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.
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 email@example.com.