Since the Facebook and Zynga Initial Public Offerings (IPO) their stocks have dropped significantly. The implications of this lost equity may have an unexpected effect: a slowing real estate market.
As of close on Friday, Zynga (ZNGA) stock was at $2.48, a drop in excess of 75% from the IPO price of $10. Facebook (FB) stock was at $20.91, a loss of approximately 45% from the IPO price of $38. This huge loss of equity hurts the employees the most as many have stock options with their respective companies and limits on when they can cash out their stock. Even more critical is that the employees will always look at what their options were worth when the stock was at it’s peak and think about how much less they are receiving and will receive when they cash out their stock.
The Wall Street Journal had an article about this over the weekend that explained how these options had diminished for Facebook employees:
The average nonexecutive Facebook employee remains enviably flush, holding stock or stock options valued at an average of roughly $2.5 million as of Friday.
But they have lost roughly $2 million of wealth on average since the company’s May IPO.
and Zynga employees:
The drop has left nonexecutives there holding equity valued at an average of $132,000, down 79% from $635,000 at the time of its December 2011 IPO. In all, Zynga employees have lost $1.4 billion on paper since the IPO.
The article went on to discuss how this loss of wealth is going to slow down the real estate market. It makes sense: when housing prices rise faster than income, there is an imbalance that will eventually have to be corrected. In the book Aftershock
The decline of Facebook and Zynga have taken away a lot of potential purchasing power from Facebook and Zynga employees. With all these arguably well-off employees having a lower purchasing power, it is bound to have some impact on the housing market. How great of an impact is up for debate, but it will have some impact on the hot real estate markets in California where the employees make up a chunk of the buyers/sellers in the market.
Most important to remember is that real estate markets are very much linked to the income and purchasing power of the population buying in a given market. Rising housing prices can only be sustained if they are in line with increased income. When reporters talk about the housing market and whether it has gone up or down, they would be much more accurate if they also discussed what is driving this increase. Unfortunately before the housing collapse, very few put two and two together and saw the inevitable crash in home values.
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Photo by Andrew Feinberg
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Hopefully prices will get lower in California and “normal” employees will be able to afford houses too! I just hope the FB and Zynga employees who did buy super expensive houses either cashed their stocks or can afford their payments whatever the value of their stocks!
@RFIndependence Those who already took the dive and bought that $4M mansion are the ones who are in trouble!
Interesting article. It makes total sense, especially for the areas where the respective empoyees are concentrated or if they were looking for housing elsewhere in a specific place. I’ve read several article recently that haave discussed how many of the higher ups within both companies bailing ship before the stocks both started going south. I imagine you’ll always have that to some level, but it was interesting to see how many of them still got out before steep declines.
@FrugalRules The ones who got out/were able to get out were the lucky ones. I don’t see either of them getting back to their IPO level anytime soon…if ever.
@DC @ Young Adult Money
I totally agree, especially for Zynga. I’ll be interested how long they last on the Nasdaq before they get booted and have to go OTC.
I think it definitely will slow down the real estate market, especially in that area.
I do think it will slow it down in that area, but that is all. This situation doesn’t reach very far.
@OneSmartDollar Sorry if I implied that it did.
How many employees do they have? It wouldn’t seem like it would affect the market to much unless it was a huge percent of an entire town. Then maybe for that town. If the oil companies ever pull out of our area, I can see it affecting the economy in many ways.
@Eyesonthedollar Zynga has 3k but facebook has a lot more. I mainly used it as a lead-in to explain how real estate is tied to income : )
I don’t think it will slow down the real estate market as a whole but it will hurt the local area. From what I’ve heard the prices out that way are ridiculously expensive (at least to me) so it could use a little pullback.
@DebtnTaxes I have similar thoughts. The effects will be isolated. If you’re in the San Francisco/Silicon Valley area…absolutely. Will I feel anything on the East coast…highly doubtful.
@Funancials @DebtnTaxes Sorry if I was misleading never meant to say it would hurt the East Coast. I was mainly talking about San Francisco/Silicon Valley area as you said.
Of course it will! What do you think all those people spending 24/7 on FB will do once zynga craps out after being unable to produce a quality game anymore. They’ll have to get out and look for a job for the first time in 3 months. And since they won’t be able to retain a decent job that doesn’t allow them to check their profile on an hourly basis, their purchasing power decline as they get fired. Hehehehe!
I do think it has the possibility to affect the local market in Silicon Valley but at the same time there are lots of other millionaires to make up for what Facebook and Zynga lost.
@Money Life and More It will be interesting to see what kind of an impact it has.
Tech stocks are funny things – I don’t hold any in my portfolio. I never thought about whether these declines would affect housing prices, but I can see how they could relate. The thing with tech though is that there are always other companies ready to fill the void. I think the overall effect will not be as bad as it may initially seem.