Silicon Valley: Housing Bust? What Housing Bust?

The U.S. housing bust continues to wipe out wealth in major markets nationwide. Then there's Silicon Valley. Investor enthusiasm for technology initial public offerings this year has resulted in big payouts for some workers, who are bidding up home prices in the well-off suburbs south of San Francisco. In May the median price of single-family houses sold in Palo Alto climbed 20 percent from a year earlier, to $1.6 million, the biggest jump since 2008, according to preliminary figures from research firm DataQuick. In Mountain View, where Linked In (LNKD) is based, prices rose 3.1 percent, to $957,500.

Share sales such as the mid-May IPO of LinkedIn—the stock more than doubled on its first day of trading—are helping tech employees fund all-cash purchases and fight off rival bidders. With Palo Alto-based Facebook expected to go public next year, some buyers are rushing to close deals because they believe home prices are headed even higher, says Kenneth Rosen, an economist at the University of California, Berkeley. "I suspect we'll see an explosion in the next couple years," says Rosen, chairman of the school's Fisher Center for Real Estate and Urban Economics. "You've got young people with real money, and it's not surprising they want to have a house."

Facebook founder Mark Zuckerberg, 27, didn't wait for the IPO, buying a house this year in Palo Alto, according to a company spokesman. The San Jose Mercury News, reported that the seven-bedroom home in a "leafy and affluent" area cost $7 million and features five full baths, a spacious porch, and glassed-in sun room.

Such deals defy a U.S. housing slump that sent home prices in 20 major cities down 3.6 percent in March from a year earlier, to the lowest level since 2003, according to the S&P/Case-Shiller index. The Valley's surge has been confined mostly to cities where median home prices were already above $1 million. Cupertino prices gained 12 percent last month from May 2010, to a median $1.08 million, and values in Saratoga rose 4.7 percent, to $1.62 million, according to DataQuick. Palo Alto, adjacent to the Stanford campus, and Cupertino, where Apple (AAPL) is headquartered, are particularly desirable because of those institutional links and the areas' coveted public schools, says Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. "We're a happening place because of the university," says Levy.

Sean Scott, head of sales for software firm Ingenuity Systems in nearby Redwood City, recently toured a four-bedroom home in Palo Alto and was discouraged by the $1.8 million price tag. The property drew five bids, including one more than 20 percent above the asking price, says Denise Simons, the listing agent at Alain Pinel Realtors. A sale is pending for at least $2.2 million. "The market seems to be returning to the crazy days," says Scott.

Steve Eskenazi, an entrepreneur who sold his portion of an online advertising network to Yahoo! (YHOO) in 2007, expects the wealth generated from tech IPOs, secondary share offerings, and buyouts to power the Valley's property market through 2014. "Most people in their 20s who find themselves millionaires feel it's their inalienable right to buy real estate," says Eskenazi, "and they're typically not price-sensitive."

The bottom line: Big tech IPOs have enriched workers and led to double-digit home price gains in Silicon Valley as buyers anticipate more to come.

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