May 31, 2011
S&P/Case-Shiller: San Francisco Top Tier And Condos Tick Up In March
According to the March 2011 S&P/Case-Shiller Home Price Index, single-family home prices in the San Francisco MSA fell a nominal 0.1% from February ’11 to March '11, down 40.6% from a peak in May 2006 and down 5.1% on a year-over-year (YOY) basis, a steady slide from the 18.3% gain reported last May and the fourth consecutive month of year-over-year declines.
For the broader 10-City composite (CSXR), home values fell 0.7% from February to March, down 33.0% from a June 2006 peak as values fell 2.9% year-over-year.
“This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index, the 20-City Composite and 12 MSAs all hit new lows with data reported through March 2011. The National Index fell 4.2% over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight.” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Since December 2010, we have found an increasing number of markets posting new lows. In March 2011, 12 cities - Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland (OR) and Tampa - fell to their lowest levels as measured by the current housing cycle. Washington D.C. was the only MSA displaying positive trends with an annual growth rate of +4.3% and a 1.1% increase from its February level.
“The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit. Excluding the results of that policy, there has been no recovery or even stabilization in home prices during or after the recent recession. Further, while last year saw signs of an economic recovery, the most recent data do not point to renewed gains.
While prices continued to fall across the bottom two price tiers, prices for the top third of San Francisco MSA single-family homes increased 0.7 percent on a month-over-month basis in March, the first gain in ten months. That being said, on a year-over-year basis, values fell across all three price tiers for the fourth time in four months.
The bottom third (under $312,546 at the time of acquisition) fell 0.9% from February to March (down 5.5% YOY); the middle third fell 1.5% from February to March (down 7.5% YOY); and the top third (over $573,577 at the time of acquisition) ticked up 0.7% from February to March, down 3.0% on a year-over-year basis.
According to the Index, single-family home values for the bottom third of the market in the San Francisco MSA have fallen back to May 2000 levels having fallen 59% from a peak in August 2006, the middle third has fallen to below March 2002 levels having fallen 41% from a peak in May 2006, and the top third has returned to December 2003 levels having fallen 27% from a peak in August 2007.
Condo values in the San Francisco MSA increased 2.6% from February ’11 to March '11, down 1.9% year-over-year, but the first month-over-month uptick in seven months. Condo values remain down 33.0% from a December 2005 peak but have reversed a two month "double dip" and 34.7% drop from peak recorded in February.
Our standard SocketSite S&P/Case-Shiller footnote: The S&P/Case-Shiller home price indices include San Francisco, San Mateo, Marin, Contra Costa, and Alameda in the "San Francisco" index (i.e., greater MSA) and are imperfect in factoring out changes in property values due to improvements versus appreciation (although they try their best).
∙ S&P/Case-Shiller: National Home Prices Hit New Low in 2011 [Standard & Poor's]
∙ S&P/Case-Shiller: San Francisco Value Decline Accelerated In Feb [SocketSite]
∙ May Case-Shiller: San Francisco Tiers Up But Gains Moderating Atop [SocketSite]
∙ San Francisco’s Condo "Double Dip" Is (Or Was) Here [SocketSite]
First Published: May 31, 2011 6:30 AM
Comments from "Plugged In" Readers
I feel that ex SF-er's painting of grass growing is drying faster for some cities than others.
Chicago's outcome is dismal. 11 years gone up in smoke. 8 years in LA, 7 years in NY and SF city. Who could have predicted that (apart from a few people who can do 3rd grade math).
I still stick with my prediction that 2012-1014 will be the trough years. Things are starting to make sense today on quite a number of properties in SF. Wild guess on numbers: Upper BA like SF would overall settle at 30-35% under 2008 top. Location trumps trend many times though. More bubbly sub-prime at 50-70% discount (already happening in a few places in CA or NV). Flyovers are also being slaughtered by a bubble none of their making.
Many bargains for those who have the cash.
Posted by: lol at May 31, 2011 8:31 AM
Yeah, these things do move sloooowly, although the various stimuli that have now largely run their course did make things interesting for a while. Now we just watch the very slow descent with lots of wiggles in between.
Here is a May '10-'11 re-sale that is pretty consistent with the overall trend -- down 7% (with the seller even offering to finance the 20% down!):
And a double re-sale that shows the hit on a weaker segment:
Those who sold in '06-'07 -- nice! Those who bought then -- ouch!
Posted by: A.T. at May 31, 2011 8:50 AM
250 King has its own set of troubles. FNM is killing the value because of their financing restrictions. Tough financing means less Monopoly cash to play. Decent deals if you have your own financing of course.
Posted by: lol at May 31, 2011 9:03 AM
Chicago's outcome is dismal. 11 years gone up in smoke. 8 years in LA, 7 years in NY and SF city
What are you basing that 7 years on?
Posted by: REpornaddict at May 31, 2011 9:26 AM
For SF city, top tier of the CS is a good proxy. You'll notice the index is around where it was in 2004. That's 7 years ago. Which means property values are the same as 7 years ago and buyers of that time paid their mortgage on a property that didn't even follow inflation.
Posted by: lol at May 31, 2011 9:42 AM
C'mon you guys, the decline on this chart is just a temporary blip. There is a tech stock bubble, you know. Why, those of us who bought 10,000 LinkedIn shares at $122.7 are going to be out buying houses in droves.
I wonder what I should be looking for to buy with my LinkedIn profits? Maybe billionaire's row in Pac Heights?
What?! LNKD stock is at 85?! Down!? Again!?
I hear fixer TIC studios underneath S&M dungeouns on busy streets in the Bayview can be nice...
Posted by: tipster at May 31, 2011 10:03 AM
^^^^ ha. Cisco/Apple/HP/Intel/LinkedIn is/isn't important to SF because people do/don't live or buy in SF. You read it from Tipster first. Great information, truly.
There's a HUGE difference in the market between March 2010 and March 2011 in SF this spring I tells ya I tells ya. Real great spot to pick for crowing purposes, a very slight uptick. Whatever. "Zippadee live here/don't live here/matters/doesn't matter."
Posted by: [anon.ed] at May 31, 2011 10:33 AM
^Imagine that! A realtor saying things are looking up. I'll bet that's the first time I ever heard that...
Posted by: tipster at May 31, 2011 10:36 AM
Did I say that, or did I repeat what Socketsite stated atop the thread? You editorialize beyond the point of ineptitude every single day, Tipster. What's amusing is that you're not even consistent with your own crackpot stuff.
Posted by: [anon.ed] at May 31, 2011 10:39 AM
Current May '11 MLS sales figures are quite a bit below May '10, with one day left in the month. There will be some late additions, but it looks like another down month YOY in terms of sales volume. No spring bounce, again . . .
Posted by: A.T. at May 31, 2011 10:46 AM
There are places in the country where I own property that are seeing population declines, which is rather scary. I am an oldster, though, and I remember the Carter days well. New regulations and taxes that only noearch would like were being introduced everywhere; it seemed our civilization was in an inevitable decline. But America can reinvent itself, and that's what's going to happen, so don't sell real estate short.
Posted by: unwarrantedinlaw at May 31, 2011 10:47 AM
MLS ... looks like another down month YOY in terms of sales volume ...
Once again for the fifth or sixth time, April MLS sales were up YOY 434 to 389.
Now you're trying to slip "MLS" in there. Ha. You guys are spin-larious.
Posted by: [anon.ed] at May 31, 2011 10:53 AM
flujie, read my post. I said MLS sales look like they will finish down YOY in May not April. May, fluj. I said nothing about April. Right now, the May numbers actually look like it will be a pretty substantial decline.
Posted by: A.T. at May 31, 2011 11:21 AM
Oh, you must have meant another "another" when you said another. My bad. You meant another in the sense of, "Except for last month, which was actually up per the MLS." Nothing leading was intended at all.
Please, no need to wikipedia the word "another." Let's just agree to disagree that you're worthwhile.
Posted by: [anon.ed] at May 31, 2011 11:35 AM
I heard April 2006 was pretty good too, A.T. May as well let the Realtors live in the past while they can.
I myself am savoring the past, too. An hour ago, my 122.70 per share Linked In stock was at 85. Now it's at 83. Another $20,000.00 down the drain in an hour from the "next big bubble".
I can't hardly wait for the next hot Internet stock to hit the market. Should be the savior for SF real estate.
Posted by: tipster at May 31, 2011 11:37 AM
Your talking point is incorrect. Taxes, in general, and especially for the rich, are lower now than in at least 60 years. Here are the facts: http://economix.blogs.nytimes.com/2011/05/31/are-taxes-in-the-u-s-high-or-low/
"By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget."
Just because the Tea Party or right wing has been shouting propaganda about taxes for years does not make it true.
Taxes are not depressing housing--it's a ridiculous assertion. If anything, with the capital gains exemption, the mortgage interest deduction, and a plethora of other support for housing the government has lowered taxes for housing.
Posted by: SFHawkguy at May 31, 2011 11:40 AM
Well May 2010 was good because that's when the "double tax credit" spectre first loomed large: http://articles.sfgate.com/2010-04-01/business/20830635_1_tax-credit-home-buyers-close . May 2011 will trounce May 2009 as it's already up by 13% or so, 394 to 349, with the rest of today and tomorrow still to go.
Posted by: [anon.ed] at May 31, 2011 11:52 AM
fluj, tomorrow is June.
Posted by: A.T. at May 31, 2011 12:02 PM
"I want trading reopened right now. Get those brokers back in here! Turn those machines back on!"
Posted by: J at May 31, 2011 12:13 PM
Yes, and sales results for May will trickle into the MLS throughout the day tomorrow. Like they always do at the end of any given month. You're more than welcome to not try to go "gotcha" on here every time your brain gets a passing notion to do so.
Posted by: [anon.ed] at May 31, 2011 12:13 PM
So if I have enough cash to pay 50% down and get a mortgage of 15 years fixed on a 400k 1 bedroom in the mission- should I buy now? Is 50% down and shorter mortgage better than 20% down and longer mortgage? Im worried about earthquakes and if I will loose all my money if the building has severe cracks.
Posted by: sarah palin at May 31, 2011 12:50 PM
upper tier is down to Dec 2003 levels. That's actually 7.5 lost yrs, not 7.
Once you factor in inflation, SF proper is at 2000/2001 levels. The lost decade has already happened. There were plenty of poepl screaming that what happeneded to Jpan will not happen to us. It may not in terms of lenght, but it won't be that far off.
i would venture to guess that 2013 prices may be in line with 98 prices and we lose 15 yrs.
Posted by: Spencer at May 31, 2011 1:13 PM
also, the buy and hold for 5-7 yrs and your safe concept is totally out of th window.
Now, i think you ahve to be willing to stay 10-15 yrs when you buy if you want to ensure that you break even.
Posted by: Spencer at May 31, 2011 1:15 PM
"For SF city, top tier of the CS is a good proxy.
"upper tier is down to Dec 2003 levels. That's actually 7.5 lost yrs, not 7."
Once you factor in inflation, SF proper is at 2000/2001 levels"
wow. the top tier may be the best proxy of a bad bunch (overall, low, medium and high) but basically equating top tier to SF City/SF proper is really pushing it.
quality of comments/analysis here has gone way down. Some of the above posts riddled with spelling/grammar errors tell their own story.
Posted by: REpornaddict at May 31, 2011 1:27 PM
The upper tier is also just a tad above February 2001, before an 18-month post-dot-com crash dip. So we really are at a lost decade - and that is before taking 28% inflation during that period into account.
I think I'll get serious about looking to move up when we get back to the same early 2000 level where we were when I bought my current place. Maybe a little before that.
Posted by: A.T. at May 31, 2011 2:36 PM
The New York Times' "preview" story yesterday, Housing Index Is Expected to Show a New Low in Prices happened to be datelined San Francisco, though there was very little it in specific to SF or the Bay Area in general.
Here's a taste:
The market’s persistent weakness, however, runs the risk of feeding on itself. Buyers are staying away despite the lowest interest rates and the highest affordability levels in many years, which in turn prompts others to hesitate.
Trulia and another real estate site, RealtyTrac, commissioned Harris Interactive to take a poll last November about when people thought the market would recover. A third of the respondents chose 2014 or later. But in a new poll, released this month, the percentage giving that answer rose to 54 percent.
What's interesting for me is that eventually the fed will have to raise interest rates, and the end of QEII in the next few months will probably be worth at least half a percentage point by itself, without any action from the FOMC. Some of these "buyers that are staying away" because they think prices are going to keep going lower for some time or at least stay flat, perhaps a sizeable number, might be "scared into buying" when the interest rates on mortgages start going up and thus increasing what their eventual monthly payment.
Posted by: Brahma (incensed renter) at May 31, 2011 2:38 PM
That might happen, so there might be a slight bump, but ultimately, all else being equal, higher interest rates will result in lower prices.
Posted by: lyqwyd at May 31, 2011 3:48 PM
And it's just as likely that the end of QEII will result in lower rates as some free money flowing into stocks and commodities goes away and the real money that is left seeks safety in treasuries.
And while it is true that eventually the fed will have to raise interest rates, it could be several years before that time comes.
Posted by: A.T. at May 31, 2011 4:22 PM
^ Of course, we're assuming there will be no QE3...which is not completely out of the question.
Posted by: Not Bashing at May 31, 2011 4:56 PM
An interesting milestone:
"House Prices Have Now Fallen Farther Than They Did In The Great Depression"
Posted by: A.T. at May 31, 2011 5:08 PM
I personally I think interest rates will remain low over the the next few years, as I believe QE3 will happen sometime late in the year. In the short term it's tough for me to predict how interest rates will react in the short term after QE2 ends. Ultimately interest rates must go up, but I imaging it could be a few years before they do.
Posted by: lyqwyd at May 31, 2011 5:17 PM
"Of course, we're assuming there will be no QE3"
There will be no QE3
... at least until the effects become visible and the MSM is clamoring for Bernanke to "DO SOMETHING!"
... then he will, reluctantly, fire up QE3.
Posted by: diemos at May 31, 2011 5:20 PM
There will be a QE3, and you will all LOVE it! Obama's going to need that bump before the election.
Posted by: Jimmy (No Longer Bitter) at May 31, 2011 6:21 PM
during the bubble, buyers expected prices to rise because that was the trend.
now the trend is downward, and buyers are getting well-trained to under-bid or just wait.
so shouldn't we expect an over-correction below the index (100) line - all other things being equal? much of asset pricing is behavioral-psych driven.
Posted by: julio-eglesias-panties at May 31, 2011 8:21 PM
"Flyovers are also being slaughtered by a bubble none of their making"
Yeah, cuz the flyovers don't have representatives in Congress...
Posted by: BobN at May 31, 2011 8:35 PM
The assertion that ceteris paribus "higher interest rates will result in lower prices" and "asset pricing is behavioral-psych driven" and hence we should expect an over-correction below the index are both interesting hypotheses that aren't at all certain to happen in the real world.
As far as the latter goes, prices in real estate are sticky downward, I believe this is well-established in Real Estate economics. It's not just like any other asset. I'm not saying an over-correction won't happen, but it's not at all preordained or readily predictable via logical deduction from first principles.
One other reason that hasn't been discussed yet ( at lest on this thread) that I think prices won't decline too far is that I think there's a big pool of money out there just waiting for prices to hit a certain level.
Since I mentioned the potential buyer survey of sentiment above, here's another aspect of it. From "On The Block" Investors competing with first-time buyers:
A survey just released by Move, Inc., shows that real estate investors will be more active in their local markets by a 3:1 margin compared to typical homebuyers in the next 24 months. We could expect this to be especially true in a city like San Francisco, where so many local residents are still priced out, and stricter lending laws have pushed out those who might have been inclined to stretch the truth about their incomes to qualify for loans…most (69%) of investors expect it will be easier to find properties in the near future. 62% of real estate told Move "they're paying more attention to home values in their local markets, and only 43.5 percent say it will be harder to find bargains…As for prices, investors have mixed predictions:Hate to sound like a cheerleading Real Estate agent, but there's just an astounding amount of investor money waiting patiently to pounce.
•22% are bullish and expect prices to rise in the next six to 12 months
•Almost half expect prices to remain relatively the same…
Posted by: Brahma (incensed renter) at May 31, 2011 8:55 PM
It's already been pouncing. Tons of investor money poured in to buy "cheap" distressed housing in the last couple years. Some (not all) are now realizing they pounced on a sh*t sandwich.
"We could expect this to be especially true in a city like San Francisco, where so many local residents are still priced out, and stricter lending laws have pushed out those who might have been inclined to stretch the truth about their incomes to qualify for loans"
As an investor why would I want to buy any investment knowing the price isn't supported by fundamentals (locals ability to buy)? Illogical.
Posted by: HMSvanguard at May 31, 2011 9:20 PM
"It's already been pouncing. Tons of investor money poured in to buy "cheap" distressed housing in the last couple years. Some (not all) are now realizing they pounced on a sh*t sandwich. "
First off it never got that cheap in SF. Secondly, some didn't realize they made a bad play because they didn't. They made a good play. And not too many investors really pounced either because not a lot of money was around in 2009.
Posted by: [anon.ed] at May 31, 2011 9:39 PM
"As an investor why would I want to buy any investment knowing the price isn't supported by fundamentals (locals ability to buy)? Illogical."
Unfortunately the market is created by the mass stampeding of illogical people. So one has to develop on instinct for which direction the herd is going to stampede next and then get off before they run off the cliff.
Personally, I suck at this.
That's why I stick to savings.
Posted by: diemos at May 31, 2011 9:44 PM
It's anecdotal, but I've spoken to several older, right-leaning UHNWs in the past month who, fearing a wave of inflation, are buying swaths of housing units as a hedge. They're not worried about liquidity or what the market will do next quarter. It seems downright crazy to me - spending tens of millions on residential real estate - but it's definitely happening.
On a separate note, SF proper is going to get several thousand new millionaires over the next two years. Zynga will trade at $25b, Facebook at $150+. Gotta figure there will be some Noe bidding wars once again. For all the jokes about LinkedIn shares, there's a lot of happiness just at the $45 level...
Posted by: noodle at May 31, 2011 11:10 PM
ceteris paribus is an acknowledgment that other factors exist, it doesn't render the statement invalid. Real estate prices are significantly impacted by interest rates, but it's not the only factor.
Where do you think the real estate prices would be if interest rates were at the more natural 6-8% they should be?
High investor demand compared to typical homebuyer demand can be interpreted as strength (people think prices are low) or weakness (other people think prices are high). You are welcome to interpret it any way you please, but don't forget that yours is only one of several interpretation.
Here's some more "all else being equal" for you:
Historically high foreclosure inventories will result in lower prices. This is due to a large increase in future supply, that will have to be absorbed.
Historically high delinquency rates will result in lower prices. This is due to a growing foreclosure inventory.
The gov has thrown just about everything it can at boosting real estate prices, and it has somewhat worked as long as they kept the money spigot open, but as soon as it closed real estate prices resumed their natural trajectory. (I would argue the gov's efforts were never really targeted at helping real estate prices, but that's another debate).
There needs to be no talk of "over" correction, as we haven't even reached appropriate correction.
Posted by: lyqwyd at June 1, 2011 12:19 AM
The funny thing about Case Shiller is that it never dissuades bulls from being bulls and bears from being bears. Regardless of what any particular month's data shows,everyone still points to whatever view they had before-- whether an imminent collapse, or crazy bidding wars.
That might say that Case Shiller doesn't really tell us that much about the "real SF" but I think people just have entrenched views about real estate because it is such a slow and inefficient market where the truth is told over such long multi-year periods. If a preponderance of apples-to-apples comparison over the next year suddenly turned dramatically up or dramatically down, I'm not sure it would change people's opinions much either . . .
Posted by: nanon at June 1, 2011 6:59 AM
"On a separate note, SF proper is going to get several thousand new millionaires over the next two years."
And I hear that the French and the Chinese are clamoring to buy SF pied-a-terres because of the cheap dollar. That will surely bring those bidding wars back - except maybe for those houses on busy streets.
Posted by: A.T. at June 1, 2011 7:07 AM
"The funny thing about Case Shiller is that it never dissuades bulls from being bulls and bears from being bears."
I think a great deal of people have undergone some sort of a view shift. During the boom I don't think there was widespread acknowledgment that a bubble was occurring. Many people even believed that prices would never decline. I don't think these views are still common.
Posted by: tc_sf at June 1, 2011 7:16 AM
""On a separate note, SF proper is going to get several thousand new millionaires over the next two years.""
Note that, on the original SS linkedin thread I linked to a business insider (not the best source) post that used the SEC filings to peg a two digit number for the number of linkedin millionaires if the price held over $100 past the lockup.
Posted by: tc_sf at June 1, 2011 7:21 AM
Yeah, cuz the flyovers don't have representatives in Congress...
True, but what people do is separate from what their reps decide.
Most of the flyovers didn't (or couldn't) inflate the bubble like the coasts. Demographics, less restrictive land rules and limited incomes probably played a role. Now they're hit by the double-whammy of dis-industrialization and financing shortage.
Posted by: lol at June 1, 2011 7:55 AM
"There needs to be no talk of "over" correction, as we haven't even reached appropriate correction"
Who is "we," here? Your talk was global and then you switched to a local summation? Lots of places got plenty corrected.
Posted by: [anon.ed] at June 1, 2011 8:01 AM
What a beautiful day in SF!! The sun isn't shining, and every single linked in employee has lost a stunning 40% of their home price purchasing power in under two weeks. Not just the two dozen millionares, but every single linked in employee.. At a share price of 77, all of them are at least 40% poorer in only two weeks.
How would it affect your psyche if 40% of your net worth evaporated before your eyes. How would it affect your determination to bargain the price you pay down to the bone! Even pets.com wasn't doing this poorly in the last days of the dot com implosion.
Posted by: tipster at June 1, 2011 8:47 AM
All this talk of interest rates and economic turmoil is interesting but it there's just too many folks with tons of cash in SF. All my property owning friends in my age group, the under 30's, have the bank of mom and dad to thank for their places. It wasn't google/apple/facebook money, although several of them do work at those companies.
Posted by: brandno at June 1, 2011 8:49 AM
"on the original SS linkedin thread I linked to a business insider (not the best source) post that used the SEC filings to peg a two digit number for the number of linkedin millionaires if the price held over $100 past the lockup"
That link's lowest payout was for 29M, @ number 20. So there were only 10 or so employees positioned to gross between 1M and 29M? That doesn't seem likely but maybe it was the case. Anyway I'm sure you don't know, yet on you talk.
Posted by: [anon.ed] at June 1, 2011 8:54 AM
"At a share price of 77, all of them are at least 40% poorer in only two weeks"
Poorer is an odd choice of wording.
Posted by: [anon.ed] at June 1, 2011 8:58 AM
@anon, "we" is America.
"have the bank of mom and dad to thank for their places."
That's true, but that was even more true during the bubble. Many parents were taking equity out of their own home to help their kids with downpayments, now there's a lot less equity available to do that. It's another thing that can be interpreted two ways... lots of money because of bank of parents, or housing is still overpriced since many people can't afford to buy with their own income/savings.
"every single linked in employee has lost a stunning 40% of their home price purchasing power in under two weeks."
then by your measure all those people had their purchasing power increase by several hundred percent in under 3 weeks.
Posted by: lyqwyd at June 1, 2011 9:24 AM
Things are looking up for those seeking to buy a place actually to live in with the continuing slow sales and high levels of inventory, particularly distressed inventory. Here is a decent little Bernal SFR that closed Monday at $450,000, down a cool quarter million (36%) from the 2005 selling price.
There is further to fall, but much of SF is now closer to the bottom than to the bubble peak. One could have made enough to pay cash for this place by shorting LNKD when options trading opened on Friday.
[Editor's Note: Hopefully No One Banked On This Bernal Comp Back In 2005.]
Posted by: A.T. at June 1, 2011 9:24 AM
"Note that, on the original SS linkedin thread I linked to a business insider (not the best source) post that used the SEC filings to peg a two digit number for the number of linkedin millionaires if the price held over $100 past the lockup."
Yes, I believe the number you quoted was around 30, and many of those were investment funds and corporations, not individuals. I skimmed the original S-1 and then the later revision, and there didn't seem to be that many shareholders with huge numbers of shares other than the directors/officers and the funds that invested in LinkedIn (who between them appear to have held 93M shares).
It seems like restricted shares tended to go to directors/officers. The rank and file typically got options. More than 1/3 of the outstanding options as of Sept 2010 were held by 5 key employees. The rank and file largely have unvested stock (2/3 of the issued and outstanding options were unvested as of 9/30/2010). You can see why, since typical vesting is 4 years:
"As of December 31, 2010, approximately 57% of our employees had been with us for less than one year and approximately 74% for less than two years."
The founders held more shares than might be typical, and certainly the founders + the funds have a huge percentage of the voting power still. The IPOs these days are not like the IPOs of yore in structure.
Posted by: sfrenegade at June 1, 2011 11:50 AM
^ While BI isn't a great source, grabbing some numbers from a SEC filing seems like a low hurdle. Additionally, it's not that uncommon for the equity distribution to show a steep decline from the top, much like the overall income distribution does. Even from the people they listed some founders and executives were already down to 1/8th the stake of the CEO.
On another note, the CoreLogic Data for SF MSA showed a sharp reversal with the April numbers showing a 6 month change of +0.79% compared to -5.92% for March. Excluding distressed April came in at +6.57% compared to -1.02% for April!!
Posted by: tc_sf at June 1, 2011 11:58 AM
"That's true, but that was even more true during the bubble. Many parents were taking equity out of their own home to help their kids with downpayments, now there's a lot less equity available to do that."
They also felt more comfortable doing that when their 401(k)s and taxable investments were flying high. Unless they aggressively put their money back into the market fairly quickly, which most didn't, the accounts are still way down from the peaks.
Posted by: sfrenegade at June 1, 2011 1:38 PM
"Additionally, it's not that uncommon for the equity distribution to show a steep decline from the top, much like the overall income distribution does."
That's definitely true. They had about 990 employees as of Dec. 31, 2010, so if you exclude the 5 key players I mentioned, the average is around 10,000 shares (with at least 24,000 required to have $1M). Then you consider that 730+ of those people have been around for less than 2 years, so it's really a small number that got in early, since LinkedIn has been around since 2002, and even those 730+ are only about half-vested. The 10 other co-founders aren't listed on the S-1, even though they are likely to have more shares than a typical rank and file. Tiger isn't mentioned, and they are supposed to have 1%.
All those people who were there one year or less also got many fewer shares than the people who were there even at about 1.5 years -- the strike price went from $2.32 (when they had 348 employees) to over $8 in that time to $22+ when they were granting options in April. So even if you gave the same level of engineer the same in dollar value, the later people received fewer than 1/3 in number of shares. They later took an expense to reprice their options, so people still got >$40/share at IPO price.
A lot of the money here went to very few people. Some people will have some down payment money, but most of them won't have $2M+ house in SF money.
Posted by: sfrenegade at June 1, 2011 1:59 PM
A pre-bubble pop op-ed from our dear Paul Krugman:
About bubbles and geography, Krugman had it right as far back as 2005:
When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.
In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns [Ed.: Huh? I don't think Krugman gets out here much.], just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.
But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.
In short, we're structurally likely to have bubbles. Of course the SF bubble didn't pop as strongly as anywhere else because there's some actual wealth behind high RE prices.
Posted by: lol at June 1, 2011 2:00 PM
Whether or not the LinkedIn IPO drives 5 expensive SF home sales or 10 is not the issue. The issue is whether the 50 other LinkedIn follow on companies got to grab the brass ring via an IPO.
Was this, as JimmyC described it, a Netscape moment, the opening of the flood gates to allow 50 other follow ons to go public, thereby driving 500 expensive SF home sales, or was it a Loudcloud moment, the feeble attempt at trying to spawn another IPO bubble that fizzled, where the initial investors who bought following the IPO lost a lot of money and no one wanted to buy a similar company.
Will Palo Alto's Facebook do well whenever it has it's IPO. No question, it will be a boon for that Palo Alto company. Will Zynga do well? Yes, no question, and locating near the train station will spread that wealth down south too.
But Zynga will probably make 50 individuals rich, 25 of which will probably buy homes in SF. But there are 1200 homes bought per quarter, 25 more isn't going to make much of a dent. And everyone knows these buyers are coming: they are already priced into the market, with sellers holding off until the IPOs.
The bigger issue was whether the floodgates would open for the 50 other companies all positioned like LinkedIn. And so far, the answer is a resounding NO.
The other issue with Netscape moments is that EVERYONE made money, not just those with dot com shares. Landlords made money hand over fist, temp agencies, law firms, bankers, restaurant owners, you name it. There was SO MUCH vc money flooding in. For every IPO millionare, there was another ten business owners making money.
That isn't happening now. Rents are low so landlords are not getting rich, just doing OK, restaurants are struggling, law firms and bankers are doing good not great.
They flubbed it letting LinkedIn go out first. The VC money isn't going to come pouring in after it, and spill out to other businesses. The IPOs aren't going to come out 5 per week.
The theory was that the Fed money had run out of places to go and it would be used to create another Internet stock bubble. They tested it with LinkedIn. Some bankers pumped it up the first couple of days. Didn't work.
A handful of IPOs per year doesn't even get you back to year 2000 prices, it gets you back to 1998. Sorry. Game over. Nice try. Game over.
Posted by: tipster at June 1, 2011 2:22 PM
"They flubbed it letting LinkedIn go out first. The VC money isn't going to come pouring in after it, and spill out to other businesses."
I think they are more likely to wait and see what happens at 6 months when the lockups expire. The problem is that LinkedIn doesn't really make much profit, and it made even lower profits during the first quarter of this year. People are more likely to look at the fundamentals now than they were in 1999.
Btw, I think Barron's said that LinkedIn's shares were going for about $30 in the secondary markets pre-IPO. I'm assuming that was mostly shares from founders, executives, and directors.
Posted by: sfrenegade at June 1, 2011 2:31 PM
I don't think there's a bubble that even resembles the dot-com years.
Gone is the day when companies with 50K in sales could produce boilerplate "5 per week" 500M IPOs. We all know that pattern not coming back anytime soon.
But what you're missing is that a lot of the upcoming IPOs are based on actual tangible businesses that already produce revenue in the millions of $$$. The effect can be felt in higher commercial occupancy rate, higher housing rental cost, some froth in the $1M+ market. Heck, some places around me rent for 40-50% more than 2004 prices. That's paid with real money, not funny-money one time bubble windfalls. The world is constantly changing, and the current revolution greatly benefits some segments of the BA.
Posted by: lol at June 1, 2011 2:42 PM
I'm glad that the Bay Area is holding on as tech capital. But we're not ever going to see the throngs of minted millionaires like during the dot-com years. The main reason is that back then FASB (accounting) rules let companies toss around as many options as they wanted to and they did not have to record them as an expense. Thus, they handed them out like candy in order to entice employees because it was "free".
But now you do have to expense them, so they are not spread around nearly as much. In addition, as sfrenegade notes, VCs and investors pay at least some attention to fundamentals now to avoid the dot-com bloodbath. So expensing options results in still fewer yet.
A small number of people can and will make fantastic money with a successful company launch. But you're not going to see dozens or hundreds of instant millionaires from each IPO like in the frothy days (hell, I know untalented two-bit HTML programmers who haven't had to work since 2000 - good for them, but that ain't going to repeat itself). There is not going to be an SF real estate frenzy no matter how well these web 2.1 launches come out.
Posted by: A.T. at June 1, 2011 2:46 PM
"rents are low"
They aren't that low and you know it.
Posted by: [anon.ed] at June 1, 2011 3:04 PM
^Commercial rents are still low. Commercial landlords are not making millions off of rents.
This landlord has been carrying half the building empty for years and had to do significant work and even move some of the existing tenants. That tells me that the new tenant was in the driver's seat. They basically bent over to try to get them in there.
Commercial space in that area is at least 20% vacant. Landlords aren't making money from any of this.
Posted by: tipster at June 1, 2011 3:23 PM
Tipster, time to update your talking points...
Apparently things things are looking up:
Silicon Valley: Silicon Valley has seen dramatic increases in leasing velocity and tenant activity since the beginning of 2011. "Increased consumer demand for new innovation in mobile applications, social networking, and software development has spurred significant revenue growth, prompting aggressive increases in future headcount projections," said Christan Basconcillo, Senior Research Analyst. Within the past month both Motorola and Hewlett Packard finalized leases at one of the Valley's premier class A office campuses in Sunnyvale for 225,150 square feet and 444,088 square feet respectively. Dell, who vacated Silicon Valley after the implosion of the dot com era in 2001 has returned to reestablish their presence by signing a deal for 240,913 square feet in Santa Clara. With existing class A available product decreasing, competition for similar space requirements is expected to become aggressive, as a flight to quality trend has emerged. In response to the large volume of tenant activity and news large deals, rental rates have begun to trend upward. Moving forward, leasing activity will continue at its current pace while several proposed office projects that were put on hold will break ground in order to meet demand.
Posted by: lol at June 1, 2011 3:34 PM
To be fair though, it's possible that both the statement 'rents are low' and 'rental rates have begun to trend upward' are simultaneously true.
Posted by: tc_sf at June 1, 2011 3:43 PM
I'm plugged into the office leasing market more than you could ever know, lol.
Things were up a bit in late 2010, but in early 2011, it all leveled off. Now it's sort of up and down.
Santa Clara space is running about $1.50 psft for the nicest stuff - still very cheap. There is plenty of space available.
There is about 80,000 square feet available on Sand Hill Road in all shapes and sizes. I don't think I've ever seen it that high in 20 years. During good times, stuff doesn't come available there for years. VC's just take everything and will let it sit vacant.
Palo Alto Square (the tallest building in Palo Alto) has about 75,000 square feet in various sizes. Again, an unheard of amount. During good times, you can't get into that building.
There is no shortage of space in Silicon Valley. It's available everywhere, at all price ranges.
Things are better than 2008/2009. But not by a lot and it's still a renters market. The leasing activity is certainly up from somewhere near zero, but it isn't that great.
Posted by: tipster at June 1, 2011 3:52 PM
These threads are always funny to read. The wealth effects of these markets are far reaching beyond the individuals inside the company with equity. The fact that rents are actually fairly stable / available is a healthy sign of the market. Confusing empty VC office space with actual leased space for prospering businesses is not a sign of good times vs bad times.
Posted by: eddy at June 1, 2011 4:34 PM
"The wealth effects of these markets are far reaching beyond the individuals inside the company with equity"
Note though that any money made by non-employees (bankers, institutions,..) need not end up anywhere near SF. Individuals may make money on the stock, but they may similarly be located anywhere also as the stock may trade above or below the open there is no telling if the wealth effect will operate in forwards or reverse.
Posted by: tc_sf at June 1, 2011 5:07 PM
There will be a QE3, and you will all LOVE it!
Since we are entertaining predictions here, I just wanted to go on record as saying that I don't think that there will be a QEIII, even though I understand that economic conditions may go south from here, especially on the unemployment front. I recognize that there are plausible arguments for another round sometime during the next 18 months. I just don't buy them.
Also, Ben Bernanke has insulation from politics, policy at The Fed won't change, in my opinion, even if Michele Bachmann wins the next election. Some informed people disagree, however. From reuters earlier today, Third time's a charm? Whispers of QE3 emerge:
Most Fed watchers still see a third round of quantitative easing, or QE3, as a very remote possibility. The obstacles this time around are greater, since inflation has been creeping higher and the jobless rate, while still at an elevated 9 percent, has come down quite a bit in recent months…The Fed would also prefer to avoid reliving the domestic and international furor its second round of bond buys unleashed. Though Fed officials would rather not admit it, the criticism has weighed on their decision-making.
When the central bank embarked on the $600 billion round of Treasury bond buys, Republican politicians, some economists, and even a couple of top Fed officials cautioned that the measure, aimed at keeping borrowing costs down and stimulating the economy, would not work and risked sparking inflation.
I think it's going to take measurable danger of deflation again to motivate more QE, and I don't see that happening again in the near-to-medium term.
Posted by: Brahma (incensed renter) at June 1, 2011 10:52 PM
tipster, since you are so plugged into the market, perhaps you would share with our SF friends the per sq ask for that vacant space on sand hill and in palo alto sq?
Posted by: steve at June 2, 2011 7:36 AM
5th and 6th floor of Palo Alto square is asking $4.45 psft. A law firm moved out of the same floors of the sister building in that same complex with better views in the year 2000 to lock in a non-view building in Mountain View they bought for payments equivalent to about twice that. So I have to think that they were getting renewed at something like $10 psft. Major D'oh! move for them when they could have gotten it this cheaply.
Sand Hill road is always astronomical. In good times, $14 is not unusual. Now its around mid 7.
Plenty of space, about half the rent of good times.
Posted by: tipster at June 2, 2011 9:12 AM
In my opinion the primary concern is less how monetary policy is accomplished (QE3 or not QE3) but rather the result.
So far we have not experienced deflation or excessive inflation and forward looking market expectations are at around 2% which is normal. To the first order if the fed can maintain this good result I think it will be a positive outcome regardless of how they accomplish it.
There are some valid second order concerns about the how, specifically with a QE situation where non government bonds are being bought since this can benefit specific groups.
Posted by: tc_sf at June 2, 2011 10:36 AM
And here comes Groupon:
I haven't looked into their finances, but they seem to have massive revenue.
Posted by: sfrenegade at June 2, 2011 1:14 PM
"The deals website filed an S-1 with the SEC that signals its intent to raise $750 million. Groupon reported a 2010 net loss of $413.4 million on $713.4 million in revenue for 201, For the most recently reported three months through March, the coupon site booked a loss of $113.9 million on $644.3 million."
Posted by: sfrenegade at June 2, 2011 1:16 PM
Time to buy a condo in Chicago - the market is about to catch on fire with all the Groupon millionaires . . .
Posted by: A.T. at June 2, 2011 1:18 PM
I'm sure somewhere on some Chicago Real Estate blog there some version of this conversation being bandied about. Much wealth will be created but Groupon's growth from 1Q Rev in 2009 of 3.3M to $645M in 2011 is more a sign of how fast that market can move rather than long term sustained growth. They want to get that thing IPOd as fast as humanly possible.
Posted by: eddy at June 2, 2011 1:21 PM
"They want to get that thing IPOd as fast as humanly possible."
Indeed, there are any number of competitors in the wings, and Groupon's significant margins will drop when businesses realize that returns on Groupons aren't as good as promised and don't necessarily lead to long-term sales increases, as the data has shown thus far. The business model is also highly dependent on local salesforces, which is expensive. This is about striking while the iron is hot, pump and dump.
Posted by: sfrenegade at June 2, 2011 1:35 PM
"I haven't looked into their finances, but they seem to have massive revenue."
Note that I believe they report revenue by counting the entire amount of the groupons they sell. Since they are essentially brokering other people's product it may be more useful to look at the amount of their cut of the sales.
Similar to how looking at revenue defined in the same way for airline booking sites brokering tickets may not be the best method for evaluating their business.
Posted by: tc_sf at June 2, 2011 1:37 PM
D*mn, you're right tc_sf. Form the S-1: "Our revenue is the purchase price paid by the customer for the Groupon. Our gross profit is the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant."
So they call "gross profit" what is really their revenue, and their "revenue" is just a made-up big number. But they did disclose all this . . .
Thus their financials are just horrible, rivaling the dot-coms. $290mm of revenue (called "gross profit") and $456mm in losses for 2010. Maybe they can make it up on volume! I'm not touching this one. But I'm sure plenty of others will on IPO day.
Posted by: A.T. at June 2, 2011 1:47 PM
"Note that I believe"
hahahhaha + huh? "I believe" would be perfectly sufficient there.
Posted by: [anon.ed] at June 2, 2011 1:50 PM
Profit Margins and Free Cash Flow are the right metrics to review here re: Gorupon. Margins will ultimately be the undoing of the shareholders. They could corner the market for a few years and blow the doors off the business model so it could make sense in the short to medium run.
Posted by: eddy at June 2, 2011 2:01 PM
"So they call "gross profit" what is really their revenue, and their "revenue" is just a made-up big number. But they did disclose all this . . ."
The same issue of "grossing up" revenue arose in the first dot coms with Priceline being a poster child. Although the SEC allowed this type of reporting it doesn't seem beneficial to use when looking at this type of business. There will presumably be a quiet period surrounding the IPO, but afterwards the thing to look at is whether or not the company is deceptive or up front about the use of this type of accounting.
Posted by: tc_sf at June 2, 2011 2:12 PM
Revenue is $ you get from your customers. The customers are theirs. Thus, the number they call revenue is revenue. If customers stop spending with them, revenue goes down.
Gross profit is a measure of how well they can screw their vendors. If the cut they pay the vendor goes up due to competing sites or the vendors growing a brain, their gross goes down relative to revenue.
Net profit is how much money they lose making all the money flow around in a giant shell game where everyone appears to lose money in gargantuan amounts.
Investors need to see all three numbers to see how poorly they are doing from one quarter to the next. Did they lose money but gain share and leverage or did they lose money and lose share or leverage. Thus, they are reporting accurately.
Posted by: tipster at June 2, 2011 3:03 PM
"Revenue is $ you get from your customers."
Revenue can be recorded on either a gross or net basis. There may be SEC rules and FASB guidelines for different businesses as to how they must or may report. But regardless of the rules when analyzing a business for your own purpose you can use whichever is more relevant.
There's a big difference between burning cash to create a tech product that goes from $3.3M to $645M sales in two years where the company owns and controls the product being sold and burning cash to re-sell other people products.
Consider that Groupon has no ownership of the products or services being sold on their site, nor does it even hold them in inventory. If you've never even laid a hand on what you sell, in my mind that creates a bias towards net accounting.
None of this is to say anything pro or con about the service that groupon provides, priceline has stuck around by being an innovative middle man, but rather that their business really consists of their service rather then the products they sell on their site.
Posted by: tc_sf at June 2, 2011 3:47 PM
Looks like Pandora is going to price at $1.2 billion:
Posted by: anon at June 3, 2011 8:26 AM
Here is another view of the CS numbers for the 20 MSAs it tracks. In terms of dollars lost, nowhere else comes close to SF:
There, you see, it IS different here.
Posted by: A.T. at June 3, 2011 8:36 AM
Here is my favorite article on Groupon, and their analysis was similar to mine that Groupon's finance, structure, and trajectory make no sense, only they went even further with a headline "Groupon is effective insolvent" and pointing out how their C-level management has been abandoning them -- looks like everyone else is getting out while they can too. They even went as far as using the P-word -- Ponzi:
"Looks like Pandora is going to price at $1.2 billion"
I saw that. Their S-1 has been out for a few months. Their losses have progressively shrunk over the last few years, but in their S-1, they point out one of their largest business risks, which is that the music industry's models might change. Currently, they are in rate court with ASCAP, and I wouldn't be comfortable investing in them without knowing what the result of that is. I believe they have right around 300 employees, based in Oakland of course. It's possible their employees have more stock than LinkedIn, based on the size of the option pool, but you have to divide by 5-6, since they are thinking about more like $8/share.
Posted by: sfrenegade at June 3, 2011 10:46 AM
Whoo boy: busy morning for me. In spite of the fact that every analyst has said that Pandora's business is a joke, I knew I had to get in early! Bought 10,000 shares right at the open at 26.
I can't wait to see what real estate I can buy with my profit! I may have lost about $500,000 on Lnkd (so far), but Pandora will be different! It's an internet bubble, you know!
Posted by: tipster at June 15, 2011 9:41 AM
Meanwhile it didn't take genius to short these stocks. Did you short them?
Posted by: eddy at June 15, 2011 11:31 AM
Are you kidding? In this economy? You can short just about anything and make money!
Posted by: tipster at June 15, 2011 12:29 PM
But as long as it's "in the cloud" I'll be OK, right?
Posted by: Legacy Dude at June 15, 2011 1:03 PM
What that a Yes or No?
Posted by: eddy at June 15, 2011 1:16 PM
SEC shot down Groupon's grossing up of revenues...
"That includes the way it measures revenue, which will now be reported excluding the money it pays out to merchants.
Some felt the “gross revenue” figure was not reflective of Groupon’s true performance.
Said the company in its amended filing:
“We consistently have stated that the amount we retain — rather than bill or collect — from the sale of Groupons is the key measure of the value we create. This change in presentation is consistent with that belief.”
Okkkkaaaay, whatever you say, but the change was requested by the Securities and Exchange Commission.
Posted by: tc_sf at September 23, 2011 3:26 PM
More telling, Groupon COO just walked away from $500k salary and options, returning to Google after five months at Groupon.
Posted by: Michael at September 23, 2011 5:01 PM
Oh man! Lnkd=from 122.7 to 67.55.
I got a Call from Mr. Margin today. I wonder what he wants?
Posted by: tipster at November 21, 2011 7:59 AM