DeLeon Realty’s 2015 Quarter One Palo Alto Update

DeLeon Realty’s 2015 Quarter One Palo Alto Update

Ken DeLeon, Esq., Founder of DeLeon RealtyApril 3, 2015

The most important news for the Palo Alto housing market in the first quarter of 2015 is not about something new in the marketplace, such as international buyers two years ago.  Instead it is about what is missing, which is inventory to sell.  While the entire Silicon Valley suffers from a lack of inventory, the decline in the number of homes for sale is most acute in Palo Alto due to its having the greatest appreciation of any local city, more than doubling in value over the last six years.  Discussed in more detail in my update on the overall market for the first quarter, this decline in inventory is primarily caused by 3 factors, which, in order of declining impact, are 1) the increased capital gains rates; 2) the property tax subsidy provided to long-time home owners by Prop 13, disincentivizing them to sell; and 3) sellers’ optimism that housing will continue to appreciate, and if so, many feel it does not make sense to sell, pay taxes to earn 1% in a money market account and then have nowhere to move to. 

The lack of inventory is best illustrated empirically, with there being 83 single-family home sales in Palo Alto during the first quarter of 2012 and then a consistent reduction to 61 homes in 2013, 53 in 2014, and likely even fewer in 2015.  In just over three years inventory has dropped by approximately 35% and this downward trend in inventory shows no signs of abating.  This lack of supply is pushing prices up and, even after jumping 70% in the last 3 years, Palo Alto prices are already up over 11% in this first quarter.  As the first and second quarter generally have the most appreciation of the year, we project that this rate of appreciation will slow slightly but that Palo Alto will overall have another solid year of appreciation in the 16-20% range.  Even with this rapid ascent, we continue to remain very bullish long-term on Palo Alto appreciation due to a perpetual lack of inventory coupled with strong demand both domestically and internationally.

There are some additional important long-term trends to consider.  Over the last 10 years the neighborhoods that appreciated the most were generally south of Oregon Expressway such as Midtown, with all of its new construction, South Palo Alto, or lower-priced areas of North Palo Alto such as Green Gables and College Terrace.  The neighborhoods with the least relative appreciation were the high-end North Palo Alto neighborhoods of Professorville, Community Center, and Crescent Park.  We project this trend will continue as we will see greater appreciation of the “lower-end,” as price points below $3 million have many more buyers who can afford that range.  For future appreciation, we project Barron Park and Community Center will appreciate above average.  Barron Park has large lots out of the flood zone, an elementary school we project will improve, and has lagged Midtown in making it a relative value.  Community Center has not performed well in the past but seems attractively valued now due to the fact that the majority of the neighborhood is also not in the flood zone and many new homes with full basements are springing up throughout the neighborhood.

A few representative sales include 2330 Byron Street, a non-prime location in Old Palo Alto, near the busy intersection of Oregon Expressway and Middlefield, which sold for $5.7 million, or $460 per square foot for the lot, as this is likely a future tear-down.  This indicates that prime Old Palo Alto tear-downs in average locations should now command over $500 per square foot. 

2941 South Court, an eight-year old home in Midtown of decent quality sold for just over $5 million.  The high prices that newer homes command in Midtown and South Palo Alto are driving up the price of land, reflected in the sale of 471 Alger Drive, a tear-down, jumping $600,000 to $2.5 million, or over $400 per square foot for the land.  This is more than a 10% jump from previous land prices in Midtown and South Palo Alto, so the debate is whether this $2.5 million benchmark is the new normal or just the irrational exuberance of one buyer.

Another prime example of lesser North Palo Alto’s meteoric rise is the recent sale of 90 Jordan Place in Green Gables, which was listed for $3.2 million and sold for $4.05 million, or close to 2,000 per square foot for the home.  This was less surprising than the fact that of the five offers, four of them were all cash.  Our poor clients with “just” 50% down felt like they did not belong at the party.  While this high of a percentage of all cash offers is an anomaly, we are seeing more cash offers now than ever before mainly due to stock options for tech buyers and international buyers generally paying all cash.

Our own Palo Alto listings have been selling very well, including one that jumped from a $1.3 million list price to $2.1 million, which was a cottage of only 920 square feet on a sub-standard lot of less than 5,000 square feet, another illustration of the lower-priced segment of the market being the most competitive.

To illustrate my belief in Palo Alto, I have just moved into my new home, my fifth in Palo Alto, trading up since I personally want as much exposure to the Palo Alto market as possible. 

DeLeon Realty forecasts a strong second quarter but with somewhat of a lower rate of appreciation, in the 4-5% range for this quarter, as frustrated buyers who did not get into homes this first quarter of 2015 will make stronger offers.  The second quarter is when you tend to see the most inventory available, so this is a good time to look since you will have a nice selection of homes to consider.  Even so, demand will outpace supply now and in the foreseeable future.  Even with appreciation of past years and this first quarter, we remain bullish on Palo Alto as it attracts buyers for a myriad of reasons, which is why I love to call this city my hometown.  If you want to learn more about the dynamics of why inventory keeps dropping, please watch my first quarter update on the overall Silicon Valley market.