After a significant decline in home prices and sales activity during the latter half of 2022, homebuyers made a comeback early this spring. Open houses are buzzing with activity once again, and even homes that failed to sell last year are now finding buyers. Because of limited inventory, pre-emptive offers and multiple bids also are back at all price points.
Whether the market will remain on track for a healthy recovery, however, remains unclear following the epic collapse of Silicon Valley Bank on March 10 and Signature Bank on March 12.
Supply down, demand up
From the start of this year through mid-March, the market's home supply (measured by the number of new listings) saw a decline. In Palo Alto, only 111 single-family homes, town homes and condos were released to the market, representing a 17% decrease from the same period in 2022 and a 26% decrease compared to 2021. Other Midpeninsula cities have experienced even larger year-over-year declines, with a 22% drop in new listings in Los Altos and a 29% decrease in Menlo Park.
Conversely, a slight improvement in mortgage interest rates at the beginning of the year sparked renewed interest from buyers, and the market is seeing an increase in demand. Move-in ready homes at reasonable prices are being snapped up within just seven to 10 days of being listed, often selling after just one weekend of open houses.
Homes that did not sell last year and were relisted this year are finally finding buyers, albeit at lower prices. The sale of relisted homes is particularly notable in the $5-million segment, where out of the 12 sales in Palo Alto, seven were "leftovers" from last year. New construction is another segment of the housing market that has experienced higher demand this season. As the process of building keeps getting longer and more costly, buyers are looking at newly constructed homes, which are selling faster than teardowns in better locations. In Palo Alto's South of Midtown neighborhood, a newly constructed home recently sold in just eight days, fetching a price slightly under $6 million. This sale marked the second most-expensive new construction to ever be sold in the neighborhood.
Market still trying to catch up to 2022
Despite the market's recent improvement, when compared to the peak in early spring 2022, the home sales have declined across all Midpeninsula cities as both buyers and sellers remain anxious about low visibility down the road.
In Palo Alto, total home sales have decreased by 28%, while Los Altos saw a decline of 25%, and Menlo Park experienced a bigger drop of 37%.
Home prices also saw a decline. From the start of this year to March 15, the median price of single-family homes sold in Palo Alto was $3.33 million, 19% lower than that for the same period last year. The home price in Los Altos held relatively well, only dropping by 8% to $4.15 million. Menlo Park had a price increase of 20% as inventory early this year skewed toward homes in higher price points.
Even with multiple offers, buyers remained disciplined and avoided overbidding. At the same time, sellers were afraid of losing offers, even those below asking.
Home sales activity is typically a leading indicator of price. As sales activity has picked up recently, more sellers are jumping off the fence. Marketing vendors involved in the home-selling process, such as stagers and photographers, have reported being heavily booked, suggesting that more inventory will become available as we move into late spring.
Impact of banking turmoil, reduced labor force
It remains to be seen, however, whether home prices will turn downward in coming months.
The recent tightening by the Federal Reserve to combat inflation has had unintended consequences on the banking system. Regional banks in our area, some play a significant role in consumer finance, including mortgage lending, are particularly affected. These banks used to offer competitive interest rates to borrowers who also had savings accounts with them. If consumers become reluctant to put their savings at these banks, however, lower-than-market-average interest rates will no longer be available. This could impact the affordability of some buyers.
In addition to the challenges in the banking system, the continued reduction of the labor force by big tech companies also is hurting the sentiment of potential homebuyers. While buyers are making quick decisions on whether to buy or not, sellers may find it more difficult to pivot quickly, especially if they have already moved out of the house and have made extensive preparations to sell. If supply increases while demand softens, home prices will inevitably decline.
These growing uncertainties in the market may cause potential sellers to pause as the risk of bad timing could result in significant differences in sale prices. On the flip side, market turbulence can create excellent opportunities for buyers to find good bargains.
Xin Jiang is a real estate agent with Compass in Palo Alto. She can be emailed at email@example.com.