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.
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