What happened to the Palo Alto house market?

Asked by Mk, Palo Alto, CA Thu Oct 30, 2008

Recently, the home prices in Palo Alto dropped unusually. Look at this one:

1.95 M => 1.8M => 1.72M => 1.57M, still on market.

The living space is huge (2445 sf). Lot is big (7820 sf). Has a pool. The location and all 3 schools are good.

It is on Gailen Ave.

Why does the price drop so much? Did Wall street have so much impact? No one is buying anymore?

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Sera, Home Buyer, 95131
Fri Jan 30, 2009
0 votes
Steve, , Rohnert Park, CA
Mon Nov 3, 2008
Well sure Matthew... if you'll see an average 9% appreciation over the next 30 years, of course you should buy. Then again, somehow I doubt the extraordinary series of events that allowed that past performance will repeat itself again (small town region evolves into a tech center, heads into a dot-com bubble immediately followed by a housing bubble of unseen proportions).

Homes don't magically gain in value. It requires willing and capable buyers to appreciate. This area can't sustain these prices - that's obvious to anyone who bothers to think about it. I know there's wealth out there, but not the type of wealth required to keep that quantity of homes at those prices. Particularly given the evaporation of home equity and investments that just occurred. These aren't Bel Air mansions we're talking about, or the stuff over in Woodside. These are 20-year old 3Ks.f. homes on 1/4 acre lots trying to sell for $2.5M+. Anywhere else in the country these are viewed as nothing more than middle class homes.

I realize your job is to ensure transactions occur regardless of the outlook, but this is pretty basic economic stuff we're talking here. Suggesting a second 30-year period of 9% annual yields is comical.
0 votes
Mk, Home Buyer, Palo Alto, CA
Sat Nov 1, 2008
Thanks for all your thoughtful answers. As some indicated, now, for buyers, we should take more analytical steps due to stock, house and economical market conditions.

Yes. Many homes start to reduce its asking price slowly. Here is another example with its price dropping dramatically:

New rebuilt (not remodel), 4 bedroom/4 bathroom, 1993 SF of living space, 7000 sf of lot:

1.5M => 1.39M => 1.29M => 1.25M, still on market.

On Ruthelma Ave, Palo Alto.


0 votes
Lynne Mercer, Agent, Palo Alto, CA
Sat Nov 1, 2008
Whereas Palo Alto remained relatively unscathed by the sub prime crisis that ravaged most of the country this year, there is no question that the recent volatility in the stock market has affected the real estate market here. What has happened recently is that houses are staying on the market longer and the number of sales per month has dropped significantly. Buyers seem to be in a "wait and see" mode.

As of this morning there are 93 active listings on the Multiple Listing Service, which is unusually high (approx. twice as many as this time last year.) Serious sellers must recognize that they have more competition that usual, and also that buyers are running scared, so they will have to be more realistic with their pricing if they really want to sell. That is beginning to happen now, as we have seen houses staying on the market longer and recent price reductions.

However, don't expect the bottom to drop out. Typically, Palo Alto most sellers are financially stable, so if they can't sell for what they think is a reasonable price they often will pull their property off the market and wait for more favorable market conditions.

In almost any economic slowdown, Palo Alto real estate is typically among the last to get hurt by an economic slowdown and the first to bounce back. In my opinion this is one of the best buyer markets we have seen for a long, long time, with more to choose from, softer pricing, and very few multiple offers. Just do your homework, check the most recent sales in the neighborhood you are looking in, and try to do some serious negotiating to get the best price possible for the home you want.
0 votes
Steve, , Rohnert Park, CA
Fri Oct 31, 2008
It's dropping because no one in their right mind pays $2million for a home they can rent for $6K or less.


- $2M purchase
- $400K down (20%)
- 8% mortgage
- 0.5% annual maintenance
- 1.3% property tax

After three years, you'll have spent:
$380K in interest
... less $154K in tax "benefits" (first $1M, assume highest tax bracket @ 35%)
$78K property taxes
$30K maintenance
$50K loss of down payment investment yield (assume 4% after taxes on the $400K)

Total 'dead' money (does zero for equity) spent in three years totals $384K, and that doesn't include various home insurance costs and other fees. Nor 5%-6% fees in the event you have to sell.

That dead money equates to nearly $11K/month. Considering you can easily rent a comparable home for $4.5K-$6K per month, any rational home buyer runs from a deal like that.
0 votes
Pa_home_buyer, , 94301
Fri Oct 31, 2008
In response to Chris Iverson's post, it is not historically unprecedented for prices in palo alto to drop by more than 15%. They actually dropped 30% following the dot com crash.

In fact, palo alto home pricing trends are bearish. Check the most recent sales info available of redfin in the link provided. Housing inventory is up 50% while the sold price/sq.ft. has dropped from $850 to $750 from august to today. This trend should only accelerate as the housing overhang continues to increase.
0 votes
Chris Iverson, Agent, Menlo Park, CA
Thu Oct 30, 2008
Hi MK,

The Palo Alto market has slowed like so many others lately. Many homes are overpriced, and currently about a third of the homes for sale in Palo Alto have had price reductions. Many sellers are unrealistic about the market value of their homes.

I think this is what is going on with the house on Gailen that you refer to. Almost $2M for an updated Eichler is a lot, even if it is nicely done. The house has been on the market for 4 months, which is an eternity compared to what we have seen in Palo Alto until recently. Since people in general have limited attention spans, we are always looking for what is new, especially with automatic listing notifications, so homes that have been on the market are easily forgotten, and develop a stigma.

I have found that people either love Eichler style homes or hate them. If you love them, this may be an opportunity for you to take advantage of motivated sellers.

Homes that are well priced and offer what most buyers are looking for like a good floorplan, location, schools, and newly remodeled are still selling quickly, or those that represent a good value. Homes that are missing one of those key ingredients are sitting until the price comes down enough that buyers perceive it to be a good value.

I am expecting long-term interest rates to climb in 2009, especially on jumbo loans, and an increase in rates raises the effective cost of a house far more than a drop in prices. For example, if rates move from 6% to 7% on an interest only loan, your payment goes up 15%. It's unlikely, and historically unprecedented, that we will see prices fall 15%, so it's a great time to buy.

You asked if no one is buying anymore. People are still buying, but I have many clients who are currently waiting out both the local housing market (waiting for it to bottom) and the capital markets (waiting for their stocks to come back up). They were planning to sell stock or exercise options to use as a down payment, and now they are seeing the values of those stocks have fallen 20% or more in recent weeks.

You can see current statistics for Palo Alto at: http://www.REMarketReports.com, and sign up for free reports on the market in Palo Alto and the surrounding communities delivered to your mailbox weekly or monthly.

If you would like to discuss specific properties, neighborhoods or price ranges, send me an email or give me a call.

0 votes
Marge Draper, Agent, Palo Alto, CA
Thu Oct 30, 2008
There are no pat answers to your question. Usually there are several reasons that a home may not sell. Sometimes good schools and everything else you mentioned just aren't enough. The answer is in the current market analysis (CMA) an agent does for the seller. That analysis should inform the seller of the price that comparable homes have sold for recently. "Recent" used to be roughly six months past. Now "recent" is more like three months.

Wall St. has had an impact on our market. Any buyers that had their downpayment in stock may not have it anymore or may have much less. Until this past week getting a loan was very difficult.

The median price for a Palo Alto home is about $1,850,000 so this home is below the median. You can see the median prices for homes in Palo Alto, Menlo Park, Redwood City on my web site. When you check the Hot Market Data, you'll find that Palo Alto has the highest median home price.
Web Reference:  http://www.homesbymarge.com
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