ARE Palo Alto’s Housing Prices Falling?

Updated December 13, 2019

We were looking at the market stats the other day, and an alarming trend seemed to jump out at us:  Palo Alto’s median sales price has fallen 24% from its peak!  What?  Many people are saying, and we are feeling, that the market has slowed down.  But 24%?  That seems ridiculous.  That sounds like a crash.  And a deeper dive into the number reveals that it is not quite true. 

Join us on an action-packed voyage thru the figures, as we seek a deeper truth about what is going on.

Here is the basic view that alarmed us:

Why don’t we believe this chart at face value?  Because we walk thru 20 houses a week and talk to other realtors all day long to improve our insights.  And it just doesn’t seem this bad.  Charts can deceive if used blindly, or if improperly fed and tended to. Let’s dig in.

There are two peaks defining the top of the market: January 2018 and April 2018.  Let’s toss out January, as this is a slow month where a few outliers could skew the conclusions (only 12 homes sold).  But April should be pretty reliable, with 35 homes sold in the middle of the spring-summer rush.  A critic could say that its still an outlier month.  Maybe.  But it is the high point of the recent bull market that has seen home prices more than triple since the Great Recession (Mar 2009-April 2018).

Again, we just are not *feeling* such a decline.  Sure, our buyer clients are feeling more justified to be discerning.  Our seller clients are having to wait longer.  But there is not a sense of catastrophe.  Let’s slice and dice to see other views.  What if we break up the data into different price bands?

We can split the median sales price into 4 lines:  homes that sold for 0-$2 million (light blue), 2-5 (grey), 5-10 (red), and over 10 (green).  Do any of these seem to be declining?  Not really! The green line ($10MM+) is scratchy, but that’s to be expected due to the low volume of these mega-expensive properties.  But when we look at median, the low volume of the $10MM+ properties is irrelevant. (for reference, in Sept 2019, there was 1 closed sale in the $0-2MM range, 24 in the $2-5MM range, 2 in the $5-10 range, and none above.  This is a fairly typical month as far as the distribution goes).

Basically none of these lines is declining.  What gives?  Where’s the beef, for those old enough to get the reference? How can the median be declining, but each price band is staying stable(ish)?  Well, the ratio between the bands must be changing.  Let’s look at the months of inventory in the Palo Alto market at each price band:

Oh yeah, now we can see what is happening.  “Months Supply of Inventory” is a metric that factors in how many new homes are being listed, how many are being sold, and the frequency of transactions.  And what this is telling us is that the blue and grey lines (the sub $5MM market) have been “normal” over the past few years…  supply is equaling demand.  But look at the red and green lines over the past year:  a skyrocketing standoff between sellers not selling and buyers not buying.  So these higher-end homes just stay on the market unsold, as new inventory piles on.  If no new $5-10MM homes appeared, it’d take 9 months for the current supply to be gobbled up by buyers, given their current pace!  That is twice as slow as just a year ago.

So this is the answer:  homes in the $0-5MM market are transacting swiftly enough, but the $5MM+ market is seeing a dramatic slowdown.

What is Driving the High-End Slowdown?

Four inter-related things are likely driving the slowdown. 

1.       First, we are long overdue for a correction in the economy, in the public stock markets, and in real estate asset markets.  This has been the mantra of clever people for years now… clever people who have missed out on the appreciation of Palo Alto homes.  It is very challenging to time the market; if the house is right for you and your situation, timing works itself out over the decades.  But buyers are increasingly feeling that the end must be nigh. 

2.       Second, our local IPO market, which seemed so promising at the beginning of the year, has largely disappointed with a large crop of high-profile newly public Silicon Valley darlings trading below their offering price.  The expected influx of newly-minted millionaires buying homes has been very faint.

3.       Thirdly, the Chinese market largely stayed away this year.  Chinese buyers were driving the high-end, but our elective trade war and the Chinese retaliatory responses have made it difficult for this affluent segment to invest here, and many of them feel distinctly less welcome than in previous times.  Will they stay away?  Is this a blip?  It’s hard to say.

4.       Finally, buyers often take a pause in election years.  There is something about the uncertainty of macroeconomic policy that makes people slow down on big investments, just like the textbooks proclaim.  We are not in an election year, but are suffering through political uncertainty unlike what America is accustomed to.

These four factors seem to be causing the slowdown at the high end of Palo Alto’s housing market.

Conclusion

While Palo Alto’s $0-5 million housing market is behaving as it has in previous years, the $5million+ market is experiencing a dramatic slowdown in velocity.  Because they are sitting unsold for longer, the mix of all the homes that *do* sell is increasingly skewed towards the lower end of the spectrum.  A generic chart of median sales price shows a decline, suggesting some sort of crash, but what is really happening is more subtle and perhaps less exciting.

The Young Platinum Group specializes in Palo Alto, Atherton, and surrounding areas.  We work with buyers, sellers, and builders to enhance wonderful lives in the finest homes in the heart of Silicon Valley.  We proudly affiliate with Golden Gate Sotheby’s International Realty for our realty activities, and the Peninsula’s finest builders, architects, and designers for our development projects. Contact us to discuss your real estate needs!