Home prices in Palo Alto have been on the rise so far in 2018. Last year, median home prices hit an all-time high of $2.7 million, with tight supply and strong demand being the main drivers. The median home price for Palo Alto has already reached $3.1 million as of the end of March.
It literally takes $3 million to get into Palo Alto these days. Even homes sold around $3 million are not exactly move-in ready: buyers pay mostly for the “dirt” and will likely spend tens of thousands of dollars just to bring those homes up to today’s building codes.
Supply, or the number of new listings, has actually increased on a year-on-year basis. There were 139 new listings in Palo Alto as of the end of March, a 16-percent increase from the same period last year. Less rain and a very “hot” market at the end of last year motivated sellers not to wait until after the Super Bowl to put their homes on the market.
In spite of a few more available homes on the market, the increased supply failed to ease competition among buyers. Bidding wars for homes listed below $3 million have become a norm. These homes are generally selling about 16-percent higher than their listing prices, which in some cases means more than just a few hundred thousand dollars.
One old home on a 6,000-plus-square-foot lot in Old Palo Alto, listed at $2,998,000, attracted 13 offers, and was sold for $1.35 million over original asking price. Another 1,400-square-foot South Palo Alto home couldn’t sell in 2015 with a list price of $2,088,000. In February 2018, the home went back on the market for $2,298,000, received 10 offers and was sold for over $3 million. The average length of time homes are on the market before they are sold (also called “days on market” in real estate lingo) is shortening to 12 days this year, versus 16 days last year.
Another interesting fact this year is that there has been an increasing number of all-cash purchases. Among 52 homes sold in Palo Alto through the Multiple Listing System, nearly half (25) closed escrow within 15 days, most likely without the involvement of lenders. For the same period last year, cash transactions only represented 30 percent of total homes sold. Intensifying bidding wars have driven more buyers with financial resources to compete not only on price but also on terms like delivering funds more quickly to make their offers more compelling.
Where is the market heading toward the rest of 2018? There’s a fairly high probability that home prices may start coming down after a very long, almost 9-year “super cycle.” However, we do see many conflicting facts at the start of this high spring home-selling season.
One factor that’s likely to put pressure on home prices is rising mortgage rates. In the short term, rising rates make buyers feel more urgency, and lead to more aggressive offering prices. In the long term, higher-mortgage interest rates will raise concerns about affordability, and put downward pressure on home prices. For instance, a typical young family purchasing a $3 million home in Palo Alto borrows $2 million. When a 5-year adjustable mortgage rate increases by 50 basis points, or from 3.125 percent to 3.625 percent, the family’s monthly mortgage payment will increase from about $8,800 to $9,400, or by $600. This may impact to the monthly cash flow of many double-income young families.
On the other hand, the solid tech economy will continue to support high home values in Palo Alto. As long as local high-tech companies keep hiring, young engineer families will continue to move from other parts of the nation to join the buyer pool in Silicon Valley. Furthermore, despite several downward bumps of the stock market so far this year, we are still at record high markets. Tech startups both locally and from abroad are lining up in the initial-public-offering pipeline this year, and new IPOs will generate more millionaires who come to seek the best they can afford in Palo Alto.
Xin Jiang is a real estate agent with Alain Pinel Realtors in Palo Alto. She can be emailed at xjiang@apr.com.