Los Altos Real Estate Blog

With the impending Facebook IPO, there has been a lot of gossip about what impact it will have on local real estate.  I've written about this before but as time moves on, the markets continue to evolve.  Two of the hottest nearby markets are Palo Alto and Los Altos.  Will people with wealth from the Facebook IPO drive sales and prices higher?

Yes and no.  The Facebook Effect is already starting to be seen in these markets (as well as Menlo Park and others).  The anticipation of higher prices is driving prices up as other buyers snap up homes which prices are within their reach.  This is driving sales (number of homes sold) a bit higher as well.

What is The Facebook Effect?

• Sellers on the market expect multiple offers and higher prices
• Some sellers are holding off selling hoping for a future windfall
• Prices in Palo Alto and Los Altos are up sharply so far this year, before the Facebook IPO happens
• Buyers are moving quickly on nearly anything on the market in many local towns
• Some buyers are "settling" now instead of waiting in the belief prices will rise
• General market euphoria feels like the boom markets of 2000 and 2005

Is The Facebook Effect Good For Real Estate?

Absolutely but it has changed the dynamics of how homes are sold.  One effect I've seen is a rise in off-market sales.  Sellers are willing to sell off the MLS to any buyer who will pay a price close to the open market.  This gives buyers who don't have Facebook money a chance to buy without having to compete with cash-rich buyers.

The other factor is that average and median sales prices are rising at a steady pace with Palo Alto leading the way.  As prices return to their dot-com peaks, the euphoria is likely to abate a little as buyers settle down.  Sellers will still be in control for a long time and hopefully this market sustains itself.

Lastly, new construction is plentiful which is great for local builders who were hit hard by the economic downturn.  There are a lot of speculative builders coming back into the market which should continue well into 2013.

Are you considering or already own a property in Palo Alto on which you'd like to build a new home?  Perhaps you're considering buying a new home and want to know if you're getting a good deal.  You need to know the cost of new construction before going down either path.

Home buyers ask about the cost of new construction a lot but it's not an easy question to answer.  A ballpark cost to build a new home is $200-300 per square foot.  This is a wide range because determining the actual cost depends on a few major factors.

Factor 1: Basement - If you add a basement to your plans it'll add 15-20% to the base cost of the home.  It'll cost a six-figure number just for the engineering and cement as well as additional reinforcement of the first floor. If you have a smaller lot, you may want to consider this but if you have a larger lot, try to stay "above grade" to keep costs lower.  If you're going "below grade" it's also important to know what you'll do with the space.  A home theater will add more cost than a fun room.  Just remember that when reselling, basement space has less value than what is at ground level or above.

Factor 2: Steel - The grand foyer with 18ft ceilings will require steel.  How much steel is used throughout the house will significantly impact the cost of building.  Count on $50/sf more for a simple center frame up to $150/sf for whole-house framing.  Steel adds cost but also stability which means the house will last longer.  Note:  As an option, you can use LVL (Laminated Veneer Lumber) which are 67-75% lower cost than using steel beams.

Factor 3: Finish work - Most of the cost in a house is in the finishwork and materials.  The more custom materials and "perfect" finishes you require, the higher the cost.  The cost ranges vary widely so you'll need to be selective.  Just remember that a craftsman can easily run up to $100/hr for top quality work.

Generally, you should use $250/sf as a baseline and adjust the budget from there.  If you're over $350/sf then you should make sure the expense suits the neighborhood.  It is possble to push construction costs higher when using significant custom products and antique/unique extras (e.g. imported antique fireplaces, etc.).  The key consideration is not to overbuild for the neighborhood.

Palo Alto is one of the most popular destination markets in the country.  It is recognized around the world because of Stanford University as well as excellent schools, a thriving downtown, lots of trees (it's a "Tree City"), and nice neighborhoods.  The price of real estate, particularly on a price per square foot basis, is very expensive for the area.  It has been trending upward as the local markets improve and high-tech employers hire more and more staff. 

Last year, the average selling price in Palo Alto rose over 10%.  The monthly trends were twofold; multiple offers exceeding asking prices and general price increases.  To compound this aggressive market, inventory continued to decline as the year wore on and by the end of 2011, there was less than a months supply of homes to meet demand.  Going into 2012, the same situation still exists.

If you look at the chart below, you'll notice that prices have risen so much in the last 2 year that they're getting close to the average selling prices from the peak (in 2008).  What's more interesting is that the ratio of sales price to list price is also a near-perfect match to the peak markets of the past.  It's that confluence of circumstances that make buying a home such a challenge in Palo Alto.  As we head into the spring 2012 market, it's very likely that inventory will continue to be insufficient and overbidding will be necessary.

The strongest market segment in Palo Alto is for homes priced under $1.5M.  That's considered the entry-level and I've seen homes with over 30 offers.  That's right...over 30 offers on a single home.  My advice for buyers looking in Palo Alto is to know exactly what you want, how much you can afford, and if possible, find something "off market" to avoid competing.

Palo Alto, California is one of the hottest real estate markets in the United States.  It consistently ranks high in terms of demand and recognition, partially because of Stanford University but also because of its reputation for a high standard of living and quality schools.  In 2011, the real estate market here exploded with the average selling price increasing 10.8% for single-family homes.  There were 454 homes sold, compared to 449 in 2010 - a slight increase.

The real story with Palo Alto is the "entry-level" home.  For a while, the basic rule for homes priced around $1.2 million was to add 10% and then bid higher to have a chance to get it.  Multiple offers were no only common in the Spring but in some cases the number of offers was extraordinary.  In one case, a home received 32 offers!  Getting 8-10 offers on a home was common.  The average home sold for 103.6% of its asking price and many of these buyers were "all cash".  A buyer with 20% down had very little chance of getting anything.

A major factor in this growth in prices was the lack of inventory, a common theme throughout Silicon Valley.  However, in Palo Alto's case, they only had 545 new listings in 2011, down from 591 in 2010.  That drop, combined with strong sales and a huge buyer pool of relocating technology employees meant that prices would continue to rise all year.

As of now, the market is almost back to 2008 pricing levels and well on its way to returning to the peak of 2007 - the all-time high for the town.  That means that as long as pricing continues into 2012 as it did in 2011, we'll see prices as high as they've ever been.

Palo Alto is one of those rare markets that never seems to fade too far from popularity.  When the local real estate market took a hit in 2006, Palo Alto was still popular.  In fact, prices continued to rise in 2007 with the average selling price peaking at $1.871 million.  The percentage of listing price received was nearly 104% and it looked like Palo Alto would come through the economic crisis unscathed. 

Unfortunately, even though it was one of the last markets to drop in value, it eventually saw the same pain most other markets saw; increasing inventory, decreasing prices, and little interest in development or remodeling.  By 2009, the average selling price had dropped back down to about $1.5 million and the median was down as well.  At the height of the market, speculators and builders would buy up nearly anything priced around $1 million and competition for homes priced up to $1.5 million was crazy.  Most of the activity was driven by well-to-do homebuyers with plenty of cash and desire to send their kids to legendary Palo Alto schools.  Those days were long gone at the end of 2009.

Most people felt that 2010 would be just as bad as previous years.  Analysts predicted that a recovery wouldn't start until 2011 or 2012.  The seeds of recovery were sewn in 2010 as the market started to recover a little but it was still basically flat.  The year started out well but the second half looked as bad as ever.  Most local agents, sellers, and buyers were wondering when a recovery would ever happen.

Blast into 2011!  We have a massive, earth-shattering, full-blown, world-class recovery in the Palo Alto real estate market!  In the first 6 months of 2011, the average selling price of a home in Palo Alto is $1.8 million - almost back to the peak of 2007.  I personally participated in offers on properties with 10-30 offers some of which went 30% over the asking price.  The economy came back big time and buyers were going crazy buying anything and everything they could get their hands on.  I saw one house come on the market and sell before the agents had a chance to preview it.  The mix of all-cash offers and overbids scared many buyers away and they'll be coming back into the market later in the year when things normally cool off a bit.

Why did the market come back so strong?  In a work, Facebook!  And LinkedIn, and others in the "dot com" space.  These companies have been growing and the influx of new employees along with the incomes to pay a premium are driving sales.  When these companies go public (if not already) and begin to mint fresh millionaries we'll see even more sales in Palo Alto.  In the meantime, we can enjoy one of the strongest seller's markets in the United States.