When the Market Pushes Back.

July 12, 2016

Last week I recapped the performance of the San Carlos real estate market for the first half of 2016. From a purely numerical standpoint, everything appeared to point to just another insanely strong year in the local real estate market. The price of a single family home in San Carlos rose by another 14% to an unthinkable average of $1,800,000. For San Carlos! Condos and townhouses jumped at an even higher rate when compared to the first half of 2015.

There was even some good news in the mix for home buyers. After a slower than normal start to the year, the number of new listings actually increased slightly over 2015, reversing the long downward trend of available homes for sale in San Carlos, and pushing the inventory to levels that we have not seen for a number of years.

But sometimes the raw numbers don't tell the whole story, particularly when it comes to reading underlying vibe of the market. This is much more of a subjective feel for what's actually going on, and you have to dig a little deeper to find the statistics that validate what your gut is already telling you.

One thing was very clear to those of us who work in this market, and the home buyers and sellers that were involved in the market in the first half of 2016: Despite the stellar numbers that were posted in the first half of 2016, there was a noticeable downward inflection in the market just as the second quarter began.

In other words, the market finally pushed back.

More Listings, Fewer Sales.

During the months of April and May of this year, there was a palpable sense that the market was beginning to lose some of its steam. There was a noticeable lack of urgency from buyers as they perused open houses. And while even the most desirable of homes still fetched breathtaking prices, listing agents noted that the number of offers they were receiving on these homes was a fraction of what they were seeing just a few months ago — and those were the ones who were lucky enough to get multiple offers. Quite a few homes only garnered one offer, while others didn't sell at all. What a difference a few months made.

As we look back on the first half of 2016, there were a few indicators that clearly point to slowing trend in the market, and one of those indicators was an unexpected spike in new listings, and the market's subsequent inability to digest it. When we break down the first half of 2016 by month, you can see exactly where and when this happened:

New Listings vs Homes Sold - 2016

New Listings vs Homes Sold – 2016

This chart is very interesting in a couple of respects. First, it clearly shows the surge of listings that hit in April and May. The number of listings in those two months alone represent an average of over one new listing every single day of each month, and accounted for a whopping 49% of all of the listings that hit the market in the entire first half of 2016.

For a market that had grown accustomed to running extremely lean, this was a huge meal to digest. Buyers certainly sensed this new influx of listings, and it served to temper their urgency. There was a feeling that if a particular house wasn't just the right fit, there would be another one hitting the market very soon. That urge to jump at the first opportunity was replaced by a more patient and methodical approach to home buying.

The second interesting observation from this chart is that there was a significant disparity between the number of new listings that hit the market, and and the number of homes that actually sold. Looking at the period from March through May, there were a total of 100 new single-family listings to debut. Assuming that the average escrow takes 30 days to close, then it would be logical to assume that roughly 100 homes would have registered as sold during the period April through June — or basically 30 days later.

But that clearly did not happen.  The number of homes that sold during period of May through June (skewed 30 days later) was only 75% of the number of homes that listed during March-May — suggesting for the first time in many quarters that not all of the homes that were being listed were actually selling. The market simply could not digest everything that was on its plate, which is a significant change to what we have grown accustomed to.

Price Reductions.

The second key indicator that the market was cooling down was in the number of price reductions that the market took in the second quarter. Each week in the San Carlos Real Estate Week in Review, I recap all of the sold data from the previous week. To make the data more useful, I calculate how far or above (green) or below (red) that the home sold compared to the list price.

Leading up to 2016, the data on the site was almost always green. No matter where the price was set, homes were selling above those points. But I began noticing a return of the red ink with surprising regularity in 2016, so I dug a little deeper to look at the number of price concessions, and the data was quite revealing:

Single Family Price Reductions in San Carlos

Single Family Price Reductions in San Carlos

The number of listings that took price reductions almost tripled in 2016 compared to just last year, and was at a level that we had not seen since the end of the Recession. This clearly shows that either sellers were ready and willing to take a haircut on their homes to get them sold, or the buyers were willing to wait them out.

Wh0's the Culprit?

The debate on why this is happening and how long it may last is a far ranging and complex one. Some will point to the fact that we are in an election year, which always has a “full moon” effect on the real estate market. Others will point to softening tech economy, in which startups are being weaned from their silver spoon and being forced to fight for their survival. It's also the first time that we are seeing significant tech layoffs in quite a few years, especially by tech titans such as Intel and Hewlett Packard.

But there is one more bit of data that could shed some light on why the market smacked its head on the roof in early 2016:

Average List Price - Single Family Home

Average List Price – Single Family Home

This is perhaps the most telling of all of the charts in this article. During the peak run-up years in the market after 2011, the average asking price of a home experienced relatively linear growth — usually in the 12-14% range year over year.

But for whatever reason, in 2016 the average asking price for a home in San Carlos jumped a whopping 23% to over $1,900,000. That is just a mind-blowing number, even by San Carlos standards.

So perhaps it's not the economic climate, nor the fact that it's an election year. Maybe it's just the inflated optimism and over-exuberance shared by sellers and their listing agents as to the value of their homes. But no matter how you look at it, the San Carlos real estate market pushed the ceiling pretty hard in the first half of 2016.

And for the first time in years, the market pushed back.

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