At the beginning of 2015, I wrote the column "A long-term cyclical view" and pointed out the high probability of a temporary correction in property pricing in Palo Alto, assuming everything is cyclical and looking back at the two price declines of the past 17 years.
The median home price in Palo Alto for all sold transactions in 2015 actually rose by another 14 percent to reach $2.485 million. This marked the fourth-consecutive year of double-digit increase, and contrary to my earlier projection, the "super cycle" seemed intact. A strong local tech economy, low inventory and multiple layers of demand were among many factors that continued to support property prices in Palo Alto.
What's the outlook for this year? Is the tide finally going to turn? I do see increasing probabilities that the market is going to change. Among various moving parts of the market, many are pointing to the same direction.
1. Local buyers have started to experience weakening purchasing power. The NASDAQ Composite Index closed 19 percent below its 2015 high on Jan. 22. This is definitely not encouraging for local buyers who plan to cash their stock options as an initial down payment. This trend has already emerged in South Bay where buyers backed off at the last minute to write offers. Weak tech-stock performance in general may be another reason why buyers have become more willing to wait. Since last summer, especially for entry level homes in Palo Alto, a high number of offers has become less likely to lift the final selling price as it used to in the past few years.
2. International demands may soften, too. While there's no reliable statistic to tell us the real impact of international, mainly Chinese, buyers on our property market, they do play a role that can't be ignored. The big correction of Shanghai Composite Index early this year (down 18 percent in the first three trading weeks this year) basically triggered the weakness of global stock markets. This brings a different impact for potential Chinese buyers. For high-end buyers ($4 million or more), the big decline of local stock market only reminded them how "safe" an investment the homes here in Palo Alto are and basically increased the attractiveness of Palo Alto property as an investment alternative. Many of them also have financial resources already in U.S. dollars that can be re-directed to buy homes here whenever they want. Consequently, demands this year may remain strong on high-end homes, especially in north Palo Alto.
However, for mid-to-low-end Chinese buyers, the weak stock market will put a more meaningful dent in their wealth portfolio. Moreover, cash-out refinancing is normally part of the game plan for buyers in this segment. It means that they buy homes in all cash but plan to borrow against the home later so that the funds can be put somewhere generating possibly higher return. One commonly used international bank has just restricted lending on home mortgages to foreign residents, including Chinese. Furthermore, many of the mid-to-low-end Chinese buyers need to convert Chinese currency to U.S. dollars to be able to participate in the property market here. Chinese RMB has never been a freely traded currency; it has just become more difficult due to both government controls and the market's fear of continuous RMB depreciation against U.S. dollar.
3. Potential sellers may become more willing to take actions now than later. For many local residents, short-term ups and downs of property price have little impact on their daily life. However, for people who are considering selling their homes within two to three years, they may start to accelerate the process once they see that bidding wars are cooling and buyers have become less desperate. In hindsight, once the market starts to correct, it normally takes about two years to recover. The fear of having missed the peak of the market (and for many sellers, it becomes a reality) could lead to more houses on the market. In addition to weakening demand, the increasing supply could soften the pace of price increase or might lead to a moderate price decline.
The market is constantly evolving. 2016 will definitely bring a tough test of the resilience of the property market in Palo Alto.