We have had about a 6 year run of a “hot seller’s market” here in Silicon Valley, but the conditions have been cooling in recent months. It is significantly different to sell a home in a buyer’s market versus a seller’s market. We have gotten so used to overheated conditions that it may be a challenge for buyers and sellers to adapt, should our current trends continue, and turn into a correcting or buyer’s market. How will we know when it shifts? How do you identify a buyer’s market?
What kind of real estate market is it?
Right now it’s a seller’s market, but a cooling one. If the trend continues into next spring, it will be a buyer’s market. But we aren’t there yet – and the current cooling may just be a seasonally normal pattern, if a little deeper than typical.
Let’s start with how you identify a buyer’s market or seller’s market. There are a lot of criteria you can use, but two of the best in my opinion are the days to sell (how long does it take to go under contract, also called Days On Market or DOM) and the sale price to list price ratio, meaning how much over or under list price a home sells for. Other criteria, of course, include the average and median sale prices and the absorption rate (days, weeks, or months of inventory).
I just pulled this from the MLS last night and added some notes. It’s not pretty, but it will provide a clear visual as to the overall market conditions in the San Jose area right now.
Here’s a graph of our local Santa Clara County market for the days to sell (days on market, DOM) and the sale price to list price (SP to LP) ratio going back to 2006 so the difference between a buyer’s and seller’s market is more obvious. Please note the sale price to list price ratio in relation to 100% (if a home is listed at 1 mil and sells at 1 mil, that’s 100%). What is “normal” can vary from place to place, but overall, when homes average less than 100% of the list price, it appears to be a buyer’s market, and when over 100%, a seller’s market.
What a difference between 104 days on the market and 14! Did you also notice that when the DOM are high, the SP to LP ratio tends to go low? The highest high with DOM tends to track with the lowest low for SP to LP ratio.
Right now, in early November 2018, we have some mixed signals. Homes are still selling at 102% of list price, but the ratio has been falling at a dramatic rate. In 2017, the market never had a seasonal cool down in the second half of the year, so is our market adjusting to get back into line with where it should have been? Or is this a beginning of a correction? You can see a number of steep drops in recent years (but not as long / deep) and they didn’t turn into corrections. If this pattern continues into February, we will be in a correcting market. If that happens, we will also have a lengthening of the days on market, too.
Right now, it’s relatively easy for properties to sell as long as:
- they are not overpriced
- they are in decent shape, have been maintained and at least somewhat updated
- they are reasonably easy to view
- the marketing is solid (professional photographs, good internet exposure)
- there are no major location issues (backing to high voltage power lines, freeways, etc.)
In a buyer’s market, it is far more difficult to sell properties. Depending on how “deep” it is in the buyer’s favor, maybe only 1 home in 5 will sell in a given month. Perhaps 1 home in 20 will sell. Then the question becomes “what must a seller do to improve the odds of selling?” That will be addressed in another post, but for right now, what we have is a softening market, not a buyer’s market. In fact, in October, sales ticked up and the Silicon Valley real estate market generally inched back toward the seller’s favor. Here are the numbers from my RE Report:
Santa Clara County Real Estate Trends at a Glance
| Trends At a Glance | Oct 2018 | Previous Month | Year-over-Year |
|---|---|---|---|
| Median Price | $1,292,500 (+3.4%) | $1,250,000 | $1,220,000 (+5.9%) |
| Average Price | $1,597,490 (+7.9%) | $1,480,750 | $1,502,130 (+6.3%) |
| No. of Sales | 774 (+9.9%) | 704 | 816 (-5.1%) |
| Pending | 819 (-4.0%) | 853 | 865 (-5.3%) |
| Active | 1,360 (+1.1%) | 1,345 | 604 (+125.2%) |
| Sale vs. List Price | 102.0% (-0.2%) | 102.2% | 107.6% (-5.2%) |
| Days on Market | 26 (+5.3%) | 25 | 18 (+46.4%) |
| Days of Inventory | 53 (-4.9%) | 55 | 22 (+137.4%) |
For the county, most of the data points indicate the pendulum swinging back to the sellers. However, the days on market increased slightly, and the sale to list price ratio dropped slightly. Both of these are close to flat, though.
In a softening market, which is not uncommon in the second half of any year, it is easy for buyers to misread the market and to decide that homes are often selling for a lot less than list price. The SP to LP ratio disproves that. But some homes do sell for less – those are often the properties that have been on the market a very long time. Those which sell in a couple of weeks or so frequently do so well above list price.
Will 2019 be a buyer’s market? We don’t know. (If I did know, I’d quit selling real estate and instead find a way to buy and sell with perfect timing.) Economists are suggesting a much milder year – not as good for sellers as 2018 or 2017 (which was an extreme seller’s market). They are telling us 3% appreciation for the state. For the SF Bay Area or Silicon Valley, I don’t know, but this area normally out performs the state, so I would think 5% or better in areas with strong schools, short commutes, or both. It’s a far easier time to buy, and not a bad time to sell. Perhaps we will hit that elusive “normal” or “balanced” market in the year ahead.
