A Ridiculous Premise?
That’s probably your first reaction when you first read the title of this post. Or perhaps the author is finally losing his mind (also possible.) After all, if you read the San Carlos Real Estate Week in Review column each week on the site, you are accustomed to seeing the mind-numbing premiums that are being paid over the asking price for homes in San Carlos. So the thought that home prices might be leveling is absolutely absurd.
Or is it?
What defines when a market starts to level off? It’s when the rate of change of home pricing begins to decrease over time. Think of the analogy of an airplane taking off — it climbs at a steep rate for a period of time, but as it approaches its intended cruising altitude, the rate of change of the ascent begins to decrease. Or in other words, it starts to level off. And that is analogous to what appears to be happening in the San Carlos real estate market right now.
I have posted the chart below many times on the site. It is the average sales price for a single-family home in San Carlos going back to 2011 (2017 is year to date.)
At first glance, what you see is an impressive graph of steadily increasing home prices over the past 6 years. To even fathom that the average price of a home in San Carlos is now almost $1.9M makes any long-term resident of this area just shake their head in amazement. But if you focus solely on the home prices in the graph, you’re missing a key trend that’s right in front of you. And that’s the rate of growth.
Even though the home values have continually increased over time since 2011, the rate of this increase tells a different story.
|2011 -> 2012||+11.5%|
|2012 -> 2013||+17.6%|
|2013 -> 2014||+15.6%|
|2014 -> 2015||+14.0%|
|2015 -> 2016||+7.7%|
|2016 -> 2017||+4.9%|
This data is pretty impressive on a couple of fronts. First, to have any kind of investment that gives you a double-digit increase in value every year is simply remarkable. Since the end of the Great Recession all the way up to end of 2015, home prices in San Carlos did just that. For those of you who had the guts to buy a house in San Carlos in the 2009-2010 time frame, your home has very likely doubled in value. THAT is impressive. You took a risk, and you reaped a huge reward.
But what this data also clearly shows is that the rate of increase of home prices in San Carlos is definitely slowing — dramatically. The rate of increase has dropped by nearly half each year since 2015. And we could sense this last year, when the majority of 2016 seemed like it was just bumping along with no direction. Not every house was getting multiple offers, nor getting a healthy premium over the asking price. And despite what appears to be a revived market in 2017, the numbers clearly show that home prices are not reflecting the exuberance that we’re feeling.
What Does This Mean?
There is a lot to take away from this data. First of all, it’s important to understand that home prices are not dropping. Nor have they flattened out — at least not yet. But the data undeniably shows a leveling trend in home prices in San Carlos. This should not really be a surprise to anyone. When you look at the breathtaking growth of home prices all along the Peninsula over the past decade, common sense dictates that it could not grow at that rate forever. It’s what I refer to as the “physics behind the economics”, and it’s something that every startup company experiences. They grow at unbelievable rates when they are small, but that growth rate is impossible to maintain forever. In the case of home prices, the result would simply be that home prices would escalate past the point of affordability for the very buyers that are trying get in. Home buyers probably already feel as if this is happening.
For homeowners, this data should definitely make you sit up and take notice. Those of you who have been thinking of selling over the past few years but have been waiting for the market to hit “the top” will want to pay close attention to trends like these. It’s difficult to say whether this is just a temporary blip in the bigger picture of escalating home prices, or if it’s the sign that the market may be trying to find its cruising altitude. But make no mistake that there are real forces at play that are working to slow the growth rate — rising interest rates, and the ever widening affordability gap as home prices grow faster than wage increases.
If you’re a homeowner who is holding onto your San Carlos home solely because you believe you’ll get double-digit increases in the value every year, the data above is clearly telling you that this ship has already sailed.
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