Real Estate

Real Estate Matters

Where have all the houses gone?

by Wendy McPherson

Why is it so darn hard to find a house to buy on the mid-peninsula? I remember long ago (or it seems like long ago) when an agent got a new client, we would pack them in our car and give them "the big tour." We would drive them around the area, pointing out all sorts of things and have a list of about eight or 10 houses to show them. It was sort of a first look at the buffet table. The buffet table is now pretty much a single serving.

Sometimes a house pops up on the MLS and we quickly call our client. Or we hear a colleague on the phone talking about a new listing they might be getting and quickly call our client to tell them to drive by this house immediately.

"Oh, your husband is unavailable as he is doing heart surgery? Well, you need to tell him hurry it along. You need to drive by this place ASAP."

In 2012, 394 houses were sold in Menlo Park and 480 were sold in Palo Alto. In 2013, it was 341 in Menlo Park and 406 in Palo Alto. If you look back as far as 2005, you will see 416 sales in Menlo Park and 501 sales in Palo Alto (All numbers are from the MLS). The trend is clear a small but steady erosion is occurring in number of sold homes. A shortage of buyers is not the problem; it is simply a shortage of homes.

Even though we do live on a peninsula with little land left to develop, there has been a small but consistent increase in new housing units each year. Right now, Palo Alto and Menlo Park have about 50 new homes/condominiums becoming available over the next 12 months. With additional units being added each year, why are the sold home numbers still decreasing?

Where have all the houses gone?

There are two main reasons for our decreasing house availability/sales. The first is that many of our local homeowners are aging in place. I live on a cul-de-sac in Menlo Park with 11 houses on it. Three of my neighbors are over 90. Only three of the 11 are under 65, the rest are over 65 and not going anywhere. The fact is, that in our area, the people are generally healthier, wealthier and are able to take advantage of the substantial local resources being offered in order to stay in their homes. Meals on Wheels, Avenidas, Little House and lots of other hyper local organizations are here to assist the elderly and let them be independent for as long as they want. The old standard of moving to "be near the kids" is not what is happening here now.

The second reason is financial. In 1997, the Taxpayer Relief Act was passed, which included a substantial amount of "relief" for a homeowner who had $250,000 in capital gain on his or her home ($500,000 for a married couple). Before this 1997 tax law, if you bought a new house of like or greater value you paid no capital-gain tax when you sold your existing house (until death). With this new 1997 law, you now pay the tax upon sale, albeit with the $250k or $500k exclusion from the overall gain. For local homeowners this 250/500 windfall was wonderful BUT since appreciation around here has been so rampant, many homeowners are faced with writing huge checks to the government even after the exclusion amounts. This has hampered them from buying again.

If you have to write a check to the government for $400,000 you will need to replace that $400,000 out of pocket and then some to buy your next, bigger house. Prior to 1997, you could use that $400,000 to help you buy your next house. Many folks feel "trapped" in their homes and simply will not or cannot pay these taxes and then also buy a bigger house or many times, even a smaller house.


There is another less widespread reason for our lack of house availability but still impactful. Neighbor buying neighbor's homes. The neighbor-buying-neighbor effect essentially takes houses off the public marketplace, aka Zuckerberging. Mark is not alone in this trend. A number of well-heeled local homeowners have bought their neighbors' property and usually pay more than market value to ensure it does not hit the open market. They have the ability to buy the houses, they know and like the neighborhood and they want the property for privacy, for their children or even as guest houses.

None of these reasons is going away. The housing market in our area continues to be a most unique animal.

Wendy McPherson manages about 145 agents for Coldwell Banker in two Menlo Park offices, plus Woodside and Portola Valley. She can be reached at


Like this comment
Posted by older homeowner
a resident of Old Palo Alto
on Feb 19, 2014 at 10:48 am

This change in the capital gains tax is stupid and self-defeating as a revenue generator. Because of Prop 13, we older homeowners are paying a fraction in property taxes as our newer neighbors. Our home is now worth over 5X what we paid for it a quarter century ago. If we sold it, the new owners would be paying 5X the property tax of what we pay - FOREVER! Having raised our kids, we would like a smaller home, but the capital gains keeps us from moving. Also, if we moved, our new, smaller house would be more energy efficient.

Like this comment
Posted by Homeowner
a resident of Barron Park
on Feb 19, 2014 at 2:53 pm

Part of the problem is speculative buyers from overseas. What middle class family (especially if, God forbid, they need a mortgage) can compete with these all-cash buyers for a place to live?

Like this comment
Posted by Robert
a resident of another community
on Feb 19, 2014 at 3:56 pm


Middle class? Palo Alto shut the door to them a while ago, though at the very least there is hope that affordability might be discussed, now that the affluent are feeling the effects of being priced out.

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Posted by palo alto resident
a resident of Embarcadero Oaks/Leland
on Feb 19, 2014 at 4:25 pm

There is also the issue of property taxes, many of my friends would love to sell and move for a variety of reasons, but their current property taxes are based on a 10-20 year old property value and it doesn't make financial sense for them to move.

Like this comment
Posted by Homeowner
a resident of Barron Park
on Feb 19, 2014 at 4:48 pm

I think Wendy makes a good point about the Taxpayer's Relief Act. Paying a $400K penalty for after selling does hold sales back.

Like this comment
Posted by PA007
a resident of Community Center
on Feb 19, 2014 at 5:20 pm

Wendy, People all have hope. but these days they have more.. Houses will be back in the market when hope is fading. It could take years.

Sorry, but further commenting on this topic has been closed.

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