or more.
Three months earlier, before the Facebook IPO, Redfin Silicon Valley agent Brad Le represented a client on the exact same unit a few doors down, listed at $938,888; Brad’s client beat out three offers total with a winning bid of $955,000. This tells us that the market has only gotten stronger.
The competitive dynamics for these Mountain View townhouses have been tame compared to what we just saw at this Cupertino three-bedroom home, listed higher than any nearby comparable properties at $1,038,000, but within walking distance to three of Cupertino’s best schools. Redfin Silicon Valley agent Nicolas Meyer represented a client willing to pay $1.1 million with no inspection, but the property attracted 17 other offers; the winner was willing to pay even more than $1.1 million, with no inspection and no financing contingency. We’ll find out next week what it ultimately sold for.
In Silicon Valley, Houses Become Like Food
What this tells us is that After Facebook, the real estate market is just as strong as it was Before Facebook. How could that be so?
Well, the truth as far as Facebook’s employees were concerned is that Elvis had left the building years before. We’ve been working with Facebook buyers at least since 2010, many of whom sold their stock on secondary markets, at least in one case using the proceeds to buy a house and the surrounding lots, too. And now, even if no one from Facebook cashed in her stock, the NASDAQ is up 20 percent since the beginning of the year, and Apple, Google and LinkedIn buyers are out in force, as are a larger number of foreign investors. Everyone, including folks from India and China, wants to send his kids to a Cupertino public school.
And the deepest truth is this: Regardless of whether Facebook is trading at $20 or $200, Silicon Valley housing is effectively trading at $2. What I mean is that in Silicon Valley, property has become more like food, a commodity that takes up a smaller and smaller portion of our net worth. Even if you shop at Whole Foods, prices just can’t keep up with what people here are earning.
It’s hard to believe sometimes that all the money that comes from 1s and 0s can be used to buy real physical things, and that all those things, made from sweat and rocks and careful craftsmen’s fingers, can be so relatively cheap. But this has become the central fact of the global economy.
This isn’t to say that prices can’t go down in Silicon Valley. But if they do any time soon, it will be because people don’t want to pay that much, not because they can’t afford to. Facebook’s IPO, whether it was merely enormous rather than absolutely flabbergasting, just contributed another layer to the Valley’s accumulated riches. This stupendous wealth creation is a wonder of the world until you want to buy a home in Palo Alto. No place can claim to be heaven unless it’s hard to get into.
See the original post: If Silicon Valley Stocks Are Down, Why Are Home Prices Up?
Ignore us. Ignore the pressure from the media and Wall Street to make more money now as lockups expire and your stock price dips to new lows. The only thing you need to remember is “Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.” That’s your leader Mark Zuckerberg in his pre-IPO letter to the world.
I say this because I worry you may be veering off course in a fit of desperation to please investors. This week you announced two new ad units that give businesses unprecedented access to the news feed. They pose grave threats to the user experience and your ability to accomplish your mission of bringing us all closer together.
In the eight years since I joined your social network, I’ve only seen one moment more dangerous than this. After you opened the platform, quizzes and games from companies took advantage of the ability to publish to the news feed. The stream was soon overrun with app spam.
Developers loved it. They’d pay you for ads to score some users, whose automatic posts to the news feed would then make games grow virally. But the Facebook experience suffered. Zuckerberg explained in an interview that “A lot of users like playing games, but a lot of users just hate games…people who don’t care about games want no updates.”
So you did what was right. You protected the news feed by changing it so game posts only appeared to other gamers. This tough decision drastically reduced free growth for developers, hurting the partners who boosted your time-on-site. But by prioritizing the long-term health of the user experience so people kept coming back to Facebook, you ensured those developers would still have a business today.
Now everyone wants to you generate more revenue, and you’ve found some ways that align with your mission. Pages can use Promoted Posts to reach more of the fans who’ve opted into their marketing updates. Mobile app developers can buy mobile-specific Sponsored Stories to show us what our friends are playing. You’re starting to make ads more relevant outside of Facebook with your ad network appearing on Zynga.com. And you launched Facebook Exchange, a powerful cookie-based retargeting system that makes your sidebar ads helpful by reminding us of things we almost bought around the web.
With time, these could blossom into strong revenue streams that satisfy investors. And there’s little danger since they embody your business model’s core ideology of connecting us to what we and our friends are interested in. But you’re also testing two new ad units that diverge from this pursuit.
The new mobile app ads let developers target anyone with “Try These Games” ads in the mobile news feed that push people to download from their device’s App Store. Unlike the old app usage Sponsored Stories, none of our friends need to have installed the advertised app.
Meanwhile, the new ads for Pages let businesses push their updates to the news feeds of non-fans. Again, these are not social. They inject marketing messages in the news feed from Pages we haven’t subscribed to and that our friends haven’t interacted with.
For the first time you’re not relying on the wisdom of the social graph or the user’s choice to populate the stream. You’re trusting the user experience to the brands and the app developers. If they fail to accurately target me, I’ll end up with a less relevant feed.
These are early tests, and I know you’re just iterating to see what sticks. You’ve been clear that limits may be put in place to keep these ads from overrunning the feed. Those kinds of limits are safeguard enough when we’re talking about paid social content that could have appeared in the feed anyway.
But these asocial news feed ads contradict your mission, so displaying just few enough that users don’t get angry doesn’t cut it. Even if users occasionally click, the data won’t show that you’ve subtly but seriously altered the feel of Facebook. And its a slippery slope to a feed that’s less friendly and more like a scrolling billboard.
You’ve built a company that’s meant to last. Even with a share price around $20 you’re trading at roughly 30x your next year’s earnings projection. That’s because those who believe in you believe you’re going to be the dominant social network for years to come.
Asocial news feed ads jeopardize that. You’re extraordinarily popular and your network effect creates a giant moat. That doesn’t make you impervious to disruption, though. You’re arming your challengers by diluting the feed — the herald of ambient intimacy, a concept that let you redefine how we communicate. There are plenty of other ways to earn money, and with time they’ll pan out. But your foundation of relevant content has to stay strong for you to make it that far.
One tenet of The Hacker Way is “Be Bold: Building great things means taking risks…even if that means being wrong some of the time.” This is one of those times, and it’s not too late to move away from asocial feed ads and get back on track.
Your toughest months are still ahead. In November, a huge number of employee RSUs will be converted to actual stock they can sell on the market. But no matter what happens, remember why you’re making money, and stay true to the ideals Mark laid out in his letter:
There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice…
We’ve always cared primarily about our social mission…
By focusing on our mission and building great services, we believe we will create the most value for our shareholders and partners over the long term.
Simply put: we don’t build services to make money; we make money to build better services.
See more here: Stay The Course, Facebook. Even If Your Share Price Crashes
Today’s Facebook IPO is a momentous, historical occasion. It’s set to be the biggest tech IPO ever, and the third largest IPO in U.S. history, second only to Visa and General Motors. The company that was once just a glimmer in the eye of a Harvard student named Mark Zuckerberg raised over $16 billion yesterday as shares were gobbled up by hungry investors, and that $38 share price point is expected to increase as the stock starts trading around 11am today.
Do you know how much money that is?
And how did I calculate this madness, you ask? I didn’t. A new website just popped up titled “Facebook made more money than”, and it looks a helluva lot like a Facebook page (fittingly). The site is sourcing facts from the web to provide a little added perspective on just how much $16 billion is worth.
Check it out here.
Here’s one more for the road, just to nail down the nearly unimaginable sum in your mind:
The $16 billion netted by Facebook before the stocks begin trading is more than the value of 66 sets of Winklevoss twins.
Why is there nothing but Facebook IPO news today, you (Facebook haters) may be asking? Well, outside of the obvious – people are obsessed, this is a historic event, it’s the biggest tech IPO over, etc., etc. – there’s another reason why all the news outlets are publishing Facebook this and Facebook that today. It’s because everyone else is holding their news for a later date….the result of which has led to a historic event of my own: inbox zero.
So this is what it’s like not being a tech blogger?
OK, if I’m being honest, it’s like inbox two or three, since there are a few tech companies who are clueless enough to think I care about their minor enhancements today, of all days (Nuance, I’m looking at you. Nuance PDF Software update, really? Really?!) But for the most part, it’s been radio silence since sometime last night.
(Note that I’m not counting automated newsletters and notification emails – those never hit the inbox anyway.)
As someone who pretty much gets 50 emails every couple of hours, this is a marvel. I want to take a snapshot to remember this moment. It’s a beautiful thing. Inbox zero. Inbox zero, I tell you!
I expected a little more fanfare from Gmail. “Woohoo?” That’s it? Ah well.
Not only have PR people made the FB IPO a national holiday of sorts, other startup founders who email, text and Skype us are delaying their outreach efforts as well. There’s no “our app just rolled out version 2.0!” No “we got funded!” No “we added sharing features and user profiles!” No “we just hit a million users!” Nothing. Zip. Zero. Nada.
The handful of pitches which have come in today are Facebook-related, and didn’t come in via PR. PR is taking the day off!
I’m going to be a smart PR person and not pitch today. Going to focus on writing and doing other work.
— Joe Gallo (@JGallo02) May 18, 2012
If you run a tech PR company and none of your clients are in any way connected to FB, I’d take the day off.
— Hillel Fuld (@HilzFuld) May 18, 2012
Facebook IPO also means an unwanted day off for the 99% of tech PR folks.
— Tony Keller (@TheRellek) May 18, 2012
PR folks, who often reach out trying to shimmy their way into the news cycle by tying their company to whatever news is happening that day, have actually given up today. That’s how big the Facebook IPO news: they gave up.
No, I’m not crying. I just have a little something in my eye.
Read more from the original source: How Big Is The FB IPO? It’s So Big I Just Hit Inbox Zero