In the Bay Area, the already competitive real estate market is about to get even more fierce. Some of the biggest tech companies in the country are planning to

How has Facebook’s IPO affected the real estate market in the SF Bay Area?

The economic success of the region, especially amid a slow recovery from a deep recession in the rest of the country, has generally tended to push prices up, and Facebook has been an integral part of that. But it’s also important to realize that this isn’t the whole story. The way prices respond to an increase in demand is determined by the behavior of the supply. And housing supply in the Bay Area is very inelastic, i.e. it responds very little to changes in price, because of a combination of two factors:

  • expanding the metro area outward is largely limited by the presence of large bodies of water and various protected state and country parks, and the limited capacity of transportation infrastructure that for various practical and political reasons cannot easily be increased;
  • expanding the density of the existing built out area is limited by local politics.

That’s basically it. The nearest cheap housing is too far away for a reasonable commute, and increasing density in any one of the 101 Bay Area cities is politically very tricky.

Now where does Facebook come into it?

I think Facebook has had a few specific effects:

  1. As I said, it’s part of the general software industry boom that is attracting people to the region.
  2. The IPO provided a lot of people with money to make at least downpayments on mortgages, and with money that they seek to invest in tax efficient ways, and that incentivizes people to buy rather than rent. Since much of the housing stock in the area is single family homes (and local governments overwhelmingly like to keep it that way), it probably also pushed some people to buy single family homes that might have otherwise rented apartments.
  3. Facebook’s HQ is located near a historically comparatively poor area (comprised of unincorporated South Fair Oaks, the Belle Haven neighborhood of Menlo Park, and the city of East Palo Alto). They have considerably more people at that facility than Sun ever did, and the workforce skews younger. At around the same time as Facebook’s relocation to the area, the decrease in crime rates in those areas has been consolidating. Moreover, as young professionals come into considerable amounts of money many years before considering children, the traditionally questionable quality of the schools in these places is much less of a concern to them than it might have been in the past. Unsurprisingly, these circumstances make it even less tenable of a situation to have two adjacent cities with such extreme differences in property values as East Palo Alto and Palo Alto. As far as I can tell, the number of Facebook employees purchasing property in East Palo Alto is still quite limited, but there are quite enough buying in Belle Haven to also indirectly affect prices in East Palo Alto. I think it is quite likely that prices in this anomalous part of the peninsula and the rest of the area will continue to converge over time. (I personally think that widespread upzoning is the only solution that can really prevent the current residents from being eventually priced out. Either that or a bad global or regional/sectoral economic downturn. But even the latter may not be able to counter the effects of a long-term downward trend in crime stats.)