If Silicon Valley Stocks Are Down, Why Are Home Prices Up?

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.