December 1, 2005 Weekly Bay Area Real Estate Market Newsletter

This GRAPHIC SUMMARY of our data allows you to quickly visualize the detail data presented in this Newsletter.

5-year averages This graph shows the three market components (inventory, sales, DUI) compared to a 5-year average. Comparing the same date each year seasonally adjusts the data. Notice 2005 inventory is increasing rapidly and 2005 sales are decreasing rapidly causing 2005 DUI to increase rapidly. The marked change started October 4, 2005 when DUI was only 63.1% of the 5-year average. Now just 2-months later DUI is 112.5% of the 5-year average. 

Sales compared to the 10-year average The seasonally adjusted sales volume has not been this low since 2001!

inventory   sales volume   dui  The three market components, seasonally adjusted by comparing current market conditions to each of the previous years using the same date. Notice inventory is increasing in 2005 compared with each of the past years. Sales had been tracking past years but of have now started to decrease compared to the past years, except for 2000. DUI (the key component) is increasing compared to all previous years. 

1999   2000   2004 These graphs show the current (2005) market conditions compared to the year indicated. The 2005 market is no longer following the behavior of these or any other previous years back to 1998. 

Shifting from seasonally adjusted data to the raw data, things look a lot better. Unfortunately, we believe that the seasonally adjusted data is far more significant because real estate has a strong seasonal cycle.

Current Inventory (supply) has finally started to decrease as of October 22, 2005. This normally happens by mid-July. The current rate of decrease is less than normal.

Sales per day (demand)  This is the average daily number of initiated sales (offers accepted). Sales have been decreasing since the Friday before Memorial Day. This is normal. However, the rate of decrease in sales is a little more than normal.

Days of Unsold Inventory (supply/demand ratio) is the key market indicator in a free economy. At 62 days of unsold inventory, it is difficult to be concerned. Remember we consider 45-90 days a balanced market. So this is in the middle of a balanced market. What has us concerned is the increase in DUI when it is normally decreasing. This says that the market is still good now, but getting progressively worse. 

Percentage Sold price greater than List price  (frequency of overbidding) It is difficult to be concerned when more than 50% of the sellers are getting more than their asking price, but this has dropped significantly since early May at 75% and appears to be starting another drop after being fairly stable from mid-July to mid-October. 

Median List Price  (seller's expectations) At $729,500 it is hard to get concerned. This is essentially tied with the 1-week record of $742,000 set on July 28th. However, Seller's expectations tends to lag the market changes.

Median Sold price  (reality of market) It is difficult to be concerned about the market when the median Sold price is at $750,000 and the market has been fluctuating between $733,000 and $760,000 since March 2005. But this is reflective of the market 30 to 45 days earlier because of the length of escrow. 

90-day market indicator. This is where we expect the public will perception will be in 90 days based on today's market trends. The last time this indicator was this bad was 2001 and prior to August 1995.

CONCLUSION: The market continues sending interesting signals that deserve close attention. Real estate is seasonal. Therefore, the seasonally adjusted data is more significant than the raw current data. Unfortunately, this doesn't speak well of the near-term future of the SCC real estate market. The only saving grace is Thanksgiving falls between the 22nd and 28th. Being on the 24th in 2005, Thanksgiving was on the early side so several years are including more pre-Thanksgiving sales. So the 2005 sales volume will appear slightly worse than it is. 

Each client has to make their own decision on when to buy and sell real estate. We believe real estate has been and will continue to be a good long term investment. Because of the holidays we believe that sellers should continue to wait. However, sellers should be ready to place their homes on the market on January 12, 2006. This is because as we look at the data now there is a good chance that the market will peak very early in 2006 like it did in 2001 when the peak was January through March 2001. 2006 will likely be earlier and shorter duration in 2001. The data could change over the next 45-days and a seller can always delay putting the home on the market. But if the home isn't ready for the market this could cost the seller critical time. 

Buyers need to balance their personal needs with the risk of increasing interest rates coupled with a softening market. Basically, we believe that a buyer should not feel any pressure from higher prices, but buyers should move forward because of interest rates provided they are looking at a long term investment. 

This weekly DETAILED 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. 

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. Better/worse is determined from the owner's point of view. 

Viewing the three graphs that are linked in the column headings above provides a good overview of the current market conditions. Both 2001 and 2002 were abnormal years and both were weak in the Fall. Notice that 2005 is slowing more rapidly than any past year (since 1998) when using the key indicator (DUI) 

Inventory – 2190; 2005 has more inventory than in 1999 at 254%, 2000 at 222% and 2004 at 191%; the same as 2003 (114%) and significantly less than 2001 & 2002 inventory at 73%. The gradual elimination of surplus inventory during 2004 caused a shortage of inventory in 2005 contributing to our belief that 2005 would likely be similar to or stronger than 1999. With the recent increase in inventory 2006 likely will be less robust than 2005. From mid-May until July 4th inventory was actually decreasing. 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. Inventory appears to have finally leveled off and actually decreased since mid-October. But the rate of decline is smaller than normal. The general perception of limited inventory earlier this year contributed to the price firming. As inventory continues to grow, it will contribute to price stabilization and if it continues, price easing. Based on the continual increase of inventory in August and September, we reduced our 2006 appreciation guess from 15% to 10% and now to 5% or less.

Days of Unsold Inventory – 62.0 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. DUI has been increasing again in October. It will now depends on how much longer "extra" sellers come onto the market. But now that the number of buyers appears on the decline we are becoming concerned about the 10% appreciation for 2006. Based on the increase in DUI caused by increasing inventory and now decreasing buyers we think 2006 appreciation will be closer to 5% or less.

Many areas such as North Valley, Milpitas, Santa Clara, South San Jose, Blossom Valley, Cambrian, Campbell, Cupertino, Sunnyvale, Mt. View and Palo Alto are leading the way in Santa Clara County with 25 to 53 DUI. The DUI for these fast areas is 40. This put much of Santa Clara County still in a seller's market. Other areas such as South County, Central San Jose, Willow Glen, Los Altos and Saratoga & Los Gatos which are almost always the slowest two areas, are lagging behind with 85 to 175 DUI with buyer's market conditions. The areas not mentioned are in a balanced market with a DUI ranging from 65 to 74.

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 43.1 DUI. Homes between $750,000 and $1,000,000 have 60.4 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 96 DUI (that's 3 months); homes between $2.5M and 5.0 M have just over 9 months of unsold inventory and homes over $5 Million have just over 3 years. We consider 45 to 90 DUI as a balanced market. The high end actually decreased slightly. We attribute this to the high-end sellers taking their home off the market to enjoy the holidays NOT an improvement in the market conditions. 

Median List Price - $729,500 Median List price is now $12,500 below the record high of $742,000 set on July 28, 2005. 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 fluctuating which makes it difficult to determine the direction of future Sold prices. This is an indication that the median Sold price will likely be essentially flat.

Number of initiated Sales per day – 35.3 Something happened around July 11th that caused the buyers to leave the market at a faster than normal 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. 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 – 93.9%. Sales have not been this low since 2001. This was 116.3% in mid-October. This is a drop of 22.5% in just 45-days. We believe that this is significant as it demonstrates that the buyers are leaving the market in significant numbers. 

Median Sold price – $750,000. The record high of $759,000 was set on May 19, 2005. 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.September dipped to $733,000 which is the same as March's median Sold price. October's median Sold price came in at $741,000. We are now estimating November's median Sold price to be $742K. We December price to be flat as the downward trend is offset by some of 2006's appreciation being pulled forward. 

We believe that the peak for 2005 market occurred at about the same time, Mother's Day 2005. This resulted in May and June 2005 being the hottest market since 1998 when we started the detailed analysis. This was followed by July through November where the market has cooled significantly and December 2005 is one of the weakest markets we have had since 1998. 

Average Sold price to List price ratio – 100.8% 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 from April 21, 2005 until August 18, 2005. This is an indication that buyers are not feeling as much pressure and/or that sellers are expecting more and have raised their asking prices. 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 Seller's 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 – 55.3% 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. Between July 21, 2005 and Veteran's Day the frequency of overbidding has been flat with almost 3 out of every 5 sellers are getting more than their asking price, at the time the offers accepted. This has dropped the last 3-weeks to 55%. 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 – 20 days. DOM was 11 as recent as mid-May. Then increased to 17 before returning to 16 then back to 17, 19, 20 before dipping to 19 and now returning to 20. DOM for offers accepted has increased to 25, 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 to $812,500 and is down $46,500 from their record high of $859,000 set on May 12, 2005. SMC median Sold price is $850,000 off $75,000 from their new record of $925,000 set on May 5, 2005. At $729,500, SCC median List price is now ONLY $12,500 below their record high price $742,000 achieved on July 28, 2005. The median Sold price at $750,000 off $10,000 from the record high of $760,000 established on June 30, 2005. SZC's median List price at $757.500 is off $32,000 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $770,000 is $21,500 off their new record of  $791,500 set on June 30, 2005. MTY median List price at $707,500 is actually another NEW record high by $2,500 set on December 1, 2005. Monterey's median Sold price of $680,000 is off $28,900 their record high of $708,900 on July 28, 2005.

Additional background information