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After waiting in limbo for this year’s housing market to unfold, things are looking upward along the Peninsula.
Here’s how the local market is shaping up this year:
Buyers outpace rates cuts
Unfazed by fluctuations in mortgage rates, our local housing market is bustling. As NASDAQ rebounds by nearly 60% from its 2023 low, buyers are flooding the market with renewed vigor, showing little patience for potential declines in mortgage interest rates. Meanwhile, on the supply side, homeowners clinging to historically low rates from years past are hesitant to enter the market, thus keeping housing inventory constrained. This dynamic has set the stage for fierce bidding wars, extending beyond the entry-level segment with all-cash offers becoming increasingly common, even for homes priced at a staggering $5 million, where it’s not rare to see 10 to 20 competing offers.
Inventory boost meets unrelenting demand
This year has seen a bump in inventory, attributed to the release of pent-up supply from 2023. Notable spikes in new listings have been observed across the board during the first quarter of this year: Palo Alto witnessed a 28% increase, Menlo Park soared by 38%, and Los Altos took the lead with an impressive 50% rise in new listings across single-family homes, townhomes and condos.
Demand, however, has managed to outpace supply, pushing home prices up and off the market more quickly. In Los Altos and Palo Alto, homes are staying on the market for about half the time compared to a year ago. The median number of days a home is on the market is hovering around just 12 to 14. The median price of single-family homes sold in Palo Alto in the first quarter of this year reached $3.53 million, reflecting a 5% increase from a year ago.
A recent sale in Palo Alto exemplifies this upward trend in housing prices: A property in the city’s Professorville neighborhood, bought by the seller a year ago, was recently sold with a 16% markup. While this delights sellers, it’s also forcing buyers to quickly recalibrate their price expectations in this cutthroat market. Although the current median price remains 14% lower than the peak recorded two years ago, it’s poised to keep climbing as the spring season progresses.
Los Altos takes center stage
With a 38% increase in the number of homes sold in the first quarter of this year, Los Altos leads the pack among Midpeninsula cities, followed by Palo Alto at 31% and Menlo Park at 19%.
Los Altos’ home prices also are seeing significant increases. In the first quarter of this year, the median price of a single-family sold home in Los Altos reached $4.2 million, a 5% increase from the previous year.
As home prices in Los Altos remained more resilient during the pandemic, the first-quarter median price is only 5% below the peak of $4.4 million seen in the second quarter of 2022. Notably, 42% of single-family homes sold in Los Altos this year were purchased with all cash, surpassing the percentages in Palo Alto (31%) and Menlo Park (23%). An example of the market’s intensity was seen at the beginning of the year in North Los Altos, where a 2,400-square-foot, 60-year-old house listed just under $4 million received over 20 offers and sold for more than $800,000 higher than the asking price, marking a record-high sale for the cul-de-sac.
Opportunities amid the frenzy
Despite the fervor surrounding the housing market, approximately 30% of homes are struggling to find buyers. These lingering listings often fall into the high-end segment priced above $10 million or those labeled as “projects,” requiring substantial renovations or complete rebuilds. Homes in the the “hot spot” segment priced below $5 million that remain unsold are typically over-priced, missing the initial sale window.
Among mid- to high-priced homebuyers, there’s a growing preference for move-in ready homes or a willingness to pay a premium for convenience. Many opt against the arduous process of building custom homes, despite potential tax benefits. This trend presents lucrative opportunities for developers or more mature families with home-building capabilities, particularly those eyeing older properties on spacious lots in prime locations.
Changes to commission fees
The recent antitrust case over agent commissions involving the National Association of Realtors (NAR) has introduced uncertainty into the real estate market. Pending court approval, changes will prohibit listing brokers (who represent sellers) from advertising commissions to buyers’ agents on the Multiple Listing Service starting in mid-July. Instead, buyers and agents will need to sign agreements specifying costs and terms.
Although the future implications of these changes are unclear, sellers still have the discretion to offer compensation to the buyers’ brokers. Historically, “cooperative compensation” – when the seller pays the commission fees for both their agent and the buyers’ agent – has broadened the buyer pool, particularly in slow markets or for properties struggling to attract buyers.
Regardless of how buyer and seller representation and associated compensation evolve, their impact on home prices should be limited. Ultimately, home prices are determined by supply and demand in a free market economy.
Contributing writer Xin Jiang is a real estate agent with Compass in Palo Alto.