It’s The $64,000 Question.
This isn’t the “bottom” I was referring to, but some may argue that the real estate market indeed smells like a diaper right now, especially if your home has been on the market for a long time….but when the bottom of the real estate market hits in San Carlos, it won’t be as obvious as when this little guy’s market hits the bottom, so to speak (anyone who has raised little ones knows exactly what I’m talking about!) So how will we know we’ve hit the bottom? I’ll give you a clue: You WON’T find it by looking at last year’s data.
Don’t Compare the Wrong Numbers…
Earlier this week, I posted the Q1 Report Card for the San Carlos real estate market. To the surprise of nobody, Q1 ’09 was weaker in all aspects compared to the same period of 2008. Most notable was the precipitous 19% drop in the average sales price between the two periods. There’s no way to sugarcoat this number — it’s a big drop. But what does that number really mean? Did the average value of all homes drop by 19% Or, does it simply mean that a larger number of inexpensive homes sold in ’09 compared to ’08? (I have made a strong case in recent weeks on this site that it might be the latter — look at the Active:Pending ratios in the weekly updates.)
The correct answer is that it doesn’t matter — because when it comes to identifying the bottom, we’re not looking at the right numbers.
Let’s add a little twist to the table I posted this week — in this, you’ll find your answer:
|Key Metric||Q1 2009||Q1 2008||2008 Total|
|Sales Price (Average)||$985,752||$1,219,884||$1,061,636 (-6.8% from ’07)|
|Original List Price (Avg.)||$1,074,737||$1,237,086||$1,101,892|
|Difference (Sales-List)||-88,985 (-8%)||-17,202 (-1%)||-40,256 (-4%)|
The Bottom Line is the Bottom Line…
Does the data in the table look familiar? It should — it’s just a summary of the data I post every week in the “San Carlos Real Estate Week in Review” series, where I compare the final sales price versus the original list price of every home that sells in San Carlos. This table tells us two interesting things:
- San Carlos skated in 2008. While the rest of the nation’s real estate market was hemorrhaging in ’08, San Carlos came through relatively unscathed, dropping only ~7% from 2007 (and 2007 was up about 7% from ’06.)
- It’s the gap that matters, not the price. The stat that’s even more important than the 19% drop in sales price is what you’ll find in the bottom row — the difference between list price and sales price. While that delta ranged from 1-4% below in ’08, that number jumped to 8% in Q1’09.
What does this mean? Well, when you say that “the difference between list price and sales price is 8%,” what you’re really saying is that every house that closed escrow in Q1 took an 8% concession on average to get into contract. And that, my friends, is the definition of a market that is still desperately looking for its bottom.
Back to the Original Question…
Note that I was careful not to ask “When will the market reach the bottom?” That’s not a valid question, because the bottom of the market is NOT an “event” — it’s a “process.” I can tell you right now that the bottom will not happen on a Tuesday afternoon at 3:06.
The real question was “How will we know when we’re there?” And the answer is….When RED turns to GREEN in the bottom row — or in other words, when the gap closes between list price and sales price. Even this won’t happen all at once. Different price segments will find their bottom and different times, and they’ll all probably “bounce” a bit before we see any sustained growth.
One thing that you’ll hear is that “you won’t know we’ve hit the bottom until it has already passed.” In some respects this is true… But if you stay tuned to the weekly updates on this site, and if you keep close tabs on the red and green ink, you’ll be able to see the bottom…. as it happens.
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