May 11, 2006 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.

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. December through February inventory was essentially 110% of the 8-year average. During March until mid-April inventory had been decreasing reaching 96% of the 8-year average. Since mid-April inventory increase to 102%. Sales in January sales dropped to only 83% of the 8-year average. Sales improved during February reaching 92%. Although the volume of sales fluctuated in March and April they did remain basically unchanged at 92%. May as seen sales volume decrease to 87%. Approximately 105% would be normal, because of the growth over the past 8-years. Days of Unsold Inventory is a measure of the supply/demand balance with a low DUI being good. From early October DUI has increased from 68% to 133% of the 8-year average as of February 1^st. Between February 1st and April 18th DUI improved to 90% on April 18th. Since April 18th, DUI has increased to 106%.

Sales compared to the 10-year average The seasonally adjusted sales volume decreased the last quarter of 2005 and bottomed out 84% on January 24^th. During February sales have improved to 95%. During March & April sales have fluctuated between 92 and 95%. Post-Easter volume dropped to 92% and has dropped 90% during this past week. 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 since 1995 except for 2001. Since mid-October 2005 the question has been what scared away the buyers?

inventory   sales volume   dui  Seasonally adjusting these three market components by comparing current market conditions to each of the previous years using the same date. Inventory is currently performing essentially normally compared the past years. Inventory is 116% to 168% of past years except 2001 (61%) & 2003 (72%). Between mid-October until end of January sales decreased compared to the past years. February sales increased more than normal but remained below normal. During March sales have been declining with 2001 being the only year with fewer sales. April and May sales have stabilized some, but in general have continued to decease slowly. DUI is higher 133% to 190% (worse) than any year except 2001 (44%) & 2003 (80%).

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 first quarter 2006 trend compared with 1999. Inventory increased from 82% to 148%. By mid-April inventory decreased to 128% but has since increased to 144% compared to 1999. During January, sales dropped from 91% to 76% of 1999. This means the number of sales are increasing but less rapidly than January 1999. Since January 22nd, sales have essentially duplicated 1999 with a slight improvement improving from 76% to 84% of the 1999 level. During April sales have increased from 84% to 93% before dropping to the current level, 86% of the 1999 level. DUI increased more rapidly than January 1999 going from 87% to 141%. DUI has continued to climb slowly since reaching 156% at the end of February and 175% at the end of March. Since April DUI has decreased (improved) reaching 138% on April 16th. DUI increased to 168% during April and has remained unchanged. Remember a high DUI is not good for the real estate market. We believe that it is the lower than normal sales that is causing the inventory to increase. 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 multiple past patterns to compare with, estimating the future is more difficult. This could indicate that SCC is experiencing a 'balance' year with the other years being either a sellers' market or a buyers' market.

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) 2,606 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 early in the year is not good. Inventory started increasing on January 3, 2006.

Sales per day (demand) 41.2 This is the average daily number of initiated sales (offers accepted). Sales normal start increasing around January 17th. Sales bottomed out at 19.8 on January 18th and increased rapidly to 37.3 on February 23rd. Sales are continued to climb reaching 42.6 on April 15th but have leveled off and currently at 41.2.

Days of Unsold Inventory (supply/demand ratio) 63.2 is the key market indicator in a free economy. DUI has dropped to 50 days of unsold inventory on February 22, 2006. DUI had been decreasing because of the increase in sales. This is mostly a seasonal effect and not an indication the market is improving. DUI is now beyond the significant holiday effect and future changes will be reflective of changes in the market. DUI did increase slightly to 54. Considering that DUI was 57 prior to the end-of-year holidays there has been some improvement in market conditions. DUI dropped prior to Easter and increased after Easter. This is normal holiday behavior. We believe the improvement was the consumers and agents anticipating the tradition strong start of a new year combined with the record volume of the past several years depleted many would be sellers. We expect that consumers will start comprehending the current near record low volume of transactions and that DUI will start to climb. We are a bit surprised that the climb in DUI has not been more significant but still expect the climb to happen. It is becoming clear to us that we should seasonally adjust DUI data. Until now we have consider 45-90 DUI to be a balanced market without adjusting for the time of year.

Percentage Sold price greater than List price 53.9%  It is difficult to be concerned when every other seller is getting more than their asking price. There is also no question that the frequency of overbidding has dropped significantly from a peak of 75.2% in early May 2005. Even during the worst market conditions, the frequency of overbidding stays in the teens. Adjusting the range to be 15 to 75% then 45% is the mid-point. Overbidding was fairly stable January & February at 45% followed by a steady climb in March reaching 52%. April brought stability at 51%. This week experienced a 2.5% increase to 53.9%. This reflects market conditions 45+ days earlier because of the length of escrows and how we gather the data. 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 100.8%. 

Median List Price  (seller's expectations) At $779,500 it is really hard to get concerned when essentially tying the previous record high of $780,000 set on April 27th. 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. We are surprised to see the market holding this strong this far into 2006. 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. This is because Seller's expectations tends to lag the market changes, so the market could have changed despite the record level pricing.

Median Sold price  (reality of market) $780,000. It is even more difficult to be concerned about the market when the median Sold price is setting another new record of $780,000 on May 11, 2006. However, fairly stable price during this time of year is not good news. The market had been fluctuating between $733,000 and $760,000 since March 2005. So increasing to $780,000 is positive but not particularly significant. April's median Sold price came in at $775,000. We expect May's median Sold price to be unchanged. We still think that prices will be about $710,000 around September 2006. 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 improved slightly during February then started deteriorated slightly since the beginning of March except for a normal holiday fluctuation at Easter and has resumed the deterioration. The last time this indicator was this bad was most of 2001 and 1995. Even though this data is seasonally adjusted there appears to be a tendency to decline at this time of the year.

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 bad news is the strength of the real estate market is still definitely at below normal levels. It is the lack of sales that has us the most 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. At some point we still expect to see a downward trend to about $710,000 in the September time frame with the bulk of this drop occurring in June timeframe. We acknowledge our forecast is not shared by others. It is noteworthy to mention that SMC saw their median Sold price drop from $899,000 in March 2005 to $875,000 in March 2006 and their median Sold price drop from $922,000 in April 2005 to $900,000 in April 2006. We anticipate that the annualized appreciation will drop dramatically during the first quarter of 2006 and reach negative numbers in May/June in Santa Clara 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 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 normal but there has been a shift towards more positive signs which indicates the market is improving. We believe that much of this improvement is the lateness of Easter.

Inventory - 2,606; Currently 2006 has significantly more inventory than in 2000 at 166%, 1999 at 144%, 2005 at 135%, 2002 at 116%, 2004 at 114% and significantly less than 2003 at 72%, and 2001 at 61%. From July 4th to mid-October inventory grow at a time when inventory is normally decreasing. This increase in inventory became even more significant post-Katrina. Inventory finally actually started decreasing in mid-October. The rate of decline has been less than normal. Inventory started increasing early in 2006. This would tend to support our belief that 2006 will be a soft year. Based on the increasing inventory in August and September, we have reduced our 2006 appreciation guess from 15% to 10% to 5% and now to likely being slightly negative despite the stabilization in inventory.

Days of Unsold Inventory – 63.2 What a difference 1-year makes. On May 11, 2005 DUI was only 33.2. 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 use "months of unsold inventory." Excluding holiday bounces, DUI has been increasing from 26.4 on February 26, 2005 until December 21, 2005 when DUI reached 61.0. DUI improve early in 2006 ending the New Year holiday period with 50.0 on February 22, 11 fewer days of inventory than prior to the X-mas holiday. Since February 22, 2006, DUI has been increasing slower than the 8-year average reaching 55.1 on April 7th. At which point Easter impacted the DUI. Post Easter DUI has been increasing more rapidly (worsening market) than the 8-year average with DUI reaching 63.2. 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 $725K. 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 Clara, Cambrian, Cupertino, Sunnyvale, Mt View and Palo Alto are leading the way in Santa Clara County with 30-43 DUI. By our definition are still experiencing a seller's market. Then there are areas such as Santa Teresa, East Valley, North Valley, Milpitas, Central San Jose, Willow Glen South San Jose, Blossom Valley,  Almaden Valley, Campbell, with 46 to 75 DUI. The remaining areas South County, Evergreen, Los Gatos, Saratoga and Los Altos have a DUI ranging from 91 to 123.

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 44 DUI. Homes between $750,000 and $1,000,000 have 58 DUI. Currently, homes between $1.0 Million and $2.5 M have 85 DUI; homes between $2.5M and 5.0 M have 7 3/4 months of unsold inventory and homes over $5 Million have nearly 5 years. We consider 45 to 90 DUI as a balanced market.

Median List Price - $779,500 - The median List price set yet another new all-time record high of $780,000 on April 27, 2006 beating $779,000 set April 20, 2006. We believe that this reflects agents and sellers beliefs that prices have increased with the new year opposed to any real increase in price. 

Number of initiated Sales per day – 41.2 - 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 – 90.3%. Sales bottomed out at 86% and have not been that low since 2001. This had been 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, March and April 2006 also had the second fewest closings. We believe the near record low volume of transactions will spook additional buyers out of the market.

Median Sold price – $780,000. This is now above the $760,000 achieved last year. The previous record high median Sold price of $775,000 set on March 16, 2006. Despite these new records, we still expect a slide to about $725K by September 2006. Negative year over year appreciation occurred in San Mateo County in March and April with nearly 3% negative appreciation yet this did not get any press coverage.

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 April 2006 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 with a concentration of the slow down in the last 2 1/2 months of 2005.

Average Sold price to List price ratio – 100.8% 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 gradually increased reaching 100.4% on March 2nd and 100.7% on March 30th. Finally climbing to 100.8% this week. 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 – 53.9% 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. Followed by some fluctuation reaching a new low of 44.1% on February 16th. Before climbing slowly with some fluctuations. 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 – 17 days. Last year DOM was only 11. DOM is currently not very meaningful because the MLS is still allowing DOM to revert to zero if the listing agent uses a different name when listing the property. 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 $885,000 or $10,000 BELOW their previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $915,000 off $10,000 from their new record of $925,000 set on May 5, 2005. At $779,950, SCC median List price is essentially tied with their record high of $780,000 achieved on April 27, 2006. The median Sold price at $780,000 is $5,000 above their record high of $775,000 established on March 16, 2005. SZC's median List price at $769,000 is off $20,000 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $755,000 is off $67,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $699,000 is off $8,500 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $678,500 is $33,500 below their new all time record high of $712,000 on January 5, 2006.

Additional background information