When I was about 12 years old, one of the best things you could do while visiting Disneyland was to put yourself and your friends in one of the brightly colored teacups on the Mad Tea Party ride and proceed to spin yourself so wildly that the force would cause your head to launch backward while you held on for dear life. Upon exiting the ride, with your head still spinning, you’d clumsily try and find your way toward the exit, just praying you could make it through the gate without falling down. While this visual may bring back memories from your youth as well, it is also an identical experience for the buyers, sellers and agents that made it through the 2022 San Carlos real estate market and lived to tell about it.
Let’s Start at the Beginning
For those of you who remember the headline article in last year’s report, The Market of
A Lifetime, you will recall that our real estate market was made up of the perfect storm of influences:
1. rock bottom interest rates
2. extremely low unemployment
3. record low inventory
4. a post-pandemic thirst for single family homes that was so intense that no reasonable increase in inventory would satisfy it
February and March of 2022 represented the most intense and out of control market in San Carlos that I have ever seen and will likely never see again. Just how bad did it get?
There was a six week period in San Carlos when many homes were appreciating $100,000…per week.
Let me give you an example. There was a 3 bedroom, 2 bath home in White Oaks that closed in early February after substantial overbidding. Each time a new 3/2 came on in White Oaks in successive weeks, the winning bid would be about $100,000 north of the previous comparable to go into contract. This went on through March and into early April. The San Carlos market was sent into the stratosphere, and the tea cup was spinning out of control.
Take a look at the statistics below to see the difference between Spring of 2021 and Spring of 2022. Keep in mind that the Spring of 2021 was an exceptionally good market for sellers as well, which make the statistics below even more mind-boggling.
Put another way, the house that cost you $2,416,611 in the Spring of 2021 cost you $798,448 more, just one year later. Yes, you read that correctly.
Now, let’s compare the Spring 2022 Market with the Fall 2022 Market:
What is immediately noticeable is that numbers for the Fall of 2022 are almost exactly the Spring numbers from 2021. See below:
Put succinctly, it’s like 2022 never happened. The massive gains of Spring were wiped out entirely by Fall. As we enter the Spring market of 2023, the sales numbers and projections will likely mirror the same numbers of Spring 2021, as detailed immediately above.
What Caused Our Market Correction?
1. The San Carlos real estate market was due to cool down. It has gone up in value for 12 straight years, starting in 2011. This 12-year streak represents the longest running sellers’ market in the history of San Carlos. The reality is that our upward moving market likely would have plateaued in late 2019, however, the pandemic managed to breathe new life into the longevity of the upward trend and kept it afloat for an additional 2.5 years. Buyers became exhausted. The skyrocketing costs of homeownership in the Spring of 2022 was the final straw for buyers who threw their hands up and focused on rentals.
2. Interest rates shot up and the 30-year mortgage went from 3.0% in early spring to 7.5% in Fall. This, more than any other factor, led to the sudden and substantial drop in San Carlos property values.
3. The final component to the correction has been the suspicion of a recession and tech layoffs, which have already started to occur.
What does this all mean for the 2023 San Carlos Real Estate Market? Prior to answering that question, let’s take a look at how the most recent drop in San Carlos home values was measured.
The downturn of 2008-2009, during the Great Recession, was the largest loss of property values on the peninsula since the Great Depression. San Carlos, at its true bottom of the market in early 2010, lost 21% off the previous highs in the market. In addition to a heavy recession, the housing market across the country collapsed due
to a combination of factors, including: a meltdown of the financial markets, unemployment, purchasing of homes with no money down (and in many cases, homes purchased with negative amortization loans), little regulation in the mortgage industry and very little oversight.
Let’s take a look at each of those factors as they sit in our current market:
The mortgage industry went from an industry that was underregulated (pre-2010), to one that was overregulated, overnight. Homes purchased in San Carlos over the last ten years have been purchased with substantial down payments and with loans that are far more sensible and responsible on terms. The height of the Great Recession occurred in 2009 when the San Mateo County unemployment rate hit 9.2%. Today, San Mateo County Unemployment sits at 1.9%. Granted, tech layoffs have started and this number will go up, however, hitting 9.2% during this downturn does seem like a stretch. Financial markets are more speculative. Most advisors I know believe that a mild recession is already built into the broader markets. The question here is whether the mild recession increases to something more dire.
As shown above, the San Carlos market is down 25.52% off the previous highs in the market. All of this occurred within a six-month period. My feeling is that this is a bit misleading as those previous highs of February and March of 2022 were a very temporary and extreme price spike. However, if that number is modified down five percentage points for a 20% combined loss, it would be the equivalent to the total sustained loss of home value during the Great Recession. While the layoffs and economic conditions seem unstable, this downturn seems to lack the strength of the Great Recession. On its face, the thought that housing is going to have a sustained downturn that is worse that the Great Recession seems out of line given the key metrics above.
The vast majority of the correction (likely 20%-25%) has already occurred. The market is likely to settle out very close to that 20% number and possibly dip a few more points until interest rates stabilize and there is some predictability to the type of recession we are encountering.
The Mad Tea Party ride is coming to a stop. Please collect your belongings and your balance and exit to your left.
2023 will likely see us hold the current lines with no real gains or losses of significance. A much slower moving, flat ride with some bumps along the way. It’s A Small World, anyone?