DRAFT  January 12, 2006 Weekly Bay Area Real Estate Market Newsletter  DRAFT

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

8-year averages This graph shows the three market components (inventory, sales, DUI) compared to a 8-year average. Comparing the same date each year seasonally adjusts the data. Since mid-July 2005 inventory has been increasing rapidly. 2005 sales are decreasing rapidly since mid-October. Both these factors are causing 2005 DUI to increase rapidly on a seasonally adjusted basis. In actuality DUI is stable but it is normally dropping because of the approaching holidays. The marked change started October 11, 2005 when DUI was only 71.6% of the 8-year average. Just 2 1/2 -months later on December 4th DUI is 113.5% of the 8-year average. The rate of climb slowed peaking at 123% before improving to 113% but has been climbing again and currently stands at 123.7%.

Sales compared to the 10-year average  The seasonally adjusted sales volume now at only 88.5% has not been this low since a 2-month period in Summer 2002 and 2001! Approximately 107.5% would be normal because of average growth over 10 years.

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 significantly in 2005 compared with each of the past years except, 1998 and 2002. Although the rapid increase abated in December. Sales had been tracking past years but of have now decreased compared to the past years, except for 2000. This decreasing sales pattern appears to have stopped during the last week of 2005. DUI (the key component) is increasing compared to all previous years but has leveled off and started improving this last week. This behavior could be explained by this year's early Thanksgiving. Unfortunately, we believe it is more significant than that. 

1998  This graphs show the current (2005) market conditions compared to 1998. The 2005 market is currently duplicating the 1998 market for December. This is good news as 1999 was a good year. The other previous years were removed because the 2005 market trends were no longer following any of these previous years. Without a good past pattern to compare with, estimating the future is more difficult.

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 rate of decrease has been less than normal. This appears to be changing which would be good news. With the start of 2005 inventory is already increasing. Unfortunately the longer into the new year before this happens the better the year.  

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 more than normal. Sales normal don't start increasing until January 17th and sales are still decreasing.

Days of Unsold Inventory (supply/demand ratio) is the key market indicator in a free economy. At 70 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. This says that the market is still good and relatively stable. However, the lack of improving market indicates 2006 may be off to a slow start.

Percentage Sold price greater than List price It is difficult to be concerned when close to 50% of the sellers are getting more than their asking price. Frequency of overbidding has dropped significantly from a peak of 75.2% in early May. It was fairly stable from mid-July to mid-October but has started another slide. Remember this compares Sold price to List price at the time the offer was excepted. Many sellers are having price reductions now prior to the offer being accepted. So the Sold price could be lower than the original List price and still count as an overbid. It is noteworthy that the magnitude of overbidding has dropped below 100% for the first time since March 5, 2003. 

Median List Price  (seller's expectations) At $729,000 it is hard to get concerned. This is still some what close to 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 was at $748,888. The market has been fluctuating between $733,000 and $760,000 since March 2005. However, the week of 12/22/2005 saw a drop to $730,000 which was the lowest level since March 2005. There was a small recovery to $735,000 last week but back down to $730,000 this week. This was perfectly timed to increase December's median Sold price to $734,950 opposed to the more reflective value of $730,000. Sold price reflects 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. Both the low level and the rate of decrease concerns us. Even though the data is seasonally adjusted there appears to be a tendency to decline at this time of the year, which would tend to say that the holidays are starting to have a bigger negative impact on real estate in recent years opposed to the past 10-years. This might be an indication that the general economy is getting better so more people are doing more for the holidays which takes them away from real estate. 

CONCLUSION: 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. One 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 would include more pre-Thanksgiving sales. So the 2005 sales volume will appear slightly worse than it is. This would also explain why as more data points are post Thanksgiving that the seasonally adjusted data is improving. This would indicated that adjusting the data to the holiday itself opposed to the date would yield a better analysis model. Now that Christmas and New Years are impacting the data there is no difference between adjusting by the date or holiday as these holidays always arrive on the same date. The good news is the seasonally adjusted in the table below has seen a significant decrease in negative signs over the past two weeks.

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. We believe that the 2006 peak will likely be earlier and shorter duration than in 2001. The data could change over the next week 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. December's median Sold price of $734,950 is essentially the same as March and September level of $733.000. We expect no change in January's price followed by a downward trend to about $710,000. We acknowledge our forecast is not shared by others. However, we are using current market data opposed to closed monthly data. Therefore the change we saw in mid-October won't show in the others' data until mid-January. We believe that by March 2006 it is likely to have a year over year price decline. It is noteworthy to mention that SMC saw their annual appreciation drop to only 3%. This is what the media is focused on and should continue the downward slide when reported in April 2006. There is a slight chance that this may happen a month earlier for San Mateo County. Regardless of when the cross over point happens we anticipate that the annualized appreciation will drop dramatically during the first quarter of 2006. 

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 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 7 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. This table has replaced a lot of negative signs with equal signs over the last two weeks. This is likely the effect of an early Thanksgiving followed by the fixed dates for X-mas and New Year.

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 2006 is weaker than or equal to most previous years and is starting to perform normally. The rate of change is mostly normal with the exception of sales which is negative. 

Inventory – 1687; 2003 has significantly more inventory than in 2000 at 285%, 2001 & 2005 at 171%; the same as 2004 (105%) and less than 1999 & 2000 inventory at 85% and significantly less than 2003 at only 62%. 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 will likely be significantly less robust than 2005. From mid-May until July 4th inventory was actually decreasing. Since July 4th inventory has been growing again at a time when inventory is normally decreasing. This increase in inventory became more significant since Katrina. Inventory finally leveled off and actually decreased since mid-October. But the rate of decline has been less than normal. The general perception of limited inventory earlier this year contributed to the price firming. As inventory continues to grow, the growth in inventory will contribute to price stabilization and if it continues, price easing. With inventory already increasing in 2005 this would tend to support our belief that 2005 will be a soft year. Based on the continual increase of inventory in August and September, we reduced our 2006 appreciation guess from 15% to 10% to 5% and now likely slightly negative after one more peak very early in the year.

Days of Unsold Inventory – 83.1 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 was still nothing to be concerned about, especially because it has been flat for most of August. DUI has been increasing again since October. It will now depends on how much longer "extra" sellers come onto the market. 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 0% or less and may end the year at or below current price levels at about $710K

A half dozen areas: Santa Teresa, Sunnyvale and Mt View are leading the way in Santa Clara County with 37 to 43 DUI. This is the fewest number of areas within Santa Clara County still experiencing a seller's market. Other areas such as South County, Evergreen, Almaden Valley, Los Altos and Saratoga & Los Gatos which are almost always the slowest two areas, are lagging behind with 110 to 185 DUI. That represents a buyer's market. The areas not mentioned are in a balanced market with a DUI ranging from 49 to 88.

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 53.8 DUI. Homes between $750,000 and $1,000,000 have 77.5 DUI. Currently, homes between $1.0 Million and $2.5 M have 167 DUI (that's almost 6 months); homes between $2.5M and 5.0 M have nearly 1 year of unsold inventory and homes over $5 Million have just under 3 years. We consider 45 to 90 DUI as a balanced market. NOTE: because of the significant nature of the holidays DUI is always higher at this time of the year and not a true reflection of market conditions. DUI will start to drop next week or the week after for sure.

Median List Price - $720,000 Median List price is now $17,000 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 then remain 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 – 20.2 Something happened around July 11th that caused the buyers to leave the market at a faster than normal pace. Inventory is growing slightly more than normal. 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 – 88.5%. Sales have not been this low since 2001. This was 116.3% in mid-October. This dropped of 20+% in just 2 months and stabilized for the past month. We believe that this is significant as it demonstrates that the buyers are leaving the market in significant numbers. We do not have an explanation for why there was significant increase in the number of sellers and also decreases in the number of buyers. It is clearly happened. If the current slow down was the "normal seasonal slow-down" as many claim the percentage of sales would remain constant as this data is seasonally adjusted. With a drop of 20+%, this is clearly a more significant slowdown than normal. 

Median Sold price – $729,000. 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. November's median Sold price came in at $745,000. December's median Sold price came in at $734,950. Last week's increase tends to indicate the drop may be less significant than we think. We still believe there will be a modest recovery in January 2006, before prices began a slide to about $710K by  September 2006. 

We believe that the peak for 2005 market occurred at about Mother's Day 2005. May and June 2005 were the hottest since 1998 when we started the detailed analysis. This was followed by July through December where the market has cooled significantly. December 2005 is rapidly becoming one of the weakest markets we have had since 1998, only 2001 was weaker and that may not be true much longer. We don't believe that the majority of the consumers understand how much the market has slowed in the last 6 months and mostly in the last 2 1/2 months.  

Average Sold price to List price ratio – 100.0% 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. It then stabilized until mid-October before resuming its decline weekly for the last 2+ months. 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 – 45.7% 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 every week since November 10, 2005. 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 – 27 days. DOM was 11 as recent as mid-May. DOM for offers accepted has increased to 36, so expect DOM for completed sales to increase. Currently DOM is not very meaningful because the MLS is allowing DOM to revert to zero. Although average DOM is more commonly used we believe as with price, median is much more reflective of the market.

How are the other Counties doing? Based on the moving monthly data published weekly, SMC median List price re-bounded $829,000 and is down $30,000 from their record high of $859,000 set on May 12, 2005. SMC median Sold price is $830,000 off $95,000 from their new record of $925,000 set on May 5, 2005. At $720,000, SCC median List price is now ONLY $22,000 below their record high price $742,000 achieved on July 28, 2005. The median Sold price at $729,000 off $31,000 from the record high of $760,000 established on June 30, 2005. SZC's median List price at $739,000 is off $50,500 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $735,000 is off $77,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $684,444 is off $23,000 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $707,000 is just $5,000 below their new all time record high of $712,000 on January 5, 2006.

Additional background information