Real Estate

Real Estate Matters: Palo Alto median home price reaches all-time high

Skyrocketing prices are coupled with all-time low inventory

The 2017 Palo Alto property market took a surprising upturn from a soft 2016. The median price of all sold homes in Palo Alto as of Dec. 1 reached a new high of $2.67 million, an 11 percent increase from 2016. Limited supply coupled with strong demand both domestically and internationally were the main drivers.

There were 503 new listings as of Dec. 1, a 14 percent decline from the same period last year. This is likely to be the lowest number of new listings since 1998, when multiple listing data became available digitally.

What are the reasons behind low supply? Tax consequences and high replacement or trade-up costs prevent existing homeowners from selling. The death of elderly parents and relocation have remained the top two reasons to sell Palo Alto homes.

Because of robust demand, an average listing stayed on the market for 19 days compared with 21 days last year. There were only 47 listings where the original price was reduced so far this year, a 52 percent decline from last year. Thirty-three listings were pulled off the market this year, compared to 83 for 2016.

As of early December, 431 Palo Alto homes exchanged hands — 6 percent fewer than the same period in 2016. Among the closed transactions, 120 homes settled at a price higher than $3.5 million, and the remaining 311 homes, or 72 percent, were sold at or below $3.5 million.

Homes settled below $3.5 million normally attracted multiple offers and the number ranged from two offers to close to 30 on each listing. Severe competition among buyers at this price range tend to drive selling prices up significantly above listing prices.

In my opinion, the difference between listing price and selling price isn't a meaningful barometer for the market, since the listing price of a home is merely a marketing strategy and has little to do with fair market value. However, the market segment below $3.5 million is still overheated. Even in the this normally slow end-of-year season, an entry-level home in Midtown listed at approximately $2 million attracted closed to 20 offers, and got bid up all the way up to $3 million. Similarly, about a dozen other homes experienced bidding wars, which led to homes going for way more than their asking prices, including one Greenmeadow home that sold for 63 percent higher than its asking price.

This volume-zone demand mainly consists of local young couples, at least one of whom works in high tech, benefiting from the solid tech economy. These young families are moving from other parts of the Bay Area to cut commute times and get their children into Palo Alto schools.

At the high end, buyers become more demanding on location and lot size. There were three sales above $10 million this year in Palo Alto. I represented the buyer in one of them. All have large lots, bigger than 10,000 square feet, on ideal streets in Old Palo Alto and Crescent Park.

Wealthy Chinese families have kept coming to Palo Alto despite the government's countless measures to restrain capital outflow. Just as our locals benefited from the robust stock market, the elite Chinese have grown their wealth through capital markets (Hong Kong's Hang Seng Index has appreciated more than 30 percent so far this year), as well as the policy-driven housing bubble in China. Palo Alto homes, even at $5 million, are regularly considered bargains for Chinese buyers.

Lots of uncertainty remains as we head toward 2018, while supply remains the key driver for prices.

The impact of the federal tax law changes on the property market is yet to be seen. While the tax deductions on home mortgages and property taxes may or may not discourage home ownership, the potential elimination of the alternative minimum tax bracket may be more than enough to offset any lost tax deductions for many Bay Area families. Moreover, given the high home prices, it's not practical for entry-level buyers to limit borrowing to $500,000 to get into Palo Alto anyway. In fact, most young families take a home loan ranging from $1 million to $2 million. It may not be wise for buyers who are searching for their primary homes to defer purchase because of pending tax law changes, as their purchase decisions should be based on a much longer time horizon.

Most market participants expect the current momentum to continue at least into the spring of 2018. However, looking back, an overheated property market in 2015 (13 percent increase in median home price from 2014) actually led to a 20 percent increase in the number of new listings in the spring of 2016 and an instant decline in home prices. Supply still remains the most significant driver for home prices in Palo Alto.

Xin Jiang is a real estate agent for Alain Pinel Realtors in Palo Alto. She can be emailed at xjiang@apr.com.

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