DRAFT  March 16, 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. Between mid-July 2005 and early December 2005 inventory increased rapidly from 73% to 112% of the 8-year average. Since early December inventory has been unchanged. From early October to late January sales have dropped from 115% to 83% of the 8-year average. Sales have been improving since the end of January reaching 92%. From early October DUI has increased from 68% to 133% of the 8-year average as of February 1^st. Since February 1st DUI has improved to 114%. Remember a high DUI is bad.

Sales compared to the 10-year average  The seasonally adjusted sales volume bottomed out 84% on January 24^th. Sales have improved slightly to 95%. Approximately 107.5% would be normal because of average growth over 10 years. Low sales volume remains our biggest concern. Sales have not been this low except for the first half of 1995 and March through November 2001. Since mid-October 2005 the question has been what scared away the buyers?

inventory   sales volume   dui  Seasonally adjusting the three market components by comparing current market conditions to each of the previous years using the same date. Inventory was increasing compared with each of the past years except, 2003. The increase abated in December and inventory has been behaving normally since December. Inventory is above every year except 2003 and the same as 2001. Sales had been tracking past years until mid-October. Since mid-October until end of January sales have decreased compared to the past years. Since the end of January sales have been increasing more than normal but still below normal and are now starting to level off. DUI (the key component) had been increasing (getting worse) compared to previous years  until the end of January and has been flat (performing normally) since then except when compared to 2001 and 2003. DUI is performing better than 2001 & 2003. DUI is higher (worse) than any year except 2001 & 2003.

1999  This graphs show the current market conditions compared to 1998/9. The December 2005 market had been duplicating the December 1998 market. This would be good news as 1999 was a good year. But notice the recent 2006 trend compared with 1999. Inventory is increasing from 82% to 132%. The number of sales is increasing but less rapidly than January 1999. Sales dropped from 91% to 76% of 1999. Since January 22nd, sales have essentially duplicated 1999 with a slight improvement reaching 82% of the 1999 level. DUI is increasing more rapidly than January 1999 going from 87% to 161%. It is the drop in sales that is attributing to the increase in inventory and DUI. So the key question is what happened to the buyers? We dropped other previous years because the 2006 market trends were no longer following any of these previous years. Without a multiple past pattern to compare with, estimating the future is more difficult.

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

Current Inventory (supply) finally started to decrease as of October 22, 2005. This normally happens by mid-July. The rate of decrease has been less than normal. Since December 2005 inventory was behaving somewhat normally. The longer into the new year before inventory increases the better the year. Historically, an increase in inventory this early in the year is not good.

Sales per day (demand)  This is the average daily number of initiated sales (offers accepted). Sales had been decreasing since the Friday before Memorial Day. This is normal. The rate of decrease in sales is more than normal. Sales normal don't start increasing until January 17th. Sales bottomed out at 692 on the 18th and have increased to 1306 on February 23rd. In the past week, sales have essentially been flat at 1,329.

Days of Unsold Inventory (supply/demand ratio) is the key market indicator in a free economy. DUI has dropped to 50.4 days of unsold inventory. DUI has been decreasing because of the increase in sales. This is mostly a seasonal effect and not an indication the market is improving. We believe that DUI is now beyond the significant holiday effect and future changes will be reflective of changes in the market. Considering that DUI was 57 prior to the holidays there has been some improvement. We believe this improvement is the consumers anticipating the tradition strong start of a new year. We just don't see that this year and expect as consumers start comprehending the current near record low volume of transactions that DUI will start to climb. It is becoming clear to us that we should seasonally adjust DUI as we have the data to do so and the market is not at one extreme or the other. Until now we simply consider 45-90 DUI to be a balanced market regardless of the time of year.

Percentage Sold price greater than List price 47.8%  It is difficult to be concerned when nearly every other seller is getting more than their asking price. There is no question that the frequency of overbidding has dropped significantly from a peak of 75.2% in early May 2005. Even in the worst markets frequency of overbidding stays in the teens. If we adjust the range to be 15 to 75% then 45% is in the middle. Overbidding was fairly stable from mid-July to mid-October. Then from mid-October through December another slide and finally some stability in January & February. This is comparing the Sold price to List price at the time the offer was excepted. Many sellers are now making price reductions prior to the offer being accepted. The Sold price can be lower than the original List price and still count as an overbid. It is noteworthy that the magnitude of overbidding did drop below 100% for the first time since March 5, 2003 reaching 99.9% on February 9th and currently is at 100.4%. 

Median List Price  (seller's expectations) At $764,950 is really hard to get concerned as is a new record high was set on February 23rd  of $769,950 surpassing the old record of $750,000 set February 9, 2006. This could be the price spike we were expecting very early in 2006 combined with sellers and listing agents anticipating a jump in prices with the start of the new year. The increase asking prices at a time when the buyers are leaving the market place causes the list price to increase and volume to drop more. Seller's expectations tends to lag the market changes, so the market could have changed despite this record level.

Median Sold price  (reality of market) It is difficult to be concerned about the market when the median Sold price is at $760,000. The market has been fluctuating between $733,000 and $760,000 since March 2005. December 22nd experienced a dip to $730,000 which was the lowest level since March 2005. There was a small recovery bounce to $735,000 on December 29th. This was perfectly timed to increase December's median Sold price to $734,950 opposed to the more reflective value of $730,000. The median Sold price as since returned to $730,000 but bounced high again to $740,000 just in time for January's official median Sold price. This week's increase in median Sold price to $760,000 maybe time well to have February's median Sold price to also come in at a new all-time record high. It is more common to see price dips at the end of each month opposed to price spikes. 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. Although low this indicator has been improving slightly since the end of January. The last time this indicator was this bad was most of 2001 and the first half of 1995. Even though this data is seasonally adjusted there appears to be a tendency to decline at this time of the year. This 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 could be an indication that the general economy is getting better so more people are doing more for the holidays and that takes them away from real estate. 

CONCLUSION: Real estate is seasonal. Therefore, the seasonally adjusted data is more significant than the raw (unadjusted) data. This doesn't speak well of the near-term future of the SCC real estate market. The good news was the seasonally adjusted in the table below had seen a significant decrease in negative signs after Christmas. The bad news is this data is still definitely at below normal levels. It is the lack of sales that has us concerned.

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. Sellers should place their homes on the market now. This is because as we look at the data 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. December's median Sold price of $734,950 is essentially the same as March and September level of $733.000. January's median Sold price is $740,000. February looks like it will hang strong and be close to $765K. At some point we expect to see a downward trend to about $700,000 by September but with the bulk of this drop occurring in May timeframe. 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 April 2006 it is likely to have year over year price decline. It is noteworthy to mention that SMC saw their annual appreciation drop to only 4% in December. As expected SMC saw some recovery in January. The media is focused on year of year appreciation and that focus should continue the downward slide when SMC March's decline is reported in April 2006. We anticipate that the annualized appreciation will drop dramatically during the first quarter of 2006 and reach negative numbers in March or April depending on County.

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. Cash buyers should wait for the prices to dip.

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. Notice that number of negative signs. With the drop in sales inventory will start increasing.

Viewing the three graphs that are linked in the column headings above provides a good overview of the current market conditions. Notice that 2006 is weaker than or equal to most of the previous years. The rate of changes are mostly normal with the negative signs being replaced by positive signs indicating that the trend is towards an improving market.

Inventory – 1945; Currently 2006 has significantly more inventory than in 2000 at 265%, 2005 at 156%, 1999 at 129%, 2004 at 121%, 2002 at 112% about the same inventory levels as 2001 at 90%, and significantly less than 2003 at only 60%. 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. From July 4th to mid-October inventory had been growing again at a time when inventory is normally decreasing. This increase in inventory became even more significant since Katrina. Inventory finally leveled off and actually decreased since mid-October. However the rate of decline has been less than normal. The general perception of limited inventory earlier in 2005 contributed to the price firming. The growth in inventory will contribute to price stabilization and if the growth continues, price easing. With inventory already increasing in 2006 this would tend to support our belief that 2006 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.

Days of Unsold Inventory – 50.2 What a difference 1-year makes. On March 2, 2005 DUI was only 27.6. 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." From February 26, 2005 when DUI was only 26.4, DUI has been increasing slowly until January 21, 2006, except for holiday bounces. DUI has been increasing more rapidly in July, but was still nothing to be concerned about. DUI has done well recently ending the holiday period with 7 fewer days of inventory than prior to the holidays. It now depends on how much longer "extra" sellers come onto the market and more importantly when will the buyers return to the market. As the number of buyers appeared to decline late in 2005 we became 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 $700K. However, the market is currently doing better than we had estimated but we are sticking to the zero to negative 5% appreciation by September 2006. Time will tell.

Santa Teresa, 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 24-44 DUI. By our definition are still experiencing a seller's market. The areas not mentioned are in a balanced market with a DUI ranging from 53 to 61. It is noteworthy that South County, Los Altos, Los Gatos and Saratoga that are back in their normal positions of being the slowest areas has a DUI of 73-90.

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 35 DUI. Homes between $750,000 and $1,000,000 have 46 DUI. Currently, homes between $1.0 Million and $2.5 M have 74 DUI; homes between $2.5M and 5.0 M have nearly 6 months of unsold inventory and homes over $5 Million have just under 4.5 years. We consider 45 to 90 DUI as a balanced market.

DUI has improved to 50, which is better than the DUI of 57 that SCC had going into the holidays. We believe that this will be short lived and is a function of the sellers waiting until Spring to list their homes, while Buyers enter the market right after New Years. In fact, DUI increased to 51 this week. We believe the near record low volume of transactions will spook additional buyers out of the market. We have not yet seasonally adjusted our definition of 45-90 DUI being a normal market. Historically, this is the time of the year with the lowest DUI. The easiest why to demonstrate this is despite 51 DUI being a strong market, DUI was only higher (worse) in 2001 and 2003. 1-year ago DUI was half the current level. 

Median List Price - $764,950 - The median List price set another new all-time record high of $769,960 on February 23, 2005 beating $742,000 set back on July 28, 2005 and $750,000 set on February 9th. We believe that this reflects agents and sellers beliefs that prices have increased with the new year opposed to any real increase in price. Time will tell.

Number of initiated Sales per day – 38.0 Something happened around July 11th that caused the buyers to leave the market at a faster than normal pace. 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 – 95.0%. Sales bottomed out at 86% and have not been that low since 2001. This was 116.5% in mid-October. There was a 20+% drop to 93.7% by mid-December where it stabilized until dropping again from 94.8% on January 5, 2006 to 84.0% on January 24th. 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 clear both happened. If the 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+% in 2 months followed by another 10% drop in 2 weeks it is clearly more significant slowdown than normal. January 2006 had only 661 completed sales (closed transactions). This will be the lowest level since 1998 except for January 2001 which had 599 and the next lowest was 717 in 2003. The current improvement is welcomed news but is still below normal sales volume. February 2006 is also on track to have the second fewest closings.

Median Sold price – $760,000. This ties the previous record set several time during 2005. September's median Sold price dipped to $733,000 which was 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. January's price will be basically unchanged from December at $740,000. We expect February's median Sold price to come in at about $765K before we expect a slide to about $700K by September 2006. Much of this slide will likely occur by May triggered in part by the media report in April what we believe will be year over year negative appreciation for March.

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 more than normal. December 2005 through now is rapidly becoming one of the weakest markets we have had since 1998, only 2001 was weaker. 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 of 2005.

Average Sold price to List price ratio – 100.4% Peaking at 104.4% on April 21, 2005. SCC hasn't experienced that 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 weekly decline reaching 99.7% on January 5, 2006. This demonstrates that buyers are not feeling as much pressure and/or that sellers are expecting more and have raised their asking prices. This has rebounded and now is essentially unchanged from the mid-December level of 100.4%. 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 – 47.8% 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 declined. Between July 21, 2005 and Veteran's Day the frequency of overbidding had been flat with almost 3 out of every 5 sellers getting more than their asking price, at the time the offers accepted. Overbidding has dropped every week since November 10, 2005 through the first week of 2006. 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. Now that buyers are coming back to the market to some small degree the overbidding frequency has increased slightly from 447,7% to 47.8%.

Median DOM for completed sales – 28 days. DOM was 11 as recent as mid-May. DOM for offers accepted increased to 42 before reversing with the increase in new listings since New Year. We expect DOM for completed sales to decrease after peaking at 36 days. Currently DOM is not very meaningful because the MLS is still allowing DOM to revert to zero if the listing agent uses a different name. Although average DOM is more commonly used we believe as with price, median DOM 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 $869,000 is $10,000 ABOVE their record high of $859,000 set on May 12, 2005. SMC median Sold price is $859,000 off $66,000 from their new record of $925,000 set on May 5, 2005. At $764,950, SCC median List price is off $5,000 from the new record high of $769,960 achieved on February 23, 2006. The median Sold price at $760,000 ties their record high of $760,000 established on June 30, 2005. SZC's median List price at $749,950 is off $40,000 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $724,500 is off $87,500 their new record of  $812,000 set on December 8, 2005. MTY median List price at $697,000 almost equals their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $705,000 is just $7,000 below their new all time record high of $712,000 on January 5, 2006.

Additional background information