How’s the Market? – Now What?

I’m sure you have also been watching the recent stock market gyrations with increased interest compared to the last few years of record gains. As the volatility increases and the headlines shout more loudly, I’m getting more questions from concerned friends, clients and people I meet asking if this is “the end”, and how fast and significant will a market correction be?

Our current market run (2010-today) has been based on increased stock values, be they in the market, IPO gains, pre-IPO, acquisitions, etc. Basically, a lot of people locally effectively won the lottery and found a few (or more than a few) million dollars in their bank accounts. Thus, cash transactions are making up a much larger share of home sales, both to local residents and foreign investors. The good thing about cash buyers is they don’t worry about making mortgage payments in a downturn, making it even less likely that we will see a flood of homes on the market pushing prices down.

It’s the Inventory, Stupid

The best explanation I have seen supporting our sky high prices is a blog post from Michael Simonsen over at Altos Research. Michael looked at the number of listings vs. population in several markets across the US. The summary is that it isn’t so much high demand driving competition and prices here, but scarcity of homes for sale. For instance, there are 60 homes (houses and condos) for sale on the MLS in Palo Alto this week, with another 3-5 not on the MLS, across a price range of $998,500 – $14,288,000). Interestingly, there are 16 rentals. 

With a population of 63,000 (2010 Census), that’s one house for sale for every 1000 residents, or about 1% turnover. Slim pickings indeed.

So, even though we are seeing 1-3 offers more often on homes now, vs. 5-10 in the Spring, there is still not enough inventory to keep up with demand. That is why most homes are selling in about 10 days.

Inventory in Palo Alto, Red = 2015, Green = 2013

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DOM:

Going back to September of 2014, you can see the dramatic change in how quickly houses are selling. Imagine, we called 2014 a sellers’ market! The holiday slowdown didn’t happen in 2014-2015, and increasingly desperate buyers have stayed on it all through the spring and summer.

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Now What?

For a while now I have been saying watch the NASDAQ as a leading indicator for local housing. Our biggest local employers are major movers of the stock market, and local confidence in the housing market is consistently tied to the fortunes of Apple, Google, Facebook, LinkedIn, etc.

So help a Realtor out ….. buy an iPhone 6S.

NASDAQ v PA median home price

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Median Home Price for Palo Alto. Red = 2015, Green = 2013

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Summary:

Limited inventory is what is really driving our local housing market, and a couple of factors behind that limited inventory aren’t going to change anytime soon:

  • As Mark Twain said: Buy land, they ain’t making any more of it. We have built housing about everywhere that is buildable, and adding fill to the Bay (like Foster City) isn’t a popular option.
  • The run up in prices has brought huge capital gains exposures to people who have been in their homes for over 10 years. While it’s a great problem to have, a lot of elderly potential sellers are going to wait for one to pass and avoid paying capital gains due to a stepped up basis on the house. Many are also planning to leave the house to a child.
  • Proposition 13 keeps property taxes artificially low for long time homeowners, creating a further incentive to stay in a house vs. downsizing or relocating.
  • Where are you going to go? Aside from traffic, Palo Alto and the surrounding communities are pretty nice places to live. I know, I’m originally from Chicago!

If you like the included charts, you can see them consistently updated on my website at: http://lifeinwoodside.com/market-reports/

If you are a data junkie, you can subscribe to receive reports for your city or zip code. You set how often you get them and they come as a PDF. No Spam, no bugging.

If you have a question about the market, or about market data, please send it, and I’ll use it as fodder for a blog post.

Thanks for reading….

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