The Peninsula real estate market's early recovery at the start of this year seems to have been short-lived. After looking like it would make a rebound, the market took a strange turn, and we started seeing multiple offers and price reductions occurring simultaneously during the spring selling season. These mixed signals, which could be here for a while, have left buyers and sellers uncertain about their future actions.
Here's a look at what helped create these "conflicting" market conditions.
The Federal Reserve’s continuous battle against inflation, regional bank turmoil and recent concerns about a potential U.S. debt default have collectively contributed to higher mortgage interest rates, which has partially led to the region's "divided" market that we're now experiencing.
The collapse of Silicon Valley Bank and First Republic Bank played significant roles in our local tech economy as well as our real estate economy – First Republic Bank is a big player in home mortgages, so its collapse has had a rippling effect on the real estate market. In addition, the regional bank turmoil has extended beyond the surface-level observations: It has resulted in tighter credit conditions. Banks have become unwilling to lend and have raised the lending criteria. These circumstances have created hurdles for home financing.
The only bright side in this challenging environment has been the strong comeback of tech stocks. The NASDAQ index has outperformed other major indexes and went up by 33% this year as of June 2.
Supply and demand plummet
The impact of high-interest mortgage rates has impacted both sellers and buyers: There are fewer homes on the market and fewer buyers able to afford the market.
Inventory, or supply, has been low as sellers have been hesitant to give up their current low-mortgage interest rates. This, combined with soft home prices, has resulted in a 15% to 17% decline in the number of new listings to hit the market during the first five months of this year across the Midpeninsula cities of Palo Alto, Menlo Park and Los Altos. Even after the weather cleared, inventory did not increase toward mid- to late spring.
Demand, or those looking to buy, also has declined. Higher interest rates have reduced buyers' ability to take on more leverage, further softening the demand, especially when compared to early spring 2022 when the housing market was still at the peak of the pandemic bubble.
The "absorption ratio," which represents the percent of homes that were pending sale or sold in relation to the total number of listings during the same period, has dropped from around 80% in spring 2022 to 60% this spring. Menlo Park recorded the lowest absorption ratio with 60% homes pending sale or sold, while Los Altos had the highest ratio at 68%. Palo Alto fell in the middle with 63%. In other words, approximately 32% to 40% of the total homes listed for sale in the Peninsula area this year did not sell.
The median price of single-family homes that have sold in Palo Alto this year is $3.5 million, or about a 10% decline compared to last year. Los Altos experienced a smaller decline with the median price of $4 million, or a 7% decline. Menlo Park, however, actually saw a price increase of 15% with a median home price of $3.9 million. This increase can largely be attributed to more offerings in the higher-priced segment and increased sales in the more expensive neighborhoods such as Central Menlo and Menlo Oaks.
'Perfect' homes still in demand
Despite facing numerous hurdles, ready buyers are still actively searching for the "perfect" home. The highly selective nature of these buyers has led to an usual condition of price reductions and multiple bids occurring simultaneously during the spring selling season.
The number of price reductions have increased across the board this year compared to last year at the same time. For the first five months of this year, 16% of the single-family homes listed for sale in Palo Alto, for example, saw their listing price reduced, compared to only 11% in the same period in 2022.
On the other side of this "conflicting" market, 50% of homes were sold above asking price in Palo Alto, 42% in Menlo Park and 53% in Los Altos. Aggressive bidding, typically seen in a very "hot" market, was scattered here and there. Rarely available properties, such as the 19,000-square-foot lot with a 40-year-old home in south Palo Alto that was listed in the $4-million range, received more than 10 offers and sold for $1.25 million over the asking price. Another 50-year-old home with three bedrooms on a 1.2-acre lot in Palo Alto Hills that was listed in the $5-million range received bids for more than $1 million. In Palo Alto's Community Center neighborhood, an 8,400-square-foot lot that was listed below $3 million received more than 10 offers and sold for $700K over the asking price.
Surprisingly, the average number of days a home stays on the market before selling has remained unchanged compared to the same time last year: In Palo Alto, it's 16 days, Menlo Park is 14 days and Los Altos is 11 days. This implies that if a home does not sell within the 11- to 16-day period, the hurdle to find the right buyer increases significantly.
These mixed dynamics we're experiencing in the current Peninsula market may persist until there's more clarity regarding the direction of interest rates or until rising technologies like AI create more millionaires in the Bay Area. Until then, sellers and buyers can expect a puzzling market.
Xin Jiang is a real estate agent with Compass in Palo Alto.
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