How Recession-Proof are Palo Alto and Atherton Home Prices?
April 4, 2020 | Edited 5/13/2020
Stay safe everyone! In this unprecedented time, the Young Platinum Group are trying—and succeeding—in finding some joy in these turbulent times. How did Palo Alto and Atherton home values fare in the past two downturns? Will housing prices follow financial market declines? How long will it take to recover? What follows is our exploration of the data, but to know what is right for *you*, we need to learn your goals, wants, needs, and timing to find the best fit for your new home. Call us today to customize this kind of research to your needs!
Executive Summary
Palo Alto real estate has appreciated to 335% of its value 20 years ago, and has been more stable in downturns than financial markets
Transaction volumes in Palo Alto and Atherton declined 13-39% during the past two downturns
Palo Alto real estate has performed better than financial markets in a downturn; Atherton is not so clear-cut
Palo Alto’s median home sales price has declined ~20% in downturns, finds its floor after 8-12 months, and takes 37-48 months to fully recover
Atherton’s median home sales price has declined ~55% in downturns, finds its floor after 6-19 months, and takes 75-90 months to fully recover
Financial markets decline 32-72% in downturns, find their floor after 16-25 months, and take 53-162 months to fully recover
Our Approach
What will happen to your (existing or planned) Palo Alto and Atherton real estate values? Obviously, we are dealing with a disruption without obvious comparison, but we can look at what happened in the past two financial downturns to get a sense of how recession-proof our local real estate is. Is the COVID-19 disruption worse or milder than the past two market downturns? We wish we knew. Past results may not be indicative of future market conditions. But if you’ve read this far, you must be highly intelligent ( :-) ). We can admit, amongst ourselves, that history is a useful if imperfect guide.
To answer our questions, we are specifically going to look at Palo Alto and Atherton during the dot com crash of 2000-2004, and the Great Recession of 2008-9, and see how transaction volume and median sales price changed over time.
Ready? Let’s Do This.
Data Disclaimers That Are Absolutely Very Interesting
Our data is from public market transactions (MLS data) between Jan 1, 2000 and December 31, 2019. Three months (of the 240) in Atherton featured no sales at all; the prior month median was used (to avoid unsightly gaps in otherwise spectacular charts). During these 20 years, there were 13,688 transactions in our data set. Of those, 91 (or 0.66%) were recorded as sold but the records had a blank where the sale price should be; because time is of the essence for this analysis, we substituted the list price in these cases. We considered factoring in off-market transactions (often quite important for the high end of Atherton, but a) we’ve shown in previous analyses that the median does not move materially, b) while the recent data is easy enough to get, multiple historical transactions on the same property are annoyingly hard to manipulate given the way the Counties store data, and c) it’s a trend analysis anyways; the off-markets are certainly moving in the same direction as the on-markets.
Trend analyses like these are sensitive to the start and endpoints. By shifting the start date a few months forward or back, there can be a significant effect on a longer-term growth rate, especially in Atherton (where limited volumes mean a scratchier data history). We have tried to be fair and pick a “stable” local start point when things looked aberrant.
Perhaps our biggest data caveat, however, is that we may be in a situation where past performance is no indicator of the future; the COVID-19 crash may be very different than the Dot Com Crash or the Great Recession. Please use this analysis with appropriate caution.
OK, Let’s Get It On. What Can I Learn from History?
Well first let’s check out the number of transactions. How many homes sales happen in our lovely area each month?
Over the past 20 years, Palo Alto’s median number of sales is 47, while Atherton is a mighty 7. This largely reflects the population differences between the two (67,178 vs 7,238). We should expect lots of swings in Atherton price just due to this small sample size.
Now let’s take a look at the impact of the Dot Com Crash and Great Recession. For this analysis, the Dot Com Crash started in August 2000 (the peak of the market, as measured by the Dow Jones Industrial Average (DJIA)), and ended when the DJIA started growing again in April 2003. We’ll say the Great Recession started in October 2007 (also the DJIA local peak), and ended in Feb 2013, when the DJIA reached a level exceeding the previous peak. So visually, the downturns are:
Yep, transactions do fall in a downturn. In fact, Palo Alto homes sales slowed down by 13% and 39% in the most recent two downturns, while Atherton dropped 16% each time (although the base is so low that this may honestly just be noise). In summary:
Why do the number of transactions drop? In less affluent areas, transactions actually increase, as people cannot afford what they have and dump it in a fire sale. However, in the #1 and #4 most affluent zip code in the country, sellers can just sit on their property for a few more years and wait it out.
Fascinating! But What About the Money?
Let’s look at the base data first. Here is the appreciation of Palo Alto’s median single-family home over the past 20 years:
If we add in a rolling 6-month filter on the data above, Palo Alto homes are worth 335% as much in the 20-year span. Pretty impressive. The value declined during the Dot Com Crash and also fell between 2008 and 2009… but with the benefit of hindsight these look more like temporary pauses in a tremendous upswing.
Does it look like Palo Alto is dipping down in the past year? The median certainly says it is! But, as we’ve shown in another analysis, the use of median can disguise shifts in the composition of what is selling, not just in the drop in a perfect measure of value. In other words, this data reflects what is clearing the market, which is a good, but sometimes imprecise, view of true value.
What about Atherton?
Atherton did not grow nearly as impressively, but it still grew.
How Did the Financial Markets Perform During This Period?
We looked at four metrics for “the market”: the Dow Jones Industrial Average (DJIA), the NASDAQ Composite (IXIC), the S&P 500 (GSPC), and the Russell 2000 (RUT). Here is how they performed over time:
Each of these were indexed to 100% in January 2000, and reduced to one point per month (the adjusted close price on the first day of the relevant month). They have similar curves, except for the dramatic fall of the NASDAQ in the Dot Com Crash, and the notable acceleration of mid-cap stocks in post-recessionary periods; after both downturns the Russell 2000, with its multitude of smaller companies, outperformed the “big guys” of the S&P 500/DJIA/NASDAQ Composite. In the interest of visual clarity, we decided to only display the NASDAQ and DJIA going forward… too many lines really cluttered the charts!
Palo Alto Versus the Market
Now we can compare the real estate data with the financial market data to get a sense of how relatively recession-proof our local markets are. Let’s look at Palo Alto first. If we compare the median sale price of single-family residences in each month, and further apply a 6-month rolling average function to smooth out the bumps, we get the orange line below. The green lines are the DJIA and the NASDAQ Composite. The grey bars are the transaction volume for comparison. How does Palo Alto hold up in a downturn?
Pretty well, in fact. Home prices in Palo Alto are not immune to downturns, but the value drops notably less than financial markets. Palo Alto real estate is less volatile at times when the Dow and NASDAQ are crashing hard.
Atherton Versus the Market
How about Atherton? Let’s look at it with the axes pinned to Palo Alto values, so we can more easily compare the two locations:
The blue line above is the Atherton median sale price (with the 6-month rolling function applied, and indexed). Most notably, we see that house prices apparently crash when the market does, and thereafter roughly tracks the market. Did Atherton house prices really fall that much in the Great Recession? Well, yes and no. Remember that the median home sale can only be calculated from the homes that did actually sell. What is the owner of a 1-acre estate likely to do in a downturn? Just stay put and wait for the bad times to go away. The low end does not have this luxury, so the ratio of what transacts changes in a downturn. In other words, the value of an Atherton house does not drop in half… but the kinds of houses that go to market and sell are the lower end of the housing stock, causing an apparent dramatic fall.
Now this may be cold comfort if you don’t want your investment locked up for a long time; not everyone can be so financially patient. When we visually compare Palo Alto and Atherton, Palo Alto certainly comes across as more recession resistant.
Percent Decline and Bounce-Back Speed
We can take a look at the same data thru a different lens. If we apply the rolling six month function to absolute prices (to smooth out outlier sales), and then observe the peak, the trough, and the time until the price exceeds the prior peak, we can measure the % decrease in property values, how fast the bottom comes, and how long it takes to fully recover. So, who do you think will come out on top… Palo Alto, Atherton, or the financial markets?
Green is good in the chart above; red is bad. On any metric, Palo Alto outperformed everyone. Atherton and the Dow were close, and the NASDAQ underperformed tremendously. Well, it is known as the Dot Com Crash for a reason.
What about our most recent downturn?
A more mixed picture, but again Palo Alto comes out on top. Atherton found its bottom fastest but fell farther and took longer to recover than any other category. The financial markets started growing again after 16 months (much faster than the popular conception), and the NASDAQ almost regained its value as fast as Palo Alto.
Conclusions
Crashing financial markets have traditionally been a harbinger of dropping home prices… at least those transactions that go to and clear the market. Atherton has performed roughly on par with financial indices, but Palo Alto has displayed an impressive combination of absolute appreciation and resilient value-preservation in a downturn. Obviously, we cannot be sure that our current COVID-19 catastrophe will play out like the Dot Com Crash or the Great Recession, but the historical data gives us cautious optimism (if an owner), and limited opportunity (if a buyer).