Palo Alto Real Estate Prices Continues To Defy Gravity…And Expectations…But Tight Inventory Is Part Of The Reason

October 5, 2007

Amid all the current bad real estate news, with mortgage companies going bankrupt, Foxton’s closing shop, foreclosure rates rising, a liquidity crunch in the credit market, people can certainly be forgiven for thinking the sky is falling — especially if their little corner of the real estate world really is suffering.

Meanwhile, back in our little insulated corner of the world here in Palo Alto, prices remain strong, with the median price point having risen ten twenty thirty thirty-five percent year on year. Yes, that’s thirty-five, as in the number found between thirty-four and thirty-six. Hard to believe, but no less true for it:

Palo Alto median home prices have risen 35% in the last year

(Skeptics will of course pounce on the slight drop from the high of $2.4M a month ago to where we are now — $2.35M — as evidence that — finally — Palo Alto home prices will begin to obey the same rules of gravity that apply elsewhere. I believe it’s more likely to be a seasonal thing rather than an indication of impending doom for our market.)

Not only is the overall market doing well, but every quartile is actually pulling its weight, with the top quartile doing particularly well of late:

Home prices in every quartile in Palo Alto are increasing

Median prices, of course, are not the whole picture. Inventory, for example, is well below what you would expect for this time of year: a year ago at this time, there were 80 homes on the market, while now we’re just short of 50:

Inventory of homes in Palo Alto is below where it normally is this time of year

Our neighbors to the north in Redwood City, meanwhile, are showing a different story. Median prices are down, way down…

Redwood City median home prices have gone down in the past year

…and inventory levels are up, way up:

Inventory of homes in Redwood City is well up

But again, that’s not the complete story. Observe…first, the lower two quartiles are indeed hurting…

Median prices in the lower two quartiles of Redwood City are going down

…but the top two quartiles are holding their own quite well, thank you very much:

Redwood City prices in the upper two quartiles are holding their own

What’s the explanation for all this? Why is Palo Alto and the upper half of the Redwood City market doing so well, while the lower half of Redwood City is hurting? Friend, top broker, and colleague ex-colleague Steve TenBroeck (the “Steve” in the “Jeff and Steve” team) explains it thus:

Home owners in Palo Alto learn from the Merc and the Chron that the market is bad and decide maybe now ain’t a good time to sell. But, no worries — they don’t have to sell. Their mortgage, while high, ain’t killing them. They didn’t get an adjustable rate mortgage, so their payments aren’t skyrocketing. Owning a home isn’t causing them any cash flow problems.

Similar reasoning holds for the upper half of the Redwood City market. In the lower half, however, homeowners are hearing that the market is bad, and they’re personally experiencing it: their adjustable rate sub-prime mortgages are resetting soon, and their cash flow problems are about to become worse. Many don’t have the luxury of waiting for next year to sell. They have to sell now.

The lesson? Real estate is local, very, very, very local.

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Written by Kevin · Filed Under Consumer, Palo Alto, Redwood City, Steve TenBroeck | 9 Comments