After a year of record sale prices in 2021, home values in most Bay Area cities have continued to climb in 2022 as low inventory and a large number of anxious buyers drive up the market. Between Jan. 1 and March 6, 116 homes in Palo Alto went on the Multiple Listing Service, a 5% decline from the same period last year and on par with the same period in 2019 prior to the pandemic. Among the 116 homes on the market, 11 were “leftovers” from last year — mainly around the $4.5 million-plus price point. About 32 of these single-family homes officially sold, a 53% decline from the same period last year.
The median price for single-family homes in Palo Alto has reached $3.71 million, which is 9% higher than the same period in 2021 and 4.3% higher than 2021 overall.
The same trend is occurring in neighboring cities: To the south, inventory in Los Altos has dropped 27%, and to the north, it has dropped 18% in Menlo Park year over year. Only 13 single-family homes exchanged hands in Los Altos, a 72% decline compared to the same period last year, and only 26 homes have exchanged hands in Menlo Park, a decline of 62%. The median home price for single-family homes in Los Altos is now $4.55 million, up by 18% year over year; and $3.47 million in Menlo Park, a 28% increase.
All homes sold in these three Mipeninsula cities stayed at the market for only seven to eight days, leaving buyers no time to hesitate, but rather aggressively overbid. The difference between the sales price and the original listing price is usually not a good measurement for the heat of the market because the original listing price can be set for various reasons. If, however, we have to use it as a reference, Palo Alto’s single-family homes were overbid by 14%, Los Altos’ by 25%, and Menlo Park’s by 6% year to date.
The level of overbidding was significantly higher than last year and roughly matched the level of the crazy spring market of 2018, when the real estate cycle previously peaked. No wonder the most commonly asked question by young buyers at recent open houses is, “How much more should I bid up?”
Many factors could explain the drop in this year’s inventory. The market could just be going back to normal after 2021 experienced a wave of pent-up supply from 2020 due to the pandemic. It’s also possible that the first wave of out-migration of local families because of the pandemic may have just ended. Mortgage rates may also be a reason: The rising interest rate hurts sellers the same way as the buyers. Any sellers who recently refinanced will have to give up the low-interest rate they secured last year if they sell.
This early spring frenzy leaves me to wonder if our local housing market is completely shielded from what’s happening in the rest of the world: the 20% drop in NASDAQ Composite Index and the 26% increase in the average 30-year fixed mortgage interest rate. Don’t even mention the worrisome demographic trend of the potentially increasing domestic out-migration and the declining foreign in-migration.
Even with local families moving out of the area and a sudden lack of overseas buyers, the demand for homes in the Midpeninsula is still much higher than the supply.
With easy access to work, good schools and abundant family amenities. Palo Alto, Los Altos and Menlo Park remain the ultimate upgrade destination for Silicon Valley engineers. And rising mortgage interest rates so far have only provided more incentive for buyers to act fast. With big tech firms losing more than 40% of their stock value, however, our local housing market could show signs of a slowdown. In the first week of March, for example, not all new listings were sold in a week.
Even for the $4 million “entry-level” homes, the number of offers came down to only two to three. With too many buyers chasing too few homes as the spring selling season takes off, however, it remains unseen whether the market will take a turn.