As bidding wars cool, is a Peninsula housing crash on the way?

As we roll through summer, many local families are finally getting away for their first vacation since March 2020. With fewer active buyers, the bidding war has cooled down quite a bit compared to the crazy spring, and the market seems to be back to its normal seasonality.

The first half of 2021 was the most active six months in the past decade for the local real estate market with 431 new listings on the multiple listing system — a 45% increase from the first half of 2020 and 30% more than the past 10-year average.

Unlike the supply shortage reported in the news for most parts of the nation, Palo Alto had an ample supply of houses for sale. Neighboring Menlo Park and Los Altos also experienced their largest inventory since 2011. The increased supply was driven in part by pent-up demand due to the pandemic and by the very strong pricing environment at the beginning of the year after more than two years of price correction. There were 10 active listings in the heart of Old Palo Alto in mid-May, ranging from $6 million to just north of $30 million. Higher home prices pushed sellers previously on the fence to take action, quite noticeably at those prime, rarely available locations.

Pent-up demand coupled with the strong tech economy contributed to a big and active buyer pool. More than 74% of new listings in Palo Alto during the first half of this year were sold. This consumption ratio was even higher in Los Altos at 83% and in Menlo Park at 78%. In Palo Alto, 312 homes officially exchanged hands — that’s 64% more than the first half of 2020 and the highest level since 2012.

Median home prices also saw sharp increases in cities along the Midpeninsula. The median price of single-family homes sold in Palo Alto rose to a record-high of $3.53 million — a 16% increase from the first half of 2020 and an 18% jump compared to 2020.

In Los Altos, the median home price jumped to $3.9 million, or 22% year over year. It’s become common for older, smaller homes (less than 2,000 square feet) on larger lots (over 10,000-square-feet) that are listed slightly below $3 million to receive bids that are nearly $1 million higher than asking price.

The pandemic triggered preference for bigger living spaces and larger lots, which are more difficult to find in Palo Alto.

The market also has gone back to its normal quick turnover within seven to 10 days.

As sellers experience quick sales and higher-than-expected prices, and buyers are frustrated by severe competition or bidding wars, no wonder some of the most Google-searched questions by consumers are: “Are we in a real estate bubble?” and “When will the market crash?”

If we dig into the fundamentals, the run-up of home prices is not fueled by an increase in demand or speculations in the face of limited supply. The high price is a result of very healthy transaction volume. In the near term, supply may keep increasing because of the high home price. Aging families may also choose to move out because of the high cost-of-living and tax rates. Demand, however, will remain strong from local and foreign inbound migration. Young families from the south, north or east bays continue to move to Palo Alto for schools and an easy commute. We’ve also started to see families immigrating from overseas as the issuance of the working visa has resumed since the new administration. The net population growth of Santa Clara County has been relying on foreign immigrants for quite some time. As long as the tech economy remains solid, we may be just entering another bull cycle that may last six to seven years.

While it’s impossible to time the market, sellers and buyers are wise to take different strategies in different market environments. For sellers, it always helps to know your “products.” For buyers, it is essential to “think through the mid- to long-term needs.”