Finding a house is hard in Palo Alto. The competition gets tougher for houses under $1 million dollars, and even tougher if a family wants to fit into that house. While other cities in the nation may be flailing, Palo Alto's housing market is pushing entry-level buyers out.
"Palo Alto is the worst market in the world to buy something under a million dollars," Nancy Carlson, a Realtor at Intero Real Estate Services in Los Altos, said. Based on information from MLS Listings Inc., she said, 19 percent of single-family homes in Palo Alto were listed for under a million in 2010, but only 5 percent sold for under a million.
In 2009, the percent listed was the same as in 2010 but the percent of homes sold under a million was higher, at 14 percent -- reflecting that fewer homes this year are selling in that range.
Compared to 59 percent of Mountain View homes and 34 percent of Menlo Park homes that have sold under a million in 2010, homebuyers might be wondering how much of a bubble could have popped in Palo Alto.
"Two years ago, or even a year and a half ago, the question buyers would ask me was: 'Are prices going to go down more?'," Tim Foy, a broker and Realtor at Midtown Realty in Palo Alto, said. "Now the question is: 'How do I get a house before they go up more?' It is a whole different sentiment."
Not only are fewer Palo Alto houses selling under a million but the houses that are do not typically fit the needs of a family.
A standard entry-level house in Palo Alto -- three-bedroom, two-bath, on a 5,000-square-foot lot -- is around a million dollars, and even at that price they are oftentimes fixer-uppers, Carlson said. Houses priced around $800,000 in Palo Alto usually have one or two bedrooms and just one bath, are fixer-uppers, and on a street with lots of traffic. Additionally, they are usually cottage-sized lots.
The strong job market, a good community, a location in the Bay Area and top-rated schools have kept Palo Alto home prices at a premium, she said.
"No. 1, buyer perception and the fact that the market has certainly stabilized and will go up; No. 2, interest rates are real low and those are not going to go lower; and No. 3, inventory is not high right now. Put those three together, that is what is driving the market right now," Foy said.
That push of buyers has kept sales of Palo Alto homes that are priced under $1.5 million high through the usually slow winter months, according to Alex Wang, a broker at Rainmaker Properties in Palo Alto.
In November he sold a three-bed, two-bath home in south Palo Alto for the list price of $900,000. Home prices have dipped but prices are getting stable and he is seeing multiple offers on homes again. "In the heyday it would have gone for over a million," he said.
A competitive housing market can mean homebuyers having to scramble for additional cash in bidding wars. A common practice in high-demand areas is to price homes at lower than their true value to generate demand -- one reason why houses in Palo Alto are listed under a million but go over in the final sale.
"What we are finding, too, in Palo Alto is a lot of cash buyers at under a million," Carlson said. More and more people have come into the housing market since 2009 with 40 percent down or more in cities such as Palo Alto, Los Gatos and Cupertino.
Sellers will even prefer cash over a higher bidding price because there are fewer complications with financing, Wang said.
Having more money upfront is also an advantage in light of recent regulation changes to the home-appraisal process. New rules were created that let lenders control the entire process in order to prevent collusion between the appraiser and real estate brokers and agents. "The intent was honorable but the result has been a headache for everybody," Carlson said.
Because of the changes, more commonly appraisers, who don't understand the local market, are coming from out of the area, resulting in conservative pricing of a home that is selling for more.
The bank will only give a loan based on the appraised rate so buyers must either come up with additional money down, get another appraisal or renegotiate the selling price.
Bidders who offer more cash down will not have a problem in these situations, while those with less cash lose out, she said.
Homebuyers who don't have enough money down or credit scores that are too low to qualify for today's strict lending requirements can turn to federal and state programs for assistance.
Mortgages insured by the Federal Housing Administration, called an F.H.A. loan, allow a homebuyer to put a minimum of 3.5 percent down on loans up to $729,750 in Santa Clara and San Mateo counties.
Last year, 33 percent of the loans Princeton Capital underwrote were F.H.A. loans, compared to 5 percent three years ago, according to Alan Russell, a loan agent at Princeton Capital in Los Altos.
There are also multiple homebuyer credits at federal and state levels. To take advantage of the $8,000 federal tax credit, homebuyers must be under contract by the programs' close at the end of April, according to Caroline Wolf, a loan officer at Princeton Capital in Palo Alto.
California has also renewed a $10,000 first-time homebuyers credit available only for purchases that close escrow on or after May 1, 2010.
"The county is helping out, the federal government is, and the state of California is coming back, so things are starting to stabilize," she said.
In Palo Alto, however, "you can't compete with an F.H.A. loan in a competitive market," Carlson said.
Entry-level homes in Palo Alto cost about $100,000 more than a comparable house in Mountain View, Wang said. The average price for a single-family home selling under a million in the last three months is $775,000, based on information from MLS Listings Inc.
The inventory for townhomes and condominiums is a lot larger than homes, even in Palo Alto. There are currently 80 on the market with two or more bedrooms in Palo Alto, Mountain View and Menlo Park available under $850,000, Foy said.
"Traditionally they have appreciated and people have made money on them," he said. "It is a great way to get into the market because you own something."