As market dynamics change and economic tailwinds turn to headwinds, so too are real estate consumer preferences changing. During periods of market volatility and transition, good deals and opportunities abound as the best time to purchase a home is when there is less competition. Locking in an excellent value also perpetuates a low property tax for the entirety of your time owning the home, so the good deal carries forward.

Buyers have gotten pickier and their tastes and expectations have changed as market conditions and overall economic conditions have deteriorated. These changing tastes create market opportunities where savvy buyers will seek to get a good value on what is presently out of favor.  

While the market has cooled and demand dropped, it has not done so uniformly. With the balance of power now with buyers, they have become less forgiving of any work that a home requires. Consequently, as the market has continued to weaken over the second half of the year, buyers have become unforgiving of homes that require remodeling.  

New Homes vs. Tear-Downs

Even in this market, new homes or turnkey remodeled homes are often generating multiple offers. A Los Altos property located at 845 Mora was tastefully updated and a buyer could move in without having to do a thing. This turnkey home received multiple, all-cash offers and it recently jumped more than $800,000 above list price and went from $6.99M to over $7.82M.

Conversely, homes that need remodeling are viewed as too much work and buyers are only proceeding when the value is clearly reflected in the price. The greatest discount and drop in past sale prices from earlier this year to now is for tear-down lots. Covid had a negative impact upon construction, increasing costs of both materials and labor while also greatly increasing time for completion as many cities’ planning departments inefficiently worked remotely. A tangible illustration of the discount for tear-downs is that earlier this year, a tear-down in Atherton’s Lindenwood neighborhood sold for $7.15M, whereas a larger lot just closed for $6.3M, a drop of nearly 12%.

Savvy buyers should use this down market to purchase a lot upon which to build their dream home. Tear-downs are ideal to purchase in a weaker market as housing recessions generally last only 1-2 years. Once the home is complete, the market should have recovered. Building costs should also be lower when building during a recession.

Privacy and Space vs. Density and Walkability

Before the pandemic, the strongest markets were neighborhoods that allowed for walkability to a downtown or park. The former premium buyers would pay for walkability was particularly high for the many restaurants and shops in vibrant downtowns such as Palo Alto or Mountain View. However, the pandemic redefined much of society and our view towards housing.

During the pandemic, buyers no longer sought centrality and walkability, but instead started seeking a large space that provides privacy and a compound feel so that children could be watched and protected. Public playgrounds went out of favor over expansive backyards.  

These revised valuations fundamentally flipped Silicon Valley’s demand, and downtown neighborhoods have suffered the greatest declines whereas formerly slower moving markets like the hillside communities of Los Altos Hills, Portola Valley, and Woodside are more sought after than ever before.

As the pandemic ends and we return to our former values, I project that the premium formerly ascribed to walkability will return and now is a good time to get these types of properties at a discount. Sophisticated buyers are using this short-term dip to make some very good long-term investments.
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