After a soft 2016, Palo Alto’s property market took a surprising upturn in the first half of 2017. Based on Multiple Listings Service data, as of July 5, the median price of all homes sold in Palo Alto in the first half of 2017 reached another historical high — $2.6 million.
It appears that low inventory drove a rebound in home prices.
The wet winter and a small dip in home prices in 2016 put potential sellers on the fence. There were a total of 289 new listings in Palo Alto in the first part of 2017, which is a 16 percent decline from the same period last year. Only 195 homes changed hands, 21 percent less than the first half of2016.
Low inventory accelerated turnover and lifted prices, mainly because demand had been piling up since the end of 2016. Consequently, homes stayed on the market for 19 days, about three days fewer than last year. The $2.6-million median home price reported in the first half of this year is 9 percent higher than the same period last year and 6 percent higher than the last peak of $2.45 million in 2015. The average per-square-foot price of living area also rose to $1,492, compared to $1,390 in the first half of 2016.
Because of robust market conditions, only 22 listings had to lower prices during the first half of this year, compared to 66 during the same period last year.
From a long-term cyclical perspective, I predicted two years ago that property prices in Palo Alto would go down. Prices did drop by 2 percent in 2016 after “super cycle” increases from 2010 to 2015. The instant rebound so far this year is a surprise.
As inventory has picked up, starting in April, competitive bidding has eased a bit. In fact, most recently, the market has shown some signs of divergence. Reasonably priced old homes on large lots in good locations still attract seven to 10 offers in the $2-million to $3-million range within a week, while listings with drawbacks not easy to overcome may stay on market longer, and might not even sell above asking price. There have been more price reductions, especially at the high end.
The million-dollar question again is whether home prices in Palo Alto will go down significantly, and how soon? The answer: Prices are not likely to drop much, as we are experiencing an historical low supply. From 1998 to 2006, we consistently had 1,000 to 1,200 new listings every year. The number dropped to 700-800 for the five years from 2007 to 2012. In 2013, inventory dropped even more and has stayed at about 500 a year since then. With such significant decline in supply, even if demand weakens, home prices in Palo Alto are unlikely to drop.
Both changing demographics and high home prices may have contributed to the drop in supply. The rotation of home ownership in Palo Alto is generally driven by public schools, as families with grown children are replaced by young families with school-aged ones. While the age distribution of Palo Alto residents allowed more homes to be released in the past, more young families have moved in in recent years, lowering the age distribution and thus restraining supply. Moreover, rising home prices have made selling without a large tax liability impossible, thus further discouraging home turnover. Old homes these days are routinely trust sales in Palo Alto, after being inherited from deceased parents, in order to reduce the tax burden.
Lower supply leads to fewer closed transactions, and the immediate result is intensifying competition among real estate professionals. The easiest way to accommodate competition is to discount real estate commission. Lower commissions mean higher net proceeds for sellers. However, the fundamental flaw here is that a broker who is discounting commission may not defend the value of the listing property. If a seller relies on a discounted broker, for likely the most important purchase of their lives, buyers bear significant risks. Competition among service providers generally benefits consumers. In the case of home selling and purchasing, the true benefit for consumers is not discounted, but improved service.
Xin Jiang is a real estate agent for Alain Pinel Realtors in Palo Alto. She can be emailed at xjiang@apr.com.