September 22, 2005 Weekly Bay Area Real Estate Market Newsletter

The market continues sending interesting signals that deserve close attention. Although sales are following the normal pattern inventory is growing. Inventory normally is decreasing by mid-July. Because sales are normal and inventory is increasing DUI is increasing. There is still less inventory than normal, but if the current trend continues this will not be the case much longer. In fact 2005, has more inventory than any good year since 1998. It appears that the sellers are entering the market more frequently than normal. The best explanation that I have heard is that there is some reactive selling occurring. When there is a threat that interest rates will increase there is some reactive buying as buyers racing into the market to beat the higher rates. It would seems as though some sellers maybe starting to believe all the bubble theorists and/or accelerating their decision to sell for some other reason. There has been more significant changes in investor driven markets like Sacramento, where inventory triple in the last 5-months. Although this sound drastic a doubling of inventory in SCC is common. What is not common is the increase in local inventory since mid-July when inventory is normally decreasing.

We consider the market fundamentals to be; supply (inventory), demand (initiated sales) and supply/demand ratio (DUI). The 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. 2005 ended up repeating 1999 for the second year in a row. Now there is a second departure from past years that seems to have coincided with Katrina.

Inventory is now at 134% of the 1999 level. Sales are at 106% of the 1999 level. The most important factor, DUI is at 127% of the 1999 level. (graphic) This indicates that the 2005 market is less intensity than the 1999 market. 1999 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. We don't expect 2006 to see 33% appreciation and we now think 15% is too high, maybe 10%. We are still expecting a small dip in 2005 to about $735,000.

August's median Sold price remained basically unchanged at $760,000. The $750,000 mark was achieved back in April. The 30-day median Sold price increased every week between February 17, 2005 and April 21, 2005. Since April 21, 2005, the 30-day median Sold price has been fluctuating between $745,000 and $760,000. The Sold prices are determined when the contract is negotiated, which is typically 30-days earlier. Therefore, the median Sold prices started increasing 2-weeks after New Years and has been flat for the last 6 months. We still expect to see a minor price drip to about $735K as we move into Fall. This dip will be short in duration and it is likely that the 2006 appreciation cycle with appear during the last several months of 2005. With this week's median Sold price at $749,650, the price dip has not started. 

Inventory is still growing and that is unusual for this time of the year. The low-end is hotter and the high-end cooler than in 1999.  Both 1999 and 2004 were good years followed by a good year.  (1999) (2004).  Both years experienced price dips during the summer. We think that 2005 is similar enough to 1999 and 2004 to expect 2006 to be a good year but not as good as 1999, 2000, 2004 and 2005.

DUI has climbed 11 days in 3.5 months, from 27.3 on March 23, 2005 to 38.3 on July 7. Then DUI increased an additional 7-days in July reaching 45.0. This week's level is 51.4. Although an increase of 6.3 in the previous two weeks DUI was unchanged this week. This climb is still below the 1 day increase in DUI per day that we use as a benchmark of a changing market. SCC is approaching a balanced market, which we consider to be 45-90 days. A cooling market is normal behavior at this time of the year in order to set the market up for the Fall dip. 2005 started out with SCC being the second hottest year. Because the market was slowing less than normal earlier this year May through mid-July 2005 became the hottest year since we started collecting data in 1998. Since mid-July, the market has been cooling more rapidly than normal. Consequently, 2005 has cooled to the fourth hottest year. In fairness, 2005 is still similar to 1999, 2000, 2004. The reason for this extra slow-down appears to be mostly associated with an increase inventory. The current increase in inventory could end up causing an inventory shortage early in 2006.

The magnitude of overbidding peaked 4/21/2005 and frequency of overbidding peaked 5/12/2005. Both the magnitude and frequency of overbidding have been decreasing essentially every week until the frequency of overbidding leveled off on July 28, 2005 followed by a leveling off of the magnitude of overbidding on August 25, 2005.

There continues to be a significant number of properties getting re-listed and/or having their asking price reduced. This is an indication that the listing agents are realizing that their listings are not selling as quickly as they thought they would. It is clear that the current peak has past. Sellers that are planning on selling in the near-term should consider moving forward now as we don't believe the market conditions will improve until the second half of January 2006. There will likely be higher prices as Thanksgiving approaches but with longer marketing times and greater disruption on home life. Buyer's should be careful not to over pay at the peak. Even though the median price for SCC appears set for a minor price correction the media will remain positive because the media focuses on the annual appreciation which will be significant for the foreseeable future. Because of the time lag in closing escrows we believe the near-term peak was back on Mother's Day just like 2004. We believe that SCC is approaching the near-term valley. We believe it is time for buyers to get serious about purchasing before the 2006 appreciation arrives and while there is still a good selection of homes to chose from. Remember real estate remains a good long-term investment. Our bigger concern currently is increases in interest rates and the reason why extra sellers are coming onto the market.

We are NOT expecting a popping of any bubble as we don't believe a bubble currently exists in SCC. Check out these claims of a bubble dating back to 1947. One of the biggest issues with those that believe in the bubble is they compare housing prices to income. We believe it is more important to look at affordability of the housing payments to income. Interest only loans and higher debt ratios allowed by the lenders combined with the lower interest rates provide more room for appreciation. According to Dataquick the typical monthly mortgage payment made in April 1990 was finally reached again in November 2004. Think of how much incomes have increased in the last 15-years. Additional Silicon Valley is built out and buyer demand remains high with a shortage of housing. With the increase in gasoline prices close in properties will be in even higher demand. Then there is the weather that is difficult to beat.

The market has experienced some strong price increases that are typical for February-April. SCC's median Sold price increased from $664,000 in January to $750,000 by April. Now $760,000 in August. Prices are likely to continue to remain strong but flat until the DUI increases significantly. We currently believe that September will come in at about $740K and may reach the $735K level. There continues to be fluctuations in the data. One of these fluctuations was caused by REIL when it released LM 1.8 on May 10th. The software fails to enter leading zero(s) for the real estate area number. This causes REIL's software not to find these listings because they are sorted as if the area number were a word opposed to a number. This means that area 27 is after 269 and before 270. This effectively moves many Alameda County properties into San Mateo County. We caught and have been compensating for this error. REIL made the correction on July 11th, 2-months after REIL introduced the error. Another MLS error that we hope is short lived, is that 44 properties that expired on September 14th & 15th were still showing as active listings. This "minor" error accounts for 50% of the increase in inventory this week. This error seems to be continuing as a constant offset of 2-days resulting in about 45 extra listings showing as inventory.

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.

Notice the minus signs on inventory, which indicates weaker market conditions. Weaker market conditions are associated with increasing inventory. It is not that inventory is growing rapidly but that inventory normal is falling by the middle of July. The market will have to weaken more before there is any real softening of prices. Notice the number of equal signs for sales. This indicates that sales are changing normally for this time of the year. 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 getting slightly worse. Normal for this time of year includes a price correction. Peak pricing occurred in August 1999, April 2000, and June 2004. We believe that the stronger than normal market explains why prices are flat for April-August versus dipping. We still expect to see dip in September/October but only to about $735K. 

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 had been following normal patterns, although only at 70% of the normal level. In July and August inventory has increased from 68% to 78% of the 5-year norm. During September inventory increased to 86% of normal.

There have been four significant drops in initiated sales volume using the 5-year norm:
    1) the month of June 2004, 153% to 131%;
    2) mid-November through mid-December 2004, 130% to 110%;
    3) the second half of January 2005, 119% to 92%; and
    4) July 2005, 125% to 117%.

The fluctuations in DUI compared to the 5-year average have been replaced with an increasing DUI or slowing market. DUI reached 67% of normal. DUI of less than 100% means a stronger/hotter than normal market conditions. Significant price decreases should not happen until DUI is approaching 90. We think this is unlikely to happen any time soon. Although we expected a 2-4% price correction going into late Summer or early Fall. This dip appears ready to show itself in the September data.

Viewing the raw sales volume data is eye opening. The deep blue line shows the significant drops in number of transactions. It is the vertical separation between the two lines that shows the "extra" transactions in 2004 when compared to the 10-year average. Notice that volume of initiated sales dipped below the 10-year average reaching a low of only 98% in January 2005. This appears to have been caused by a 1-week delay in the low point in the volume of sales. This corresponds to a horizontal shift of 10-year average graph 1-week to the right. We have the sales volume data going back to July 1992 and this is the first time we have noticed a time shift. Sales volume is again above the 10-year average.

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 112.2% of the 10-year average.

Sales increased more rapidly than normal climbing from 98% of normal in January to 128% just prior to Memorial Day. Sales then declined at a faster than normal rate reaching 111% of the 10-year average on July 21, 2005. Sales have been increasing in August reaching 120% of the 10-year norm before dropping to 108.9% last week and rebounding to 112.9% this week. These percentages are not adjusted for growth. The fluctuation in the sales volume remains a concern. However, we are more concerned about the growing inventory. We believe that some of the robust sales in 2004 might be partially explained by issues with the MLS software.

Comparing 2005 to 2000 seemed logical as the real estate market conditions had been similar and the calendars were identical. It is apparent that something very different started after the 2004 Presidential election. It turns out that 2005 is repeating 1999. Check out the how all three components (inventory, sales & DUI) were all close to 100%. Notice the increased inventory. It is the increase in inventory that is causing the increase in DUI. 2000 slowed relative to 1999 and 2004 so these two years are essentially tied with 2005. 2005 appreciation of median Sold price for completed sales has reached 21.1% (760/635) with indications that this is it. With a current DUI of only 51.4, 2005 has become cooler than 1999 with 40.4 DUI, 2000 that had 32.7 DUI and 2004 with 39.2 DUI. This drops 2005 to the fourth strongest year since we started gathering data in 1998. This is comparing the same dates. Also noteworthy is all three of these years saw a decrease in DUI while 2005 was flat.

Because people remember last year the most clearly, here is a comparison between 2005 to 2004. The lack of inventory that many have complained about has climbed steadily from 55% at the beginning of the year to 118% now. Sales were at about the same level until the second half of January when 2005 sales started to drop off significantly reaching 82% compared with 2004. The rate of decline in sales has slowed and even recovered some. Sales volume is now performing similarly to  2004 but with 2005 at 90% or having 10% fewer transactions. With the increased inventory and roughly constant sales DUI has climbed from 52% at the beginning of the year to 86% by Valentines day, 95% by tax day and 131% now. This means the market is now less robust than in 2004. It is noteworthy that just 6-weeks ago this was only 108%. This is a 23% increase in just 6 weeks. Nearly all this increase is a result of the increasing of inventory.

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 nor the fourth drop in July 2005. The June 2004 decrease might be associated with the MLS correcting some of its issues. Next buyers were racing to beat the increasing interest rates. This might explain the increasing initiated sales compared to normal. Currently, it appears that Sellers are racing onto the market. The million dollar question remains why?

If asked to provide guidance, we would suggest that the April through August was the price plateau and we now expect this to be followed by small reductions in price (about 2-4%) as the year progresses, ending the year at approximately $735K. We currently believe that the appreciation for 2006 with start out strong like 2005, including bring some of the 2006 appreciation into 2005. So we expect a price dip in September with a chance that October through December will start to see some of the 2006 appreciation. We believe the low DUI is more important than the drop in sales volume or increase in inventory when determining price appreciation. We remain concerned about the increasing inventory and the fluctuation in sales volume. We also don't have an explanation for the increase in inventory since mid-July and more rapid increase since Katrina. Keep in mind any interest rates increase have significant impact on affordability.

Real estate remains a great long-term investment. With the current behavior in the SCC real estate market statistics, we would recommend rational behavior, making plans for long-term and not the short term gains. If a seller needs to sell during the next 4-months now might be the ideal time to sell. If a Seller can wait until Valentine's Day 2006, waiting is likely the better option, but of course no guarantee. All Sellers should be ready to go on the market, as the market can and has changed very rapidly. 

On the other hand, Buyers should still move forward because of fears that interest rates will increase but being careful not to overpay too much or settle too much as the bulk of the price increase for 2005 has already occurred. 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. Ideally buyers can purchase between now and Halloween with our biggest concern being increasing interest rates, which increase the cost of homeownership not increasing prices. A Buyer should definitely purchase before New Years 2006 as we again expect to see some significant price gains early in 2006, even if it is less than the 15% experienced in 2005.  Both buyers and sellers should watch the market conditions for additional indications that the market for signs of strength or weakness and act accordingly. If the market shows signs of weaken or strengthening moving forward rapidly will be key. For now, the change appears to be gradual so no need to race forward.

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. 

Inventory – 2323; 2005 has more inventory than in 1999 at 134% & 2000 at 159%, similar inventory to 2004 at 118% and significantly lower than 2003 (81%) and less than 61% of the 2001 & 2002 inventory. The gradual elimination of surplus inventory during 2004 caused a shortage of inventory in 2005 and contributed to our belief that 2005 would likely be similar to or stronger than 1999. With the recent increase in inventory 2006 may be less robust than 2005. From November 12, 2004 through January 2005, inventory had been growing significantly when compared to 1999/2000. This indicates that there are more sellers ready to sell until about mid-May. From mid-May until July 4th inventory was actually decreasing slightly. Since July 4th inventory has been again growing at a time when it is normally decreasing slightly. This increase in inventory became more significant since Katrina. The general perception of limited inventory contributed to the price firming. If inventory continues to grow, it will contribute to price stabilization. Based on recent activity we are reducing our 2006 appreciation guess from 15% to 10%.

Days of Unsold Inventory – 51.4. We believe that the DUI continues its increasing trend despite dips we attribute to the holidays. 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." Since February 26, 2005 when DUI was only 26.4, DUI has been increasing slowly, except for holiday bounces. DUI has been increasing more rapidly in July, but still nothing to be concerned about, especially because it has been flat for most of August. It will now depends on how much longer "extra" sellers come onto the market and/or if the number of buyers starts to increase or decrease. 

Many areas such as Santa Teresa, Evergreen, North Valley, Milpitas, Santa Clara, South San Jose, Blossom Valley, Campbell, Sunnyvale and Mt. View are leading the way in Santa Clara County with 30 to 42 DUI. The DUI for these fast areas is 36. This puts the much of Santa Clara County squarely in a seller's market. Other areas such as Los Altos, Saratoga and Los Gatos which are almost always the slowest two areas, are lagging behind with 91 to 117 DUI. The areas not mentioned are in a balanced market. Last week, not only did the DUI increase but there are far fewer geographic areas in the Seller's market. This means more areas have moved into a balanced market. This week saw a slight improvement.

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 33.0 DUI. Homes between $750,000 and $1,000,000 have only 51.0 DUI. 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 88.9 DUI (that's 3 months); homes between $2.5M and 5.0 M have 8.5 months of unsold inventory and homes over $5 Million have 3 2/3 years. Remember, we consider 45 to 90 DUI as a balanced market.

Median List Price - $724,950 Median List price has dipped $17,000 from the record high of $742,000 set on July 28, 2005. The List price stayed flat through February 3, 2005 and then jumped upward in February. 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 List price to be stable at the beginning of 2005 before resuming the climb in February. List price reached $710,000 on March 3, 2005 and stayed there through May 5th. List price again jumped $14,000 on both May 12th and again on 19th and has been essentially flat since May 19, 2005. Not the smooth increase most people expect. Notice that currently the median List price is on a downward trend. This is a strong indication that the dip in median Sold price will still show up as we have been expecting.  

Number of initiated Sales per day – 45.2 Something happened around July 11th that caused the buyers to leave the market at a faster pace. This exactly matches with the release of LM1.8.2 (Listing Management software used by REIL to report sales.) Our concern is REIL has a track record of causing a new mistake when fixing an old mistake. At this time we are uncomfortable guessing if there is a bug in the new software or a change in the market. It is starting to appear that inventory is growing slightly more than normal, which is hard to attribute to a MLS issue. The all time record high level of 66.7 sales/day was reached just prior to Memorial Day 2004 and will likely remain the record for years to come. 2005's record of 57.9 sales/day was also achieved just prior to the Memorial Day weekend. The previous record was 54.8 sales per day also reached just prior to Memorial Day but back in 1999. We believe that part of the record volume in 2004 and 2005 is a direct result of issues with the MLS database that continue two years after the disastrous migration in July 2003.

Percentage of normal sales initiated – 112.9%. A third drop in percentage of normal sales from 114% to 96% occurred during the second half of January 2005. Percentage of normal sales had been climbing more or less since February 1, 2005. But saw flattening out immediately following the release of Listing Management 1.8 on May 10th. This is the portion of the software used to report sales. We believe that there is a direct connection between these two events. So even though sales were dropping more rapidly than normal based on the MLS data, we believe that this is simply eliminating the fictitious sales that were never there. In any case, sales have increased slightly in August. This coincides with the all the data going through the MLS's new LM1.8.2. There was a significant drop in percent of normal sales last week that bounced back this week. This could be something as simple as buyers' getting distracted by all the hurricane news. We believe that the accuracy of the raw MLS data may be improving. 

Median Sold price – $749,650. This is still essentially tied with the record high of May 19, 2005 at $759,000. May's median sold price was $749,000. June's median came in at $760,000. July's is $750,000. August is $760,000. We are now estimating September's median Sold price to be $735K. This reflects our expectations of a slow drift downward in price as Fall approaches. The dip will likely be just for September 2005, as we expect by October or November some of 2006's appreciation will be pulled forward. The fact 2005 is the hottest June since 1998 may have stabilize prices but we don't expect any upward movement. The market has cooled and 2005 is now being beaten by 3 other years (1999, 2000 & 2004) the Fall dip in prices is more likely.

Prices increased for 8 straight months $630,000 in September, $636,000, $649,000, $661,000, $664,000, $705,000, $733,000, $750,000. This longest duration of monthly price increases got broken with May's value of $749,000. June's median did increase to  $760,000 but only after May broke the trend. July clearly broke the pattern with a drop from $760,000 it $750,000. August came in at $760,000. We believe that the limited inventory on strong market pulled some of 2005's appreciation forward into late 2004. Mother's Day was the true market peak for 2004. Despite the weakness in the market back in January we believe that the peak for 2005 market occurred at about the same time, Mother's Day 2005. After a robust May and June, July, August and September are showing some weakness. 

Average Sold price to List price ratio – 101.6% This means on average Sellers are getting more than they are asking at the time the offer is accepted. This had been relatively flat from August 20. 2004 until February 2005. Increases had pushed the ratio above the recent record of 102.0% set on May 7, 2004, peaking at 104.4% on April 21, 2005. SCC hasn't experienced this level since back in 2000, when it reached 109%. The magnitude of overbidding has been decreasing essentially weekly since April 21, 2005 which an indication that buyers are not feeling as much pressure and/or that sellers are expecting more and have raised their asking prices. The magnitude of overbidding leveled off on August 18, 2005. 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 was greater than List price – 60.5% The all time record high of 75.2% was set May 12, 2005 beating the 74.8 level reached in April 2000. Starting in February 2005 through May 12, 2005 the frequency of overbidding had been increasing. Between May 19, 2005 and July 21, 2005 the frequency of overbidding has been declining again. Since July 21, 2005 the frequency of overbidding has been flat. Currently 3 out of every 5 sellers are getting more than their asking price, at the time the offers accepted. 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 – 16 days. DOM was 11 as recent as mid-May. Then increased to 17 before returning to 16. DOM for offers accepted has increased to 19, so expect DOM for completed sales to increase. Currently DOM is not very meaningful 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 dipped slightly to $838,944 and is down $20,000 from their record high of $859,000 set on May 12, 2005. SMC median Sold price is $859,500 off $65,500 from their new record of $925,000 set on May 5, 2005. At $724,950, SCC median List price is now $17,000 below their record high price $742,000 achieved on July 28, 2005. The median Sold price at $749,650 off $10,350 from the record high of $760,000 established on June 30, 2005. SZC's median List price at $750,000 is off $39,500 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $761,250 is $30,250 off their new record of  $791,500 set on June 30, 2005. MTY median List price at $675,000 is $24,000 off their record high of $699,000 set on June 23, 2005. Monterey's median Sold price of $662,000 is off $46,900 their record high of $708,900 on July 28, 2005.

Additional background information