Unexpected Strength in the 2024 Spring Real Estate Market

The real estate market faced challenges in 2023 due to a dramatic and unprecedented rise in mortgage rates. Buyers, accustomed to rates in the low 3 percent range, were suddenly confronted with rates around 7 percent. This dramatic increase left many buyers in shock, causing them to pull back on their home searches.

At the same time, many sellers feared that listing their homes in such a sluggish market would result in low offers, if any. As a result, many discretionary sellers chose not to put their homes on the market. Fortunately, this decision led to exceptionally low inventory, which had a stabilizing effect and helped maintain relatively high sales prices irrespective of the higher interest rates.

Although 2023 was a tough year in local real estate, 2024 is off to a much better start. Buyers have become somewhat accustomed to the higher interest rates, which are more aligned with historical norms, and the Silicon Valley economy remains strong. While many buyers have redefined their search criteria due to practical financial realities, most realize that they strongly prefer home ownership over renting. It is also important to note that we have received multiple strong offers on many of our listings despite a dramatic drop in the commissions that sellers must pay to sell their home.

Despite some overall weakness in Silicon Valley, certain towns fared better than others. For example, the high prices often associated with Palo Alto led many buyers to expand their search to areas offering more value for their money. Consequently, both Los Altos and Menlo Park remained more resilient than Palo Alto. Similarly, homes in Los Altos Hills and Portola Valley weathered the storm relatively well.

The Enduring Impact of COVID

Before the global pandemic, buyers favored homes with good “walkability.” Properties near dining areas, or establishments like Starbucks, were very popular, even if the home or lot was slightly smaller than ideal. That has all changed since COVID.

Now, buyers are placing a greater premium on homes with more square footage, both indoors and outdoors, and recreational amenities are highly sought after. Properties with pools, putting greens, play structures, home theaters, and wine sellers are in high demand. Many buyers who have been living in, or looking at, prime areas of Palo Alto such as Old Palo Alto, Crescent Park, and Professorville are now considering larger homes on acre-plus lots in Portola Valley, Woodside, Atherton, and Los Altos Hills. We have seen particular strength in Palo Alto Hills and the parts of Los Altos Hills that are mapped to Palo Alto schools.

Looking Ahead: What the Future Holds

Buyers can expect continued strength in estate-type properties, while smaller, more centrally located properties will rebound due to softening prices and increased relative value. However, it is important to stay aware of available inventory. If there is a spike in listings as the market strengthens compared to last year, supply may outpace demand, which buyers will find to be a welcome change due to the added selection and the resultant reduction in sales prices.

Adjustable-rate mortgages reaching the end of their lock-in period could also lead to a significant increase in the supply of homes available for sale. Many homeowners bought or refinanced their homes when rates were at their lowest in 2020. For those with 5-year or 7-year adjustable-rate mortgages (“ARMs”), that expiration date is approaching. By way of example, a couple who could comfortably afford the payments on their $3 million mortgage at 1 7/8 percent (1.875%), a rate available in 2020, may feel uneasy as that rate adjusts upwards by 2 percent (2%) per year until it reaches 6 to 7 percent (6% to 7%).

Conversely, the high cumulative built-in capital gains on California real estate, which has been a fantastic investment over the years, coupled with the inertia caused by low interest on 30-year fixed-rate mortgages, could dissuade many homeowners from selling.

It remains to be seen how the strong motivations to sell will weigh against equally compelling reasons not to sell. However, it is undeniable that the rapid appreciation of Silicon Valley real estate has been bolstered by artificially low rates. If and when inventory increases, it is inevitable that we will see downward pressure on prices.

by Michael Repka