June is typically known as one of the slower months for the real estate market due to various factors such as the conclusion of the school year, graduations and an increased number of families going on vacation.

This past June in Palo Alto, however, defied expectations as it saw an unprecedented surge in new listings, reaching the highest number in the past decade.

A total of 72 homes were introduced to the Multiple Listing Service (MLS), representing an 11% increase compared to June 2022. Several factors contributed to this June's increased inventory, including the adverse weather conditions experienced during early spring, which prompted inventory to be pushed to the later part of the year

Additionally, sellers who were sitting on the fence may have recognized that home are still selling in the current market.

A market divided

The real estate market has shown a divided trend with inventory up only in the month of June, not the entire first six months of 2023.

Out of the 272 single-family homes listed, 64% have either been sold or are pending, while 36% remain on the market. Of the 147 homes that changed hands, slightly over half were sold above the asking price with an average 10 % margin.

Homes sold above asking had a median price of $3.7 million and spent an average of 10 days on the market, compared to 27 days for those that sold below their listing price.

Unsold homes, on average, have been on the market for 40 days. Pricing is a critical factor that influences the speed and outcome of a sale, but determining the right price is more of an art than a science. In a market with divided dynamics like the current one, even with significant bidding activity, prices may not reach fair value as buyers tend to be disciplined and opportunistic.

New construction with ADUS sees a jump

This year also has seen an increase in the sale of newly built homes with accessory dwelling units (ADUs). ADUs are secondary units located on the same property as primary single-family homes, providing additional housing options.

The history of ADUs in California dates back to 1982, but significant progress on the construction of these homes hasn't been made until recent years when certain building regulations were eased to better accommodate these secondary dwellings. Notably, Palo Alto made advancements in 2017 when the city eliminated its minimum lot size and parking restrictions. Excluding Palo Alto Hills, where multiple structures on large lots are common, only 5% of the 74 new-construction homes on the Multiple Listing Service in 2019 and 2020 included ADUs. Since 2021, however, the percentage has risen to 22%, with 16 new homes featuring ADUs, seven of which were sold in the first half of this year.

Among the seven new homes with ADUs that recently sold in Palo Alto, the median sales price was $5.4 million. Except for one located along Embarcadero Road, all the other properties were situated south of Oregon Expressway. Five of the ADUs were attached to the main house, while two were separate structures.

ADUs provide an effective solution for maximizing the housing potential on smaller lots, particularly in single-family zoning areas where the size of the main residence is constrained by lot size. Having additional square footage in the form of an ADU often translates to higher property prices. Buyers, however, are still adjusting to the concept of ADUs and their potential uses. While ADUs can serve as spaces for visiting family members, additional office or gym space, the extent to which families feel comfortable renting out ADUs is yet to be seen.

When it comes to ADUs, there are pros and cons to both attached and detached units. Attached ADUs, while more cost effective, may have size limitations and lack privacy since they share a wall with the main house. On the other hand, detached ADUs offer more space and functionality, but they may occupy yard space and potentially impact the outdoor area.

Nevertheless, the inclusion of ADUs into neighborhoods, especially in the mid- to low-price range, is a growing trend. A single-family home with both a Junior Accessory Dwelling Unit (JADU) and an ADU effectively provides three separate living units, offering new lifestyle options for various families. This trend is beneficial for young couples who may find it challenging to afford a home near their workplace, as they can rent out one or two of the units to generate rental income to support their mortgage payments. Retired, downsizing couples also can benefit from the steady cash flow provided by rental income from ADUs. Moreover, the inclusion of ADUs opens up new opportunities for investors who typically focus on multi-unit properties. Single-family homes with ADUs are often located in desirable areas and can be brand new, reducing maintenance and repair expenses while offering potentially higher returns.

Xin Jiang is a real estate agent with Compass in Palo Alto.

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