Just as the U.S. economy experienced the rarity of no recession for an entire decade, the residential real estate market in Palo Alto had an unprecedented strong run in the past 10 years. The median home price of all sold homes increased 2.4 times from $1.25 million in 2010 to $2.94 million in 2019, which translates to an average compound annual growth rate of more than 10%. However, there have been signs of the end of the upcycle, once in 2016, and most recently, a market that has been slowing since the spring of 2018.
The median price of all sold homes in Palo Alto of 2019 was $2.94 million, a 3.8% decline from 2018. The weakness is particularly reflected in the total transaction amount, which fell by 10% compared to a year ago. Homes also stayed on market 10 days longer than a year ago. It now takes an average of 29.2 days for a listed home to find its buyer. As sellers are still adjusting expectations, 2019 saw a 26% increase in price reduction. In fact, more than 23% of new listings had to lower their asking prices after being listed on the Multiple Listing Service. Overall inventory remained at a historic low level. In Palo Alto, 537 homes hit the Multiple Listing Service in 2019, a 5.6% decline from 2018, less than half of what we experienced in 2006 and a 30% decline from the beginning of the decade.
Instead of general weakness, the key characteristic of the Midpeninsula real estate market of 2019 was polarization. The growing divergence happened among different homes in the same neighborhood, as well as among different neighborhoods.
When the market shows signs of slowing down, buyers tend to become more selective. Consequently, the market started to split. Homes in desirable locations with a decent-sized lot and reasonable floor plan (usually around four bedrooms and three baths for a family of four) still attracted multiple offers. Homes in less desirable locations (e.g., close to major roads or commercial areas) became hard sales. Within Palo Alto, more than half of the 404 homes sold year-to-date in 2019 still settled above their initial asking prices, which shows the average 3.8% decline in median home price can be misleading.
In 2019, various Midpeninsula neighborhoods showed completely different movements. Unlike Palo Alto, both Menlo Park and Los Altos had a double-digit increase in the number of new listings and transaction volume. In fact, the desirable Central Menlo neighborhood, the little area across Valparaiso Avenue from the town of Atherton, saw close to a 30% increase in supply, a 13% increase in closed transactions, and a remarkable 22% jump in median home price to $4.5 million. The average turnover of the Central Menlo neighborhood was also faster than the average of Palo Alto, despite a much higher median home price.
If Palo Alto is the ultimate destination for many affluent Chinese buyers, Central Menlo has been preferred by local executives for its tree-lined streets, lots that average +10,000 square feet and easy access to Stanford University, top-rated private schools and Highway 280.
How will the market behave in a new decade with the same uncertainties of global economy and the upcoming presidential election? We're very likely to see an increase in activities beyond the normal seasonality in spring 2020 as both potential sellers and buyers finally get off the fence.
There'll be a healthy supply starting from the beginning of the year. There were 35 active listings in Palo Alto on Dec. 24, 2019. A large number — 61 listings — went off-market in the last quarter of 2019 and will most likely come back in early spring. There will also be fresh new listings, evident in the "coming-soon" signs that began to pop up during the holidays from those anxious sellers.
Demand has never really died for the "right package," even when the market started to shake. Right before the holidays, I put a bid on an off-market home in Old Palo Alto for a client. Although the property had rather limited exposure, it received two all-cash offers within 24 hours and was promptly sold above the asking price.
Without a rebound in foreign investments on the horizon, the ultra-low mortgage interest rate and new initial public offerings (IPOs) for local companies remain the two biggest drivers for demand going into the new year. Considering a relatively low probability of home prices taking a big dive any time soon, potential buyers who were hesitating may want to lock in the low interest rate for meaningful savings over the long term.
The recent IPO of Bill.com, a Palo Alto payment-processing software provider, whose stock price soared 69% on its first day of trading on Dec. 12, 2019, along with other new IPO tech ventures, may give buyers another push.
The key variables of our residential real estate market remain the tech economy and the associated local supply and demand, which operate on stable policies. However, as parts of the nation have started to eliminate single-family zoning, whether and how the Bay Area will follow may be a game-changing uncertainty in the mid- to long-term.
Xin Jiang is a real estate agent with Compass in Palo Alto. She can be emailed at [email protected]