The residential property market in Palo Alto has cooled down meaningfully in the last six months or so. The median home price of all homes sold in Palo Alto has dropped to $2.79 million in the second half of 2018, 10 percent lower than $3.1 million in the first half. The average number of days a home is on the market before it is sold is 23, nine days longer than the 14-day average in the first half.
Price reduction has become the new norm. One out of four homes listed in Palo Alto since July 1 has reduced its listing price. The last time Palo Alto had more than 60 reductions in the late half of the year was 2012. The market back then had just started recovering after the financial crisis of 2009. This year's sudden shift is more than seasonality and has left many home sellers in an awkward position.
Multiple factors have contributed to this slowdown. First of all, we had slightly more inventory than usual late in the year. There were 567 new listings on the Multiple Listing System as of Dec. 7, or 11 percent more than all of 2017.
Secondly, home prices seem to have risen too much and too quickly in the last two years. The median price of all sold homes in Palo Alto rose from $2.4 million in 2010 to $2.6 million in the first half of 2017, then $2.81 million in the second half of 2017, and finally $3.1 million in the first half of 2018. This decline in affordability, coupled with rising mortgage interest rates and the increasing uncertainties of the global economy, including the trade war between the U.S. and China, have made potential buyers think twice and more before making a move on a home purchase.
However, not all buyers have disappeared. A partially updated home on an oversized 10,000-square-foot lot in the Duveneck/St. Francis neighborhood listed below $2.9 million in November received 7-8 offers, and was sold for over $3.5 million, or more than 20 percent over asking. Another old home in Crescent Park, listed at $4.5 million in the same month, received 3 offers and was sold for over $5 million, closing in 6 days.
When the market slows down, buyers become pickier. Predictably, location plays an even bigger role in a weak market than a hot one. Among the 63 homes that lowered their prices in the second half of this year, close to 60 percent were originally listed for below $3 million, and most of them in "less desirable" locations.
The million-dollar question being asked at this time is where the market is heading in 2019. The market is very likely to continue its current downward trend after an extended eight-year trend upward.
It's possible, based on the active listings in the middle of December, to see another 10- or 15-percent increase in inventory. There were 43 active Palo Alto listings in the Multiple Listing System as of Dec. 9. In the second half of this year, 44 homes listed for sale were pulled off the market, and most of them will likely come back in spring 2019.
Moreover, as Palo Alto's median home price is still near a record high, sellers who have planned to put their homes on the market will likely follow through in the near term.
As the recent market change has showed, buyers may not jump in immediately even if they see an ideal home within their budget. In fact, many buyers waited for price reductions to make their initial moves in the fall. In 2019, homes may stay on market longer than the typical one week that we all got used to in the past few years. Home prices may continue to be soft as well.
How should sellers and buyers prepare for a slower or a more normal market?
When the tide is changing, the process of bringing a home to the market, including house preparation, marketing and setting the price becomes more critical. If the initial listing price is set too low, sellers will be disappointed to find offers are not coming in as high as they expect. If priced too high, houses will receive very limited interest, lose momentum and get buried in many other listings. Sellers may also have to become more flexible to work with offers with contingencies or take over a few repairs as buyers no longer take homes as they are. For sellers who don't have cash-flow issues, providing direct financing to buyers may be considered to get a higher sales price.
On the other hand, the market will allow buyers, especially those at the entry level, to finally pick and choose a bit. However, buyers should always carefully weigh the pros and cons of a few hundred thousand dollars in savings in the near term versus the risk of rising interest rates, and more importantly, the future probability of finding the right home in the right neighborhood if they miss the one in front of them.
Xin Jiang is a Realtor for Alain Pinel in Palo Alto. She can be emailed at firstname.lastname@example.org.