May 5, 2005 Weekly Bay Area Real Estate Market Newsletter

The quick summary is that the market is currently performing very similarly to 2004, 2002, 1999 all of which were good years. We expect SCC's median sold price will continue to increase from the current $750,000 level for April to about $765K before decreasing 2-4%. Because of the time lag in closing escrows we believe the near term peak of the market is right now.

The market has been experiencing some strong price increases that are typical for this time of the year. April's median Sold price for SCC is $750,000. Prices are likely to continue to increase until the DUI increases significantly. There has been more fluctuations in the data than we have ever seen since we starting analyzing the market in September 1998. The market continues to cool a bit, which is normal behavior at this time of the year in order to set the market up for the summer cool down. DUI has climbed to 33.6 from the 27.3 experienced on March 23, 2005, but still a seller's market.

The table below compares the current real estate market conditions to each of the past 6 years. The sign ( + = - ) next each year indicates if the current market trends are improving(+), staying the same(=), or getting worse(-) compared to that specific year. You can view the graphs of each market indicator by clicking on the column headings in the table below.

The market remains strong. The market will have to weaken more before there is any softening of prices. Notice nearly every sign is =. This indicates that the market is changing normally for this time of the year. Looking at DUI, SCC is currently experiencing a 4-way tie with 1999, 2000 and 2004 for the strongest year. With respect to sales, half the years were better and half were the same or worse. Price increases early in 2005 have clearly arrived and they have shown up in the Sold data. Using DUI as the primary indicator of the real estate market's health, there is no question the market is strong. It is equally clear that the market is no longer improving compared to other years, but is now behaving normally. Normal for this time of year includes price increases followed by a price correction. Peak pricing occurred in August 1999, April 2000, and June 2004.

Using a 5-year average (graph) as a norm, allows us to better understand the behavior of the real estate market while viewing just one graph. Inventory is now following normal patterns, although only at 70% of the normal level. The Easter dip is also noticeable.

Clearly, there has been three significant drops in initiated sales volume:
    1) the month of June 2004;
    2) mid-November through mid-December 2004; and
    3) the second half of January 2005.
Sales dipped to only 93% of the 5-year average. Currently, sales are increasing and are above normal (131% not adjusted for growth). The fluctuation in the volume of sales remains our biggest concern.

The recent fluctuations in DUI compared to the 5-year average continues. DUI is below normal at only 50%, which means a stronger/hotter than normal market. 2005 had been the second strongest years out of the past 7 years. Now 2005 is essentially in a 4-way tie with 1999, 2000 and 2004 for the strongest year. Even if  the current DUI of 33.6 continues increasing (and we expect it will) it will take a while for prices to level off and/or drop because significant price decreases should not happen until DUI is approaching 90. We think this is unlikely to happen any time soon. But a 2-4% price correction going into late summer or fall is likely.

Viewing the sales volume raw data is eye opening. Notice that volume of initiated sales actually dipped below the 10-year average. This appears to have been caused by a 1-week delay in the low point in sales. This corresponds to a horizontal shift of 10-year average graph 1-week to the right. Currently, the sales volume is again above the 10-year average. We have the sales volume data going back to July 1992 and this is the first time we have noticed a time shift. SCC is currently experiencing more transactions (initiated sales) when compared to the 10-year average. The deep blue line shows the significant drops in number of transactions as shown in the second column in the table below. It is the vertical separation between the two lines that shows the "extra" transactions in 2004 when compared to the 10-year average. If you visualize this as a percentage you get the third column in the table below. Most people think that the slow down in late Fall 2004 was just the annual holiday slow-down. Noticing the rapidly decreasing vertical separation between the two lines, it is clear that this more than a normal slow-down. Based on our data, 2004 experienced the greatest percentage reduction in sales volume based on a percentage of the summer's peak volume. The end of 2004 experienced sales of only 44% of that summer's peak. Other years were 2003=55%, 2002=54%, 2001=95% (fueled by the post 9/11 feeding frenzy), 2000=47%, 1999=48%, 1998=62%, 1997=63%,1996=47%, 1995=61%, 1994=48%. Clearly something to monitor even though sales volume is currently at 124% of the 10-year average.

There is no question that there has been a drop in sales volume when looking at the 10-year average. Some people have asked why when sales have increased from 968 to 985, we consider this a decrease. This because normally sales increase very rapidly at this time of the year. The decrease can be seen in drop in the 10-year average. Comparing to 1999 is interesting as it shows the difference in timing. But there is still a drop from 127.2% to 78.9% of the 1999 volume. Remember that most of 1999 and 2000 saw volume at about 135% of the 10-year average. The fact that SCC dropped from 153% down to 136% was not alarming. The drop from 133% to 116% was a bigger concern especially because we still have no good explanation other than the election. The third drop with respect to the 10-year norm during the second half of January 2005 has seen volume drop to 96.1%. This decreasing volume stopped and volume has actually been increasing since February reaching 124%. We remain cautious about these drops in sales volume over the past year. We are very surprised no one else seems to care or even notice these decreases for that matter. If the buyers continue to stay away the market will slow. This does not appear to be an immediate concern because of the rebound in sales volume since February. Sales volume is still below the 135% experienced in 1999 and 2000.

With the passing of New Year's, the 2004 to 1999 comparison changes to the 2005 to 2000 comparison. Comparing 2005 to 2000 seemed logical as the real estate market conditions had been similar and the calendars were identical. (graphic) It is apparent that something very different started after the 2004 Presidential election. Prior to Easter, it appeared that things are starting to stabilize with inventory at 124% of 2000 levels, sales at 143% of 2000 levels and DUI at 97.1% of 2000 levels. Notice the sharp drop in sales during the second half of January 2005, followed by a sharp increase starting on February 1st and finally leveling off on Valentines Day. March and April as seen sales increase at a normal pace until the last 2-weeks where sales have increased faster than normal. Equally noticeable is the increasing inventory relative to 2000 starting 10-days after the election. The increase in inventory relative to 2000 abruptly changed on March 17th. We think it was the dip in inventory (sellers) was caused by sellers delaying their listings until after Easter. Since Easter, inventory has been decreasing compared to 2000. This is because in 2000 inventory was growing rapidly as the market slowed in 2000. The dip in inventory causes a dip in DUI as buyers continued to purchase for one more week. With the passage of Easter, the number of sales decrease (reflecting the sales lost because of the holiday) and increased inventory (as sellers return to the market) causing DUI to spike. Easter is a holiday that moves, so comparing to past years doesn't completely adjust of the holiday effect and there will be fluctuations in the year comparisons as the date Easter occurred approaches. 2005 had been the second best (hottest) market conditions, second only to 2000 that saw 33% appreciation. However, 2000 slowed relative to 1999 and 2004 so these three years are essentially tied with 2005. Appreciation of completed sales has reached 18.1% (750/635) with indications that the 20% mark will be reached shortly.

Because people remember last year the most clearly, here is a comparison between 2005 to 2004. Sales were at about the same level until January 12th and then sales started to drop off significantly 85% compared with 2004. The rate of decline has slowed and volume now appears to be matching 2004's performance but with 11% fewer transactions. Increase in inventory has also slowed and is now following the 2004 pattern but at 85%. With the decrease in sales and the increase in inventory, the current 2005 market is nearly identical to 2004 market with a DUI ratio of 97%.

Although not very satisfying, the best explanation we've heard remains that consumers were racing to beat the election out of fear something would change. When nothing changed after the election there was no longer a need to race, so the demand dropped to normal. However, this explanation does not shed any light on the third deterioration that occurred during the second half of January 2005, nor the first drop in initiated sales during June 2004. Currently, buyers could be racing to beat the increasing interest rates. This would explain the increasing initiated sales compared to normal.

If asked to provide guidance, we would suggest a better than normal year for 2005. This would suggest appreciation of about 15-20% by the end of June 2005 from the $635K level reached in 2004 before the 2005 appreciation was pulled forward. This means a price of about $755 to $765K. SCC's median Sold price reached $750,000 for April. We would expect additional increases in May and maybe June reaching  $755-765K, before hitting a price plateau followed by small reductions in price (about 3-4%) as the year progresses, ending the year at approximately $725-735K. We believe the low DUI is more important than the drop in volume in determining price appreciation especially now that the volume of initiated sales is returning. We remain concerned about the fluctuation in sales volume, which represents buyer demand. Also, keep in mind as price increase and interest rates increase there is a double impact on affordability.

Real estate is a great long-term investment. With the current behavior in the SCC real estate market statistics, we would recommend rational normal behavior, making plans for long-term and not the short term gains. We believe buyers should be very careful not to over pay as it appears we are at or at least close to the near-term peak. We believe that sellers should sell now or shortly if they need to sell in the next 6-moths. Both buyers and sellers should watch the market conditions for additional indications that the market is peaking. 

This weekly analysis is based on the overall real estate market conditions of single family homes in Santa Clara County. If you are considering selling or buying, it is important to evaluate specific real estate market data for your individual transaction based on price range, geographic area, and type of real estate you are purchasing or selling. Just contact us for this customized information. 

Conclusion - We consider the market fundamentals to be; supply (inventory), demand (initiated sales) and supply/demand ratio (DUI). Until mid-November 2004, these market fundamentals had been very similar to their 1999 levels. Inventory is now at 124% of the 2000 level. Many agents are still claiming that there is no inventory despite it being 24% above the 2000 levels. Sales are at 143% of the 2000 level. Remember, although 2004 turned into a record volume year it did not start out that way. The most important factor, DUI is at 97% of the 2000 level. (graphic) This indicates that the 2005 market is now slightly hotter than the 2000 market with more inventory, somewhat offset by more sales but on balance a lower DUI. What is interesting is that the market is appearing to repeat 1999 for a second year in a row. Inventory is 105% of 1999, sales are at 105% of 1999 and DUI is at 100% of 1999. So 2005 is now similar to 1999 which experienced 12.6% appreciation with a peak in August followed by a 4.8% correction in October 1999 before shooting up 33% in early 2000.

These three market fundamentals began duplicating a previous year's pattern in the Fall 2003 by duplicating the Fall of 1998. As 2004 arrived, market conditions continued repeating the past by duplicating the 1999 market conditions. Then starting November 12, 2004 there was a sharp departure from this established  pattern. We think that this means SCC will see less than the 33% appreciation that 2000 experience, which is actually good. Currently the market is similar to the 2004 the market conditions and following the 2004 trends.

There is little doubt the real estate market slowed for the third time in the second half of January 2005. Even if most others don't recognize the slow-down it was real. February, March and April saw initiated sales volume recover, but we remain concerned. The market conditions are still strong and now holding their own. There is typically a very mild slowing at this time of the year and SCC is experiencing a mild slowing. This is why price tend to level off in May-July time frame. Will the slowing return for a fourth period? Will a fourth slow-down be long enough to reach a balanced or buyer's market? A fourth slow-down might be triggered by increasing interest rates. A fourth slow-down has not shown up yet. 

In 1999, the median Sold price increased from $353,350 in February to $398,000 in April 1999 or 12.6%. The 2004 economy was weaker than 1999 which should have translated into a cooler real estate market. Because of the stronger Buyer demand, 2004 appreciation reached 15.7%, as the median Sold price reached $647,000 on July 9th, before dipping to $625,000 on September 3rd before increasing and reaching $660,000 on December 16, 2004 and had been relatively flat until increasing to $679,500 on January 26th before dropping back to $660,000 for three weeks, then the median Sold price started to climbing reaching $755,000 this week. We would expect these increasing prices to continue but only as the current escrows close. The recent flatness in median List price will likely cause flatness in the median Sold price in June. It looks like Valentine's Day saw an increase in both activity and price. We are still recommending a purchase as we are concerned about increasing interest rates on the impact they have on the cost of the home. But the buyer should not feel the pressure to buy anything like they did the first 4 months of 2005.

The median Sold price in 2000 increased from $420,000 to $560,000 or 33.3%. This would indicate a median Sold price of $848K IF the market continued to duplicate the past. We do NOT expect that level, especially after the November 12, 2004 change. It will be interesting to see how the market fundamentals behave in early 2005 compared with early 2000. We believe that this will determine the actual prices for 2005. If the market appreciates the same as it did in 1999 and 2004 then the median Sold price would be about $728K. This mark was surpassed with the release of March 2005 data at $733,000 and again in April with $750,000. We believe, the result will be a peak of $750-765K with a drop off of about $20-25K.

Sellers should be ready to go on the market, as the market may change very rapidly. Sellers should watch the market for signs of strength or weakness and act accordingly. If a seller needs to sell during the next 6-months now might be the ideal time to sell. Like the buyer the change appears to be gradual so no need to race forward. HOWEVER, if the market shows signs of weaken moving forward rapidly will be key. Buyers should still move forward being careful not to overpay too much or settle too much as the bulk of the price increase for 2005 has already occurred. It is likely that price will increase again in May and maybe June before the price flatten out and then decrease. But remember it is the May and June closings that are being sold now. This means buyers need to exercise some caution in the bidding frenzies that are so common. Buyers need to be willing to compete, but not go crazy. Again, our biggest concern is increasing interest rates, which increase the cost of homeownership not increasing prices.

Inventory – 1860; inventory is higher than 2000 (124%), the same as 1999 (105%), lower than 2002, 2004 (86%) and significantly lower than 2001, 2003 at only 46%. The gradual elimination of this surplus inventory during 2004 is likely going to cause a shortage of inventory in 2005 and is contributing to our belief that 2005 would likely be similar to or stronger than 1999. From November 12th through January 2005, inventory has been growing significantly when compared to 1999/2000. This indicates that there are more sellers ready to sell. The general perception of limited inventory has assisted the price firming even as inventory was really growing. Starting with February 2005 inventory has been again following the 2000 pattern. Inventory continues to grow slowly and is approaching normal levels, but still on the low side.

Days of Unsold Inventory – 33.6. The balance between supply and demand is the most important factor in a free economy. We measure this balance using Days of Unsold the Inventory (DUI). Most areas in the nation use "months of unsold inventory." With the arrival of October, DUI finally started its annual Fall decline. There has been an unexpected hiccup in DUI as a result of the November 12th change that was initially masked by Thanksgiving. DUI turned the post-holiday corner and dropped and nearly matched the pre-holiday level. Since February 26, 2005 when DUI was only 26.4, DUI has been increasing slowly, except for the Easter bounce, reaching 33.6.

Many areas such as Santa Teresa, East Valley, North Valley, Milpitas, Santa Clara, Willow Glen, South San Jose, Blossom Valley, Almaden Valley, Cambrian, Campbell, Cupertino, Sunnyvale, Mt. View, and Palo Alto are leading the way in Santa Clara County with 17 to 30 DUI. The DUI for these fast areas is 27. Several areas,  South County, Evergreen, Willow Glen and Palo Alto are all have a DUI of about 35. This puts much of Santa Clara County squarely in a Seller's market. Other areas such as Saratoga and Los Gatos, which are almost always the slowest areas, are lagging behind with 90 to 99 DUI.

It is also important to note that the different price ranges have significantly different DUI and therefore different market conditions. These price ranges should be considered the low, middle and high price ranges in any given real estate market area opposed to the set price ranges. So, in the more expensive areas the prices that represent low, middle and high are higher. The low priced homes (those under $750,000) only have 20 DUI. Homes between $750,000 and $1,000,000 have only 30 DUI. Clearly, both of these markets are hot. Even the high-end had started to improve and entered a balanced market before slowing again. Currently, homes between $1.0 Million and $2.5 M have 55 DUI (that's 2 months); homes between $2.5M and 5.0 M have 8 months of unsold inventory and homes over $5 Million have 5 1/2 years. 

Median List Price - $710,000 Median List price is actually off the peak of $718,888. However, so few properties would be listed between $710,000 and $718,888 this is not by itself statistically significant. It is more the fact that the price has not increased to $720K or $725K. On December 23, 2004, the median List price increased to $663,500. It is surprising, but not unheard of, to set a new record high for List price in December. The List price stayed flat through February 3, 2005 and then jumped upward. It seems that the consumers anticipated the price increase that we were expecting to happen early in 2005. This caused the prices to increase during the end of 2004 and for them to be stable at the beginning of 2005 before resuming their climb. This is what also happened in the Fall of 1999 and Fall of 2000.

Number of initiated Sales per day – 55.4 Buyers are coming back at a normal pace. The all time record high level of 66.7 was reached just prior to Memorial Day 2004 and will likely remain the record for years to come. The previous record was 54.8 sales per day also reached just prior to Memorial Day but back in 1999. We still believe that the MLS is creating "extra" sales. This may finally get corrected with a new version of software scheduled for release on Tuesday. It will take about a month to see if this solves the current problem. Although it will be nice to have more accurate data again, it will make comparing the market in the July 2003 through May 2005 tricky as one of the key components would be incorrect.

It will likely take years of growth before SCC beats the record of sales (2,337) set on May 29, 2004. Sales dropped to 1,885 on July 23, 2004. This means that 20% of the sales volume disappeared in under 2 months. This initial radical drop in sales leveled off. Initiated sales have been basically flat at 1,854 until September 6, 2004. As Labor Day sales entered the data sales volume dropped to 1,681. On October 6, 2004, as the Labor Day sales are leaving the data, initiated sales increased to 1,768. There was a second radical drop in sales starting November 12, 2004 when sales dropped from 49.3 sales/day to only 38.3 sales/day. This represents a second 20% drop in 3-weeks but during a period when sales started to drop significantly because of the annual holidays. Sales volume continued to drop from their reduced levels as we would expect because of the holidays. The 2004 slow-downs appear to be the more significant reduction in sales volume even when expressed in terms of a percentage of the peak. Clearly, this reduction is more than the seasonal slow-down. Fortunately, buyers seem to have returned to the market place.

Percentage of normal sales initiated – 124.3%. This has been climbing since February 1, 2005. The all time record of 154% was set just prior to Memorial Day 2004. This is a seasonally adjusted data point and therefore very difficult to predict. Sales had been dropping faster than the past 6-years. This explains the drop from 154% to 132%. In August and early September sales were dropping at the normal rate causing the percentage of sales to level off at about 132%. Between November 10th and December 16th, there was a second drop from 132.7% to 114.3%. A third drop from 114% to 96% occurred during the second half of January 2005. The big unanswered question is why the reduction in sales volume? Remember this is not adjusted for any growth over the past ten years.

Median Sold price – $755,000. Setting another new record high on May 5, 2005 beating the $750,000 level reached on April 28, 2005. April's median sold price is $750,000. We expect to see about another $15K increase in median Sold price by June.

With the arrival of Valentines Day 2004, SCC experienced significant upward pressure on prices. It appears the same thing is happened in 2005. The question is will 2005 repeat 2004 when with the passage of Easter prices leveled off. Realizing how early Easter is this year we believe that there will be some additional price appreciation. With the passage of both Memorial Day and July 4th 2004 prices dripped slightly. But then in 2004, prices started to increase to $630,000 for September, $636,000 for October, $649,000 for November, $661,000 for December, $664,000 for January, $705,000 for February's median Sold price and $733,000 for March's median Sold price. April's media Sold price is $750,000. We believe that this was pulling some of 2005's appreciation forward into late 2004. Mother's Day was the true market peak for 2004. Our current thoughts are despite the weakness in the market shown in January we believe that the peak for 2005 market might occur at about the same time, Mother's Day 2005.

An interesting footnote, November has been a year-to-date record only 3 times since 1984. These were 1988, 1999, and 2000. In all three cases this was followed by some significant price declines. June 1989 ($235,000) to Oct 1990 ($216,000); April 2000 ($560,000) to September 2000 ($505,000) and January 2001 ($577,500) to October 2001 ($481,000). Only time will tell.

Average Sold price to List price ratio – 104.1% This means on average Sellers are getting more than they are asking at the time the offer is accepted. This had been relatively flat since August 20. 2004 until February. This recent increase has pushed the ratio above the recent record of 102.0% set on May 7, 2004. SCC hasn't experienced this level since back in 2000, when it reached 109%. We consider 98.5% a normal real estate market. This is based on the asking price at the time the offer is accepted not the original asking price and reflects market conditions 25 to 95 days ago because of the length of escrow and how this data is collected. This is one of the few times where an average is more useful than the median. The median ratio would almost always be 100%. 

Percentage of completed Sales where Sold price is greater than List price – 75.3% This is actually above the 74.8% level reached in April 2000. Overbidding had been increasing more or less at a constant rate between Valentines Day 2003 to Valentines Day 2004. From Valentines Day 2004 to mid-June 2004 the increase was much more significant and pretty constant. Then there was a reversal mid-June 2004 through September 2004 where the frequency of overbidding actually decreased. Then overbidding increased in October and November 2004. Before dipping for December and January. Starting in February 2005 the frequency of overbidding has been increasing again. Currently 3 out of every 4 sellers are getting more than their asking price, at the time the offers accepted. This is a new all time high record for SCC. The Sold price could be less than the seller's initial asking price, but is more than the price at the time the offer is accepted. It is like we are in 1999 all over again despite a weaker economic conditions. It is no surprise that the dips in overbidding follow the dips in volume of sales because overbidding is a measure of the amount of unsatisfied buyer demand.

Median DOM for completed sales – 11 days. Not currently very interesting because the MLS is allowing DOM to revert to zero.

How are the other Counties doing? Based on the moving monthly data published weekly, SMC median List price is now $849,000 and is tied with their record high of $849,000 set on April 14, 2005. SMC median Sold price set a new record of $925,000 on May 5, 2005. At $710,000, SCC median List price is off $9,000 from their record high of $719,069 on March 24, 2005. The median Sold price at $755,000 is a new record established on May 5, 2005. SZC's median List price at $749,500 is their record high of $749,500 set on May 5, 2005. SZC's median Sold price of $715,000 is $25K off their record at $740,000 on April 7, 2005. MTY median List price at $659,000 is their new record high of $659,000 set on May 5, 2005. Monterey's median Sold price of $627,250 is $18,000 off their record high of $645,000 set back on March 10, 2005.

Additional background information