For starters, there just aren't that many houses for sale — at any price point, in any condition.
And once-reticent buyers, who may have been sitting on the fence for the past couple of years, are hopping off — with cash in hand.
Multiple offers are clearly the norm and are driving prices up (see chart), and buyers need guidance on how to navigate those seas.
But, the good news is that through Thanksgiving there's a traditional uptick in houses listed.
"I have four listings coming to market in the next four weeks; that's a sign that more inventory is coming," said Billy McNair, a broker associate with the McNair Group at Coldwell Banker, Menlo Park.
Although not as long as the spring market, which extends from February through May, the fall market is a time when "people get refocused again. People with children are back in school, they get settled and then restart their home search," noted Hugh Cornish, a Realtor with Coldwell Banker, Menlo Park, who was ranked No. 41 in sales nationally for 2011.
Lack of inventory
"A lot of what's driving the current market is a significant lack of inventory," said Tim Foy, a Realtor with Midtown Realty since 2002. Pointing to a graph he created, he noted that from 2000 through 2006, there were about 700 single-family homes on the market in Palo Alto. From 2007 through 2010, there were fewer than 600; in 2011, fewer than 500.
"This year is tracking lower than last year," he added.
Foy has another graph where he compares the rise and fall of the Dow Jones Industrial Average with the average price of single-family homes in Palo Alto.
He points to how closely the two measurements track until 2004; since then Palo Alto real estate has consistently done better.
"Part of the reason inventory is low in Palo Alto is because there's been so much volatility in the stock market. A lot of homeowners are thinking it's better to keep their money in Palo Alto real estate than put it in any other asset class. ... There's a momentum to keep your home if you can," Foy said.
And then there are those darned Baby Boomers.
"The general mindset is to stay in the home as long as they can, keep it as an asset; it's performed very well relative to what was put in; also they would have capital gains to pay, he said.
"I've been doing open houses in the last few years. I've never had a shortage of buyers, but they were scared. Now they're all jumping on the wagon again," said Tori Corbett, a broker associate who works with Alain Pinel Realtors, Los Altos. "People hate to admit it, but when they see multiple offers, they see values are going up and they join in."
Some attribute the lower-than-normal inventory to the "Facebook effect," with potential sellers waiting for more initial public offerings (IPOs) to bring more cash into the equation.
On the flip side, anticipation of the Facebook effect has also influenced buyers, McNair said.
"If you were a buyer in the market in January/February, knowing that Facebook was going to go public, you had this heightened concern that you'd have instant competition with Facebook employees with a war chest of cash in their pocket. A lot tried to get ahead of that wave," he said. "That really drove the spring market" with a significant run up in values.
That flurry of activity was also driven by the overall health of the stock market, he added, with buyers on the fence for 18 months with no sense of urgency and flat interest rates.
But waiting for prices to keep rising can be a poor strategic move, he said.
"If you're a family and you have a house worth $1.5 million and you're looking to move up to $2.5 million, hoping your house is going to be worth more just shoots yourself in the foot. Because if your house is worth more, so's the larger house," McNair said.
"If the market goes up 10 percent, your $1.5 million house has gone up $150,000 more, but the $2.5 million house has gone up $250,000."
Buyers are coming back now because they're feeling better about the economy, Realtors agreed.
"They felt their jobs were stable; interest rates were low. A lot who weren't active became active now," McNair said.
With fewer properties for sale and pent-up buyer demand, the result is a very competitive market, local Realtors agreed.
Add to that the flurry of IPOs and an increase in foreign buyers. Suddenly an already competitive market has heated up.
Foy said it could easily take a couple of months to prepare to make an offer, beginning with having a down payment ready and relatively liquid. Get pre-approved by a "well-known, reputable lender," he said, then "familiarize yourself with target neighborhoods and identify the most promising."
He suggested checking out how many homes have recently sold in three neighborhoods; if there are fewer than three recent sales, he suggests widening the net.
And, most important of all, "be patient. When a house comes along, your finances are ready, you know the neighborhood, then you're ready to make a strong, credible offer."
It's a lot easier to buy a house if you opt for no contingencies, several Realtors said.
"All contingencies are deal killers, some more than others," Cornish said, recalling the olden days when one could have a contract with a 21-day contingency — no financing, no inspections — and the property would be pulled off the market. During those three weeks, the potential buyer could have a contractor come check out the house for problems, then renegotiate the deal.
"As markets got more sophisticated, and people were able to get pre-approved (for financing), there was a huge step to eliminate the timeframe. Trends changed.
"Now we advise sellers to get pre-inspections. It gives clients a chance to analyze before making an offer," Cornish said.
"A lot of people have no contingencies whatsoever, zero. That's really scary, especially for first-time buyers," Foy said.
He advises his clients to spend the time to look through disclosure packets, even on houses they ultimately don't bid on.
"Nothing should be foreign to you — the neighborhood, the contract, the approval process. (It's the) only way you'll feel good about creating a competitive, credible offer."
If a buyer needs to make the sale contingent on selling a house, "that's less attractive to a prospective seller than someone who's on a month-to-month lease," McNair said.
"It's important to have all of your ducks in a row, whether that's your down payment or finance approval," he added.
And, there's a big difference between loan pre-approval based on a phone conversation and sitting down with a lender, filling out a credit application, running a credit check, seeing tax returns (and determining whether income is from wages or consulting fees), he said.
Corbett said that a buyer needs a good lender.
"That's very important. You can't have Uncle Phooey's in Fresno. You need to be pre-approved and by a reputable lender," she said.
In mid-September she was involved in negotiations for a condo in the Whisman Park neighborhood of Mountain View, which drew 11 offers
Then she sold a single-family home in downtown Mountain View.
"It went on at $928,000 and got seven offers, almost $100,000 over asking," she said. Two weeks earlier she was working with a client on an offer for a Sunnyvale townhouse, which drew 11 offers; the week before that she listed a Mountain View fixer-upper that got 13 offers and sold for $100,000 over asking, she added.
In addition to a good offer package, Corbett stressed how important it is to have an agent working for a client.
"If one thing is askew, it won't work. ... I had an offer on my listing, and the guy didn't even put the address on it," she said.
And it isn't always the highest price that wins over the seller.
Corbett found that sometimes it's the second offer that appeals because the terms better meet the seller's needs. If the house is vacant, the seller might want a quick close of escrow, for example.
Or, the seller could prefer a higher down payment, all cash, no contingencies, and of course, that the offer is written correctly, she added.
And then there's the personal element. McNair suggests including a personal letter addressed to the seller with the offer.
"If you put yourself in the shoes of the seller and you have three comparable offers, you've lived in the neighborhood for 30 years, you know your neighbors ... there are certain things that will sway the seller," such as whether or not there are young kids on the block, he said.
Sometimes it's better to step back and simply not make an offer, rather than creating a bidding war, McNair said.
"If you make a (bidding-war) offer and don't get it, that home is now used as a comp for other houses on the market. If it was listed at $1.3 million and goes for $1.5 million, the next house uses $1.5 million as the comp. You lost out on a house at $1.3 million and drove up the price of future homes," he said.
"We need to put in good aggressive offers. We can't guarantee you'll be successful, but put your best foot forward or don't make an offer at all," he said.