Real Estate

How is the U.S.-China trade war affecting Palo Alto home prices?

Amid signs of a slowing market, number of foreign buyers drops significantly

The first half of 2019 went by so quickly and left many questions among real estate professionals about where the market is in the long-term cycle, as well as where it is heading.

There were 297 Palo Alto homes listed at the Multiple Listing Service for the first half of 2019, a 7.5% drop from the same period of last year, and 199 homes exchanged hands, a decline of 22% year over year. The combination of fewer new listings and even fewer homes sold indicates a much slower market.


Xin Jiang is a real estate agent for Compass in Palo Alto. Photo courtesy Xin Jiang.
Total transaction volume dropped close to 30%, along with a 6% decline in the median price of homes sold in Palo Alto, which is now $2.9 million, according to the Multiple Listing Service. The most recent peak of Palo Alto's median home price was in April 2018, at $3.1 million, which dropped quickly to $2.79 million by the end of 2018. While $2.9 million in the first half of this year appears to be a minor rebound from the end of last year, with seasonality factored in—i.e., we normally see higher prices in spring—it's logical to conclude that home prices in Palo Alto are heading south.

There have been many other indicators of a softening real estate market. For instance, 70% more homes listed in the first half of this year dropped their prices, compared to the same period last year. Average days on the market for homes sold also increased from 14 in the first six months of last year to 21.5 this year. Among the 63 active listings in Palo Alto as of July 24, there were 13 properties that have been on the market for more than 100 days. Homes have been selling much more slowly across all price segments, and especially at the high end. Sixteen homes were sold above $5 million in the first half of this year, compared with 35 last year.

Lack of inventory was the main driver of the strong sellers' market for a very long period and was the main reason for seemingly ever-higher home prices in Palo Alto. However, shrinking demand has led the market since the latter half of last year. In my column dated July 12, 2018, I predicted that the "U.S.-China trade war could impact home sales." The prolonged trade war appears to have finally started to affect our local property market.

Based on the latest data from the National Association of Realtors, residential purchases from foreign buyers between April 2018 and March 2019 dropped 36%. Chinese, being the largest foreign buyer group, only purchased an aggregated $13.4 billion in residential homes in the U.S. for the one-year period ending March 2019. That's a 56% drop from the previous year, the steepest decline since 2010. California is normally by far the most preferred destination for Chinese buyers, representing more than one-third of total Chinese home purchases in the U.S.

The Midpeninsula, especially the cities of Palo Alto and Atherton, attracts the most affluent Chinese buyers. Many of them were educated at top universities like Stanford University and University of California, Berkeley and have strong connections with our local tech economy. Since the trade war kicked off, I've heard from many of my Chinese buyers that they have been forced to reconsider whether to continue operations in the U.S. or not. Silicon Valley had been the ultimate destination for Chinese capital, especially after the 2008 financial crisis. High home prices in Palo Alto, unfortunately, were an unwanted byproduct of it. But at least for now, Silicon Valley seems to be losing its attractiveness to Chinese capital. The low enrollment of overseas students at our local summer camps is another sign of the drastic change.

What to expect for the fall market? Many anxious sellers want to bet on a rush around the end of September after lockup agreements expire for many recent tech IPOs, enabling shareholders of high-profile companies that went public this year (Slack, Lyft and Uber among them) to begin cashing out their stock. Compared with overseas buyers, local demand tends to be flexible about locations. In other words, not everyone flush with IPO money chooses to come to Palo Alto. Home prices in Palo Alto may remain soft for quite some time whether you consider it a more normal market or not.

Xin Jiang is a real estate agent with Compass in Palo Alto. She can be emailed at xin.jiang@compass.com.

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Comments

6 people like this
Posted by resident
a resident of Downtown North
on Aug 10, 2019 at 2:20 pm

The trade war is affecting US stock prices and IPOs. That reduces the demand for home purchases by local tech workers.


17 people like this
Posted by leading indicators
a resident of Evergreen Park
on Aug 10, 2019 at 2:57 pm

The trade war and other ill-advised moves, if they accelerate the coming slowdown, will have a large affect on home prices.

With the rate cut and the trillion dollar tax cut already used as tools to 'juice' parts of the economy, we don't have a lot of arrows left in the quiver.


9 people like this
Posted by resident
a resident of Downtown North
on Aug 10, 2019 at 3:35 pm

He can end the trade war just as easily as he started it. Hard to tell if there is any real long-term benefit to the trade war or if was just a gimmick to manipulate the stock market.


2 people like this
Posted by No Savings From Tariffs
a resident of Crescent Park
on Aug 10, 2019 at 5:39 pm

The issue with POTUS/45's tariffs is that the proceeds are going directly to the US Commerce Department & not saving American consumers one cent on items manufactured overseas in China.

The immigration of wealthy overseas Chinese to Palo Alto is like everything else...there will always be ebbs & flows depending on economic fluctuations.

The 'early birds' did well & that's true of most monetary matters whether it be investment opportunities (i.e. IPOs), ponzi schemes, real estate, gold coins etc.

Come late...pay the piper. Economics is not a science, just an observation of the obvious with charts & graphs.



4 people like this
Posted by OldPA Resident
a resident of Old Palo Alto
on Aug 10, 2019 at 5:57 pm

Headline and lede in South China Morning Post, May 29th, 2019:
"China’s capital outflow controls have gone to the ‘extreme’, former central bank adviser says

Yu Yongding, a former adviser to the People’s Bank of China, was unable to transfer US$20,000 abroad after being told by an unnamed bank that he was too old

The case adds fresh evidence that China is tightening controls of personal purchases of US dollars despite a US$50,000 personal allowance each year"

Does this restriction on capital outflow from China also affect the ability of Chinese buyers to purchase properties? Or are they all finding some way to bypass the Chinese Government restrictions?


1 person likes this
Posted by OldPA Resident
a resident of Old Palo Alto
on Aug 10, 2019 at 6:01 pm

Here is the body of the article from the South China Morning Post, May 29th, 2019, which indicates that the reduction in number of buyers from China may have other causes in addition to those mentioned in the Palo Alto Online article:

"A former Chinese central bank adviser has admitted that Beijing’s capital account controls may be too “extreme” after personally being blocked from sending US dollar funds abroad because he was too old.

Yu Yongding, a senior research fellow at the Chinese Academy of Social Sciences, a state-owned think tank, told a financial forum in Beijing on Wednesday that he recently tried to exchange yuan to the value of US$20,000 at a bank and transfer the money out of China to pay for a trip to visit relatives living abroad.

But the bank refused to provide the service even though Yu, like all citizens under Chinese law, is allowed to make foreign transfers of up to US$50,000 each year. According to Yu, the bank refused to provide the service because he is over 65.

“I always support capital account controls, and I always encourage such measures. But sometimes we tend to be too extreme in doing things,” Yu was quoted as saying by Chinese news portal Sina.com. “Legal foreign exchange deals are being hindered.”

The former People’s Bank of China adviser confirmed the incident in a phone call with the South China Morning Post, but he declined to elaborate further, declining to name the bank, and only stating that the implementation of China’s foreign exchange controls were too rigid.

“There were heavy outflow pressures in 2015 and 2016, but I don’t see clear signs of outflows at the moment,” Yu said.


5 people like this
Posted by Xiao Ping
a resident of Crescent Park
on Aug 10, 2019 at 6:08 pm

> Does this restriction on capital outflow from China also affect the ability of Chinese buyers to purchase properties? Or are they all finding some way to bypass the Chinese Government restrictions?

^^^Cash on hand and/or wired to banks outside of the US...then transferred.

Many loopholes still available in America. For example, Persian & Oriental rugs. They are ubiquitous yet still expensive but with minimal resale value like pearls at Nordstrom's.

Why? The rugs are being used as tubular shipping containers for contraband & undeclared goods. The rugs are both practical & resalable. Win-win for Middle Eastern rug dealers.



16 people like this
Posted by And...
a resident of Another Palo Alto neighborhood
on Aug 11, 2019 at 12:44 am

I wonder why no one seems to have a clue about how the 2016 tax law suddenly changed the financial health of everyone on the bottom rungs of the homeowner market here and other high-cost (blue) parts of the country and made the prospect of owning out of reach for an even larger proportion than before. There is a lag from the introduction of the law until it starts affecting people in 2018 when they do their taxes for the first year it’s in effect (2017).

But word around the area is that ordinary people who struggled and sacrificed to get into homes in order to stabilize their costs suddenly could no longer afford their homes. Those wanting to buy new homes were also disadvantaged if they needed a mortgage. The law did not take cost-of-living into account.

The situation couldn’t have been better designed to bring down prices so that those with a lot of capital could get real estate at a discount. Only someone with real estate experience in an area like this with global demand and no scruples about affecting policy to his advantage could craft a law that only hurt families at the bottom in high cost areas while advantaging investors and people in red states, er, low-cost parts of the country. .


Like this comment
Posted by musical
a resident of Palo Verde
on Aug 11, 2019 at 3:24 am

^ The clue is you meant 2017 tax law affecting people in 2019 for tax year 2018?


6 people like this
Posted by Retired RE Agent
a resident of Embarcadero Oaks/Leland
on Aug 11, 2019 at 12:05 pm

Like anything, a projected ROI is a very important consideration & the wealthy Chinese arriving in the SF Bay Area & buying homes are very savvy of this consideration.

Realistically, the ideal time for them to have gotten-in on the PA RE market was when prices were somewhat lower...as paying $3M+ in CASH is a drop in the bucket to many. But when the same house is now going for $5M or more, it calls for more contemplative & speculative thought as the market is now saturated & further appreciation limited in some respects.

The PA housing market can best be described as 'after the gold rush' though an RE agent will tell prospective buyers otherwise. After all, a 3% commission on $5M is far sweeter than the same 3% on $3M.

Economics is the 'science' of common sense except with charts & graphs.


1 person likes this
Posted by Anon
a resident of Another Palo Alto neighborhood
on Aug 11, 2019 at 2:57 pm

You mean 5%
Nobody takes 3%


Like this comment
Posted by 6% / 2
a resident of Barron Park
on Aug 11, 2019 at 3:03 pm

Traditional but not universal.


7 people like this
Posted by Let's Not Be Greedy (Unless You Are A RE Agent)
a resident of Los Altos Hills
on Aug 11, 2019 at 5:00 pm

3% ($150K) or 5% ($250K) still amounts to a pretty good commission on a $5M house.

Easy money for a 'show & tell' occupation. The only challenge is beating the other RE agents on the closing.

No different than flies fighting over some ripe horse poop.




Like this comment
Posted by Fr0hickey
a resident of Fairmeadow
on Aug 12, 2019 at 10:07 am

Fr0hickey is a registered user.

Too bad Mr. Yu Yongding doesn't live in Netherlands. He can do like Emile Ratelband and get his age changed to 49.


9 people like this
Posted by And.....
a resident of Another Palo Alto neighborhood
on Aug 12, 2019 at 5:53 pm

Hello?! Can anyone say TAX POLICY?

Here's an article today in the Wall Street Journal:
Web Link
Midwestern markets have heated up suddenly they are seeing skyrocketing costs and shortages of inventory. The article admits many buyers are coming from high-cost coastal areas.

Why are reporters so doggedly stupid about this outcome? It was so predictable. The tax policies set into motion at the end of 2016 had no cost-of-living adjustment in them, so they were crushingly punitive to homeowners at the bottom rungs or prospective homeowners at the bottom rungs on the expensive coasts, and favored investors and people in red states. I saw no articles about how the taxes of ordinary people on the coasts (blue states) went WAY up, and no articles about the vast and dramatic difference between what happened to them and the giveaway to people the instigators of the policy made to their supporters. Governing as election campaign, not governing for all once in office.

I personally know many people who had to sell and leave because of the change in tax policy, and many more who will only be able to hang on for awhile longer. It was absolutely unequal treatment under the law, by someone who absolutely knew better from New York real estate - again, hello?!! why are reporters so utterly clueless?

Read this post, then read the WSJ article, then go talk to some people who aren't gazillionaires. For most of the last many decades, the only way to hang on in the Bay Area was to get into a home under hugely substandard and sacrificial conditions then move up over time. Those people have just been summarily taxed to death and forced out of their homes. Where is the coverage of this????????

Come on, reporters, get a clue!


9 people like this
Posted by And....
a resident of Another Palo Alto neighborhood
on Aug 12, 2019 at 5:58 pm

@ No savings from tariffs,

Question: Why are you calling them "tariffs"? Especially when reporters have to keep explaining what they are in stories? How about just calling them "import taxes" and keep calling them "import taxes"?

The public seems to understand the word "taxes". All the articles about how the public is paying for these import taxes will never get through their heads unless the media stop using egghead terms they keep explaining to the small segment of the audience who already know what they mean.


8 people like this
Posted by Zhou
a resident of Charleston Meadows
on Aug 12, 2019 at 6:19 pm

Import tariffs on Chinese manufactured goods is not the solution. The tariff revenues will go to the US government & the price increases will be passed along to the American consumers.

Meanwhile China will retaliate & hurt US agricultural & wine exports.

This is your POTUS-45 at work. He is not making America great again.


Like this comment
Posted by Zhou
a resident of Charleston Meadows
on Aug 12, 2019 at 6:38 pm

A Palo Alto housing slump is good for aspiring Chinese buyers who can afford to pay CASH.

Some sellers will even consider lowering their asking prices in hopes of creating a bidding war which in turn meets their target sales goal. Not always the case.

The Chinese who bought homes in PA during the late 1990s & through the 2000s have done quite well.

It is expected that one will have to pay at leaste $3.5M+ for even a modest dwelling. Not a problem for many Chinese but they are stil very savvy when it comes to the dollar sign.









2 people like this
Posted by Old Joe
a resident of Barron Park
on Aug 13, 2019 at 7:44 am

“ The Chinese who bought homes in PAt during the late 1990s & through the 2000s have done quite well. “

And almost anyone (regardless of race) who bought in Palo Alto after 2017 is loosing their shirts. Projected declines of 10% to 15% next year too ! Ouchies for everybody.


2 people like this
Posted by resident
a resident of Downtown North
on Aug 14, 2019 at 8:44 am

The stock market seems to think that the Trade War is causing an international recession, affecting the USA as well as Asia and Europe. A recession is not good for jobs or home prices. I suppose this might be a good market for bargain hunters with cash to spare.


1 person likes this
Posted by And.....
a resident of Another Palo Alto neighborhood
on Aug 14, 2019 at 10:14 am

@resident,
You mean the import TAXES countries are levying in response to 45’s?


1 person likes this
Posted by Me 2
a resident of Old Palo Alto
on Aug 14, 2019 at 10:34 am

" A recession is not good for jobs or home prices."

As the Residentialists cheer. This is what you guys wanted, right?

I suspect that if someone from China is buying a house with cash, they don't necessarily care about appreciation. It's an asset outside of China. Even if they lose 15%, that's better than having a bunch of illiquid RMB.


5 people like this
Posted by Accepting Reality
a resident of Adobe-Meadow
on Aug 14, 2019 at 5:26 pm

[Post removed.]





2 people like this
Posted by Accepting Reality Has A Point
a resident of another community
on Aug 15, 2019 at 8:04 am

> Change is always on the horizon & someday the demographics of Palo Alto may alter itself again...new people with new money.

^^^This is true. In Idaho, Oregon, Colorado, Arizona etc. 'the new people with new money' are from California!


Like this comment
Posted by musical
a resident of Palo Verde
on Aug 15, 2019 at 10:51 am

^ ... but originally from New Jersey. Or Europe if you trace back further. Actually Africa if you believe paleo-anthropologists.


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