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San Carlos Real Estate April 2, 2009

How will you know when the San Carlos real estate market hits the bottom?

by Chuck Gillooley


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:

  1. 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.)
  2. 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.

Stay Tuned…

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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Comments 7
  • Chuck
    good question:
    what is the bottom? when is the bottom? how do you measure the bottom?
    if i understand your post correctly, it appears you are saying the that the ratio of sales price to list price is most informative.
    i agree average and median prices can be deceiving.
    in the current market, the lower end is more active than the higher end.
    therefore more lower prices homes are selling than higher priced homes.
    since the more entry level homes are selling than “move-up” homes, the average and median prices are being pulled down due to this fact.
    i believe property values have dropped but not to the degree that average prices have dropped.
    i am not entirely convinced that looking at sales price to list price ratios are the best indicator of where the market or bottom is at.
    the list price is a function of how motivated the seller is, how realistic the seller is, how skilled the agent is in educating his client about current market value and as a result the list price can vary widely relative to true market value – potentially distorting the ratio – i.e. 5 or 6 very overpriced listings can skew the data.
    perhaps price per sf is a more reliable indicator of the bottom or comparision of the sale prices of the same property within a short period of time.

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    • Arn,

      Thanks for your comment.

      I may have inadvertently made this more complicated than intended, so I’ll clarify: In my book, the bottom of market is defined when the difference between the original list price and the sales price approaches zero — in other words, when prices stop falling. As you know, in a healthy San Carlos market that figure runs very close to zero, or even positive. But right now, the average difference is (-8%), which means the market is still sliding downward. You mention “ratio” several times in your comment — there are no ratios involved here, just the absolute difference between the two figures. I remain firmly convinced that this is the simplest indicator as to calling the bottom. Look at it another way:

      The difference between ’09 vs ’08 prices = “Market Correction”
      The difference between List Price and Sales Price = “Market Condition.” If that number is negative, you’re in a falling market. If it’s positive, you’re in a rising market. The inflection point when that number turns from negative to positive means you have found the bottom.

      There may be some validity in over priced listings skewing the market, but I contend that changes the 8% by no more than a percentage point.


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  • I think the more complex original statement in the table of your article is the right way to look at it where you also consider the trend in asking prices. Over the last 2 years that has been volatile, but trending downward. From data on this blog and the rate of decline of the asking price is about 2.5% yoy.

    You could have had a situation where the yoy asking price is +8% and the sale/list is -8%. That would indicate an interestingly large difference of opinion between buyers and sellers, but a flat market. What we have now is decline at the asking price level and further decline at the actual sale price.

    The broad acceptance among sellers of a lower price, and the lack of competitive bidding suggests there is an expectation of future dropping home values. That is sellers willing to be done with it, and buyers knowing they don’t have to make full-price offers. That will require a change in the market to change direction. Monitoring the list to sale ratio is invaluable to determining when that overall sentiment has shifted because so many different factors go into individual decisions to sell/buy and what to accept/offer.

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    • Alan,

      Well put. Your final paragraph eloquently describes the “inflection point” that I keep referring to. Until that expectation of an immediate decrease in price disappears and competitive bidding comes back, there’s no way we can expect to see the bottom of the market.

      Thanks for your comments.


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  • One of the great things about blogging is that everybody has an opinion. I believe the real esate is very complex so that no one perspective tells the whole story.

    I think Alan hit the nail on the head when he said to look at the trend in list prices (or in my opinion even better to look at sales prices) in addition to the relation between sale and list prices to get a sense of where the market is headed.

    If you had one quarter with this data:
    Average list price $1,000,000
    Average sale price $950,000
    A -5% differential between list and sale prices or in my terminology a 95% sales price to list price ratio ($950,000/$1,000,000 = 0.95 = 95%)

    and then the next quarter with this data:
    Average list price $925,000
    Average sales price $925,000
    a zero differential between list and sale prices or in my terminology a 100% sales price to list price ratio ($925,000/$925,000 = 1.00 = 100%)

    Would one say the market is stronger in the second quarter because the price differential was not negative or in my terminology the sales to list price ratio was higher?

    I think not. I think most would say the market continued to fall in the second quarter as evidenced by lower average sales prices.

    As an old chemistry grad student and instructor, I can say anytime percentages are used one is in effect describing a ratio. Whether one says prices are up 3% or days on market down 7% or inventory has increased 15%, one in effected has calculated a ratio.

    I agree sales to list price ratio should be one of the factors looked at to determine market direction but so should a lot of other data points: For example, # of sales, pending to active % or ratio, average sales price, average sales price per sf, days on market, inventory #s, etc.

    I do not believe we are at bottom yet.
    True bottom may be another year away.

    I do believe there is a lot of pent up demand being created right now. First-time buyers who would like to buy and take advantage of todays’ rates but believe prices will continue to drop, move-up buyers who would like to move up into a bigger nicer house or better area or school district but maybe do not have enough equity in their current house to buy their “dream” house or who are too concerned about the economy or their job prospects to take on the additional mortgage debt a “move-up” buy requires.

    So I believe when the economy turns around, the real estate market will respond robustly as people make a move they have put off during these rough economic times. I believe when it does happen, it will happen quickly. My advice would be to get in front of the curve not behind it.

    Looks like a great weekend coming up in the City of Good Living. 🙂

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  • I’d like to hear how you think about these issues since I also try to evaluate the home purchase/rent value equation with regard to some other issues.

    I’m looking to buy a home with schools (kids 4 and 1.5) and job portability (SF to peninsula and some Fremont businesses in the pharma/biotech industry) so that I can hopefully live in one place until the kids are out of school.

    With that in mind I would like to conserve capital value, but am a little more concerned about total cost of financing over the long haul.

    Right now, the declining price of homes is despite near all-time lows in the cost of financing. Even the most Pollyannaish of economist sees a treasury bubble that is now being pumped up further by Fed purchases of longer term treasuries. If the burst is rapid sometime in the next year or so and ends up with rates jumping 2-3% then 30yr mortgage rates would likely follow (if not equate). The cost of financing 80% l-t-v of an 800k home at 5% would be the same as a 650k home at 7.5%. From this alone I see almost no possibility of a rapid price rebound since the treasury deflation will most likely coincide with stock market recovery followed by economic stabilization which will be necessary to pressure markets upward sustainably. My concern is that it leads to a long-term decline in home values until the dollar has some fundamental recovery (too far in the future to pinpoint) or inflation kicks in enough to pump up the cost of replacement.

    What stands against this idea of prolonged decline due to rising cost of purchase is that we are nearing a home loan (assume 20% down and 30 yr fixed loan) versus equivalent renting cost. Unless rents start dropping (which could happen with prolonged high unemployment rate and/or down-trend in wages) I would imagine price support coming soon. Any temporary declines will recover with the economy in the peninsula due to regional demand and growing California population.

    I think, for my situation, buying while interest rates are low is the best total cost solution even if the extreme case of housing prices continuing to drop for 5 years.

    One thing I’m sure of is that we’re heading for ‘over-correction’ if you look at just historical channeled ranges of inflation adjusted pricing as the definition of ‘corrected’. I would like to see a chart of historical average cost of financing (taxes and insurance included) to see where we are and where we could be heading with certain interest rates.

    Gotta go look at houses

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    • Hi Alan,

      Thanks for your comment, and sorry for the delay in getting back to you.

      I agree with most of your assessments — Interest rates are now at historical lows, and there’s widespread belief that we are buying ourselves right back into an inflationary pattern. When or if this increase happens is anyone’s guess…but it’s a strongly held belief it will happen. As I have said before, if you look at interest rates, incentives, and the fact that home prices are at the lowest point in decades, buyers have a unique window of opportunity. Does that mean it’s absolutely at the bottom? No, I get a strong feeling we’re getting close, especially if rates start to spike.

      The only area I disagree is with regard to rents. I don’t see rents declining (at least in San Carlos) even if we experience prolonged unemployment. In fact, I see the opposite happening. I believe most people who find they must forgo home ownership due to divorce or job loss will still try to rent here first before throwing in the towel and moving out of the area. Because there are so few homes to rent around here, the increase in demand will keep prices stable, and possibly increase them.

      Thanks again for your comment,


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