Real Estate

Real Estate Matters: Palo Alto property: a long-term, cyclical view

 

After the sharp increase of property price in Palo Alto over the past three years, the questions that I get the most from real estate clients these days are "How high can we go?" and "Is this sustainable"? At the beginning of 2015, it's a good time to take a step back to review the local market in the context of past decades.

Palo Alto's real estate market did go through a super cycle from 2012 to 2014. Yearly median home price of closed sales increased at the fastest pace (+21 percent in 2012, +17 percent in 2013 and +18 percent in 2014) from 1998 when transition data became digitally available at MLS Listing. The median home price of $2.175 million in 2014 is 55 percent higher than the previous peak of $1.4 million in 2007. Interestingly, the 2007 peak was about the same 55 percent higher than the 2000 peak. This is most likely a pure coincidence. Moreover, the buyer pool today has more depth, and capital is also more available today than 2000. (See chart).

With only 10 active listings by the end of Jan. 10, 2015, there's no indicator that the issue of structurally limited supply is resolving. There are no major shifts that are turning our community less attractive, either. Nonetheless, there are many moving parts of the economy that we don't have first-hand knowledge. Moreover, if cyclicality still plays a role in our property market, it won't be a surprise if the market starts to soften in 2015. Contrary to the negative impression of correction, it is beneficial to sustain an upward trend in the long run. Short-term correction could bring more potential participants, thus more energy to our property market for decades to come.

While it's very tempting to try to time the market, market timing is actually less relevant in the case of property than other capital goods, because of the former's long-term nature. As for investors, Palo Alto property has been proven to be a better long-term investment than the overall stock market. Median home price in Palo Alto has increased at a compound annual growth rate of 8.8 percent in the past 16 years ending 2014 versus the 4.8 percent increase of the S&P 500 during the same period, and with significantly lower volatility.

Xin Jiang is a Realtor with Alain Pinel Realtors in Palo Alto. She can be reached at xjiang@apr.com.

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