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2012 in Review: Real Estate Cycles and Our Market Forecast

Here we go again
The median price in Palo Alto rose 24% over the same last quarter in 2011, but more impressive is the 20% yearly increase from 2011 to 2012. For those into cycles, 2012 looks awfully similar to 2004 when we began what ended up being a 35% run on the median price from 2004 to 2008. Doing the math that means a $2,000,000 house today will be $2,700,000 by 2016. Our forecast for this year is a 12% to 15% increase in Palo Alto housing prices with that appreciation being realized early in the spring and prices holding throughout the rest of the year.

North Palo Alto
The story for North Palo Alto in 2012 revolved around land, and the intense demand for it. Buyers bid up teardowns at such a fierce pace that the concept of exactly what was a teardown started to get challenging for local realtors. Some very livable homes were sacrificed at the altar of “having it my way” and the value distance between move-in homes and teardowns got uncomfortably close. That being said it was a bang-up year for property values across the board. The average sale price for the neighborhoods north of Oregon Expressway was up 39% against the same quarter in 2011. The super high end (over $6,000,000) was quiet after an active 2011, but that may have been due to a lack of such homes for sale as opposed to any market condition. Entry level homes moved solidly above $1,500,000.

What this means for our buyers
It’s pretty clear that the market is back and this is the first year since the 08 crash with public and media sentiment in the new year strongly positive towards local real estate. It’s time to get in and the sooner the better. Early buyers put themselves in a position to get a price that won’t be seen again, even after the next crash. If you dawdle you may be facing inventory being priced off the next price rise. And finally, interest rates are tremendous and there is no guarantee that is going to last.

What this means for our sellers
Based on past trends, we have two big price moves in this cycle. We think one is this year, and the next most likely in 2015, will be the last one. It’s great to catch the last one, because that is generally the bubble move, the manic price move that will result in excess and then a crash. The problem is the risk of timing it perfectly. Think of it this way: we are in the start of the third quarter of a football game, except it’s with a running clock and a soccer ref who keeps the game time, but nobody knows exactly what his watch says. If you are thinking of selling in the next five years, you can make a good case to do it within the next two years on the back of this next market move. If you don’t, you take the risk you miss the magic moment and you are stuck waiting an additional four years for the market to get back to where you were seven years earlier. Interest rate rises are also a wild card in the deck. Rising rates could suck some steam out of the market and take some profits off the table.

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