Editor's Note: It's officially fall this weekend, which brings bright hot days and brisk nights. Like the change in seasons, the Midpeninsula real estate market changes as well as summer turns into autumn. Will it be hot? Chilly? A buyer's market or seller's? Last week, Weekly real estate columnist Hadar Guibara, of Sereno Group in Palo Alto, gave her forecast. This week, Xin Jiang of Alain Pinel Realtors in Palo Alto, will use her experience and knowledge to predict buyers' and sellers' behavior over the next few months.
The residential property market in Palo Alto is showing multiple signs of a slowdown.
The median price of all sold homes in Palo Alto from June to August was $2.86 million, an 8 percent drop from the first five months of 2018. Summer seasonality normally sees fewer transactions but not necessarily lower prices. In 2017, from June to August, the median home price in Palo Alto was actually 3 percent higher than that of the spring.
"Entry-level" homes also are staying on market longer. Just last spring, a typical "starter home" priced below $3 million would usually sell with as many as 10 offers within a week. As of Sept.10, with 60 active listings in Palo Alto on the Multiple Listings Service, 34 were still on the market after 14 days. Six homes listed under $3 million have been sitting for more than three weeks. No home is perfect, and surely there are certain drawbacks when homes don't sell immediately. However, in a "hot" market, buyers tend to take action to grab a home and overlook most shortcomings.
The number of offers on a single property is dropping as well. The severe bidding war was a norm in the spring. Homes listed aggressively low compared with their fair market value could attract as many as 20 bids. Recently, many homes listed for $3 million only received one or two offers. At the high end, homes don't seem to attract interest even after a $1-million price drop.
The number of offers directly translates into how much more a home finally sells. From January to May of this year, homes listed for under $3 million were sold for an average of 15 percent over asking. This overbidding dropped to eight percent during the summer months from June to August. As inventory picks up in the fall selling season, home prices are likely to remain soft.
What caused the market to shift?
First, home prices may have jumped too high too fast. The median home price in Palo Alto in the first half of 2018 reached $3.1 million. It was a 15 percent increase from 2017 and 29 percent higher than 2016, on top of a long bull-market cycle that ran for five years from 2010 to 2015, when Palo Alto's home prices nearly doubled. It's hardly sustainable.
Second, while we are still experiencing historically low inventory, the number of new listings increased by 11 percent over last year for the period from January to August, which helped slightly to restore the balance between supply and demand.
Lastly, as uncertainties about the global economy are rising, potential buyers, both local and foreign, are in wait-and-see mode. The rising tension between the U.S. and China is affecting the entire global "tech value chain." The depreciation of China's currency by about 10 percent since February also negatively affected potential demand by Chinese investors.
How should sellers and buyers react to the shift of the market?
For sellers, unfortunately, market timing plays a major role in determining sale prices. A tough market raises the bar for marketing and execution during the selling process. For buyers, if the market has finally started to correct, now is only the beginning, and there's no need to rush. On the other hand, limited supply, especially of properties at prime locations, is likely to continue in the foreseeable future. It may be wiser to keep evaluating than trying to time the market.
Xin Jiang is a real estate agent with Alain Pinel Realtors in Palo Alto. She can be emailed at firstname.lastname@example.org.