Is the San Carlos Real Estate Market Slowing Down?

Slowing — But Not Dropping (yet).

The answer to the question posed in the title is yes, the real estate market in San Carlos is indeed slowing down.  But you could replace “San Carlos” with virtually any other city along the Peninsula, since they are also definitely feeling a demonstrative shift in their respective real estate markets.  It's a phenomenon that is being felt all across the country, and has been well documented in virtually every newspaper.

And lest there be any panic in what you just read, let's be clear about what exactly is, and what is not happening.  Our local real estate market is not dropping — not yet, anyway.  Home values are holding steady, and homes are still selling for a premium in many cases.  But as you will see from the stats below, the time that it is taking for homes to sell, the amount of price appreciation, and the number of sales are all facing challenges in the current market. Think of it as an airplane whose rapid rate of ascent at takeoff eventually starts to level off.  It's not losing altitude, but it's certainly not climbing at the same rate.

We'll examine some of the key factors as to why the temperature of the market has cooled over the past few months.

Market Indigestion.

While many agents felt the winds in the market start to change as early as May of this year, the numbers in September were very evident of the market shift:

In September, 53 new single family homes hit the market — easily the highest month so far this year, and matched the high water level from last year (which ironically was also in September).  So what happens when you take a market that is already suffering from sluggish buyer demand, and you triple the inventory in two weeks?  You get a bad case of indigestion.  It's like one too many trips to the all-you-can-eat buffet… you pay for it later.

The surge in listings only tells half of the story.  In an inventory-deprived market like we've been experiencing for the past decade, you would expect that tripling the inventory would equate to throwing a gallon of gas on a campfire.  But in September, it was more like a gallon of water on the fire:

This is an interesting chart that compares the number of closed sales to the average number of active listings in a given month.  For about a year, the market has essentially been playing catch-up as the number of closed sales has outpaced the number of active listings. This is somewhat akin to the active/pending ratio that I track each week in the Real Estate Week in Review — for most weeks, that ratio is less than 1, meaning that there are more pending sales than there are active properties.

Starting in August, the market essentially caught up, with the number of closed sales matching the average active inventory.  And very clearly in September, the market finally hit a relative saturation point, where it could not absorb the inventory at the rate it was being created.  That's a strong indicator of a slowing market.

What About Prices?

As I mentioned at the outset of article, prices aren't necessarily dropping as a result of the recent slowdown, but they certainly aren't rising either.

The chart at the top shows the average sales price for all single-family homes sold in 2018, and the bottom chart shows the average price per square foot over the same period. The average sales price has remained relatively steady throughout the year, while the average price per square foot dropped slightly in September. There's really no obvious trend either upward or down in pricing –it's just holding steady.

Longer to Sell, Smaller Premiums.

Two other charts that do show the effects of a slowing market are below:

The average days on the market (DOM) for listings in San Carlos tied the high-water mark for the year in September at 17 days.  While not a huge difference from the rest of the year, it verifies the perception we've all felt that it's taking slightly longer for homes to sell in this market.  As I have documented in the latest Weekly Update, the average DOM for the homes that are currently for sale in San Carlos is a very un-San Carlos like 25 days.

The other indicator of a cooling market is the premium that homes are fetching above their original list prices, as shown below:

This chart shows the ratio of the final sales price to the original list price — or in other words, the average premium above the original list price. September's figure of 7.3%, while certainly respectable, ranks as the second lowest in any complete month in 2018 – and that was in the month of the highest level of inventory for buyers to choose from.

What Does This Mean?

No matter how you look at the data, it's evident that the San Carlos real estate market has slowed down in the past 60 days. Ask any Realtor that's active in the city, and they'll tell you that they are seeing fewer offers and their listings are taking longer to sell.  It's too early to tell if this is just the normal seasonal slowdown, or if it's indicative of a more significant shift in the market.  Since we're already heading into the traditionally slow months of the year, we really won't know definitively until we see how the Spring 2019 market behaves.

But in the near term, what does this mean for anyone who is in the market?  Sellers will need to re-calibrate their expectations on what their home is worth, and what it's going to take to get it sold.  You can't just stick a sign in the front yard and expect tons of offers to roll in.  Overpriced listings are being absolutely punished in this market, as buyers are perfectly content to wait for something better to come along.

Buyers are behaving in a somewhat peculiar manner in what should be the most favorable buying conditions in at least two years.  I can sense a feeling of “If nobody else wants it, then I don't want it” that seems to be the pervasive undertone in the buying community.  That tentative mindset is somewhat understandable, since interest rates are rising are rising, and the new tax laws take away a significant incentive to own real estate. But serious buyers should be seizing the opportunity to participate in more balanced market in which there's less competition and more opportunity to negotiate a great deal.  It is exactly the market that they've been waiting for.

Regardless of what side of the table you are on, a gap has been created between what sellers think their home is worth and what buyers are willing to pay for it.  The key to success in this market is finding THE point in between that will make both parties happy.