DRAFT  June 1, 2006 Weekly Bay Area Real Estate Market Newsletter  DRAFT

8-year averages This graph shows the three market components (inventory, sales, DUI) compared to their 8-year average. Comparing the same date each year adjusts for the seasonal fluctuations in the real market. 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 103%. 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 86%. Approximately 105% would be normal for both inventory and sales because of the growth over the past 8-years. Days of Unsold Inventory is a measure of the supply/demand balance so no growth adjustment is necessary. A low DUI indicating a strong sellers market. 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 decreased (improved) to 90% on April 18th. Since April 18th, DUI has reversed course and has increased to 110%.

inventory   sales volume   dui  Here we 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 as indicated by the flat line. Inventory is 112% to 158% of past years except 2001 (62%) & 2003 (75%). 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 saw sales have stabilized some but in general the volume of sales have continued to decease slowly. May has seen sales decrease a little more significantly. Currently sales are 63 to 90% of past years with 2001 being the exception at 133%. DUI is higher 125% to 195% (worse) than any year except 2001 (47%) & 2003 (88%). Remember inventory and sales should be but are not adjusted for growth and DUI being a ratio self adjusts for any growth.

90-day market indicator This is where we expect the public will perception will be in 90 days based on today's market trends. This proprietary calculation has forecast the local real estate market well back to 1993. 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 slow deterioration. The last time this indicator was this bad was most of 2001 and 1995.

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 recent levels. It is the lack of sales volume that has us the most concerned. We do not believe this is a weather issue as the drop started back in mid-October and the weather got bad at the end of February.

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. We believe sellers should place their homes on the market sooner opposed to later. At some point we expect to see a downward price trend to about $725K in the September time frame with the bulk of this drop occurring in June/July 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 June/July 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 and adjustable rate loan 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 negative with equal for inventory which we believe is only because many sellers that would be trying to sell now accelerated their plans and sold in 2004 or 2005. We believe that much of the improvement noticed earlier this year was related to the lateness of Easter and this negative change post-Easter tends to support that belief.

Inventory - 2,732; is significantly more inventory than in 2000 at 160%, 1999 at 145%, 2005 at 135%, 2004 at 115%, 2002 at 112% and significantly less than 2003 at 75%, and 2001 at 62%. From July 4th to mid-October inventory grow at a time when inventory is normally decreasing. Inventory normally starts decreasing by mid-July The increase in inventory became even more significant post-Katrina. Inventory finally started decreasing in mid-October. The rate of decline has been less than normal. Inventory started increasing on January 3, 2006. This would tend to support our belief that 2006 will be a soft year as historically the early in the year inventory starts to increase the softer that year is. 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 – 67.6 What a difference 1-year makes. On May 18, 2005 DUI was only 34.3.  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 at 50.0 on February 22, 2006. This was 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 finally impacted the DUI. Post Easter DUI has been increasing more rapidly (worsening market) than the 8-year average with DUI reaching 67.6. 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 has been doing better than we had estimated although the market appears to be turning for the worst again. For now we are sticking to the zero to negative 5% appreciation by September 2006. 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.

Santa Clara, Cambrian, Cupertino, Sunnyvale, Mt View and Palo Alto are leading the way in Santa Clara County with 33-43 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 and Campbell, with 50 to 78 DUI. The remaining areas South County, Evergreen, Los Gatos, Saratoga and Los Altos have a DUI ranging from 94 to 125.

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 50 DUI. Homes between $750,000 and $1,000,000 have 60 DUI. Currently, homes between $1.0 Million and $2.5 M have 88 DUI; homes between $2.5M and 5.0 M have 7 3/4 months of unsold inventory and homes over $5 Million have just over 5 years. We consider 45 to 90 DUI as a balanced market.

Median List Price  (seller's expectations) At $794,975 it is really hard to get concerned when there is a $15,000 increase in the median List price in just one week, beating the previous record high of $780,000 set on April 27th. This is the price spike we were expecting early in 2006, we are just surprised that it has lasted this long into 2006. This could reflect agents and sellers believing that prices have increased with the new year opposed to any real increase in price based on market conditions. The increase median List prices at a time when the buyers are leaving the market place  will causes volume to drop even more. This is because Seller's expectations and tends to lag the market changes. Therefore, the real estate market could have changed despite the record level pricing.

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.

Average number of initiated Sales per day (offers accepted or demand) – 40.4.  The all time record high level of 66.7 sales/day was recorded 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. Sales normally increase from January 18th until the Friday before Memorial Day. However, in 2006 sales have been decreasing recently and are currently at the same level they were on March 31, 2006. 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%. This had been in the 125-150% range from June 2003 through June 2005. By mid-October 2005 it was down but still at 116.5%. Then 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. This demonstrates that the buyers left the real estate market in significant numbers. If this had been just 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. There was an improvement in offers accept rebounding to 95% on February 22, 2006. Any improvement is welcomed news but this was still below normal sales volume. But on April 20, 2006 sales volume started to drop again reaching 88.5%. As buyers realize that only 2001 was worse, additional buyers will be spooked out of the real estate market.

Median Sold price – (reality of the market) $790,000. This is now clearly above the $760,000 achieved last year and the previous record high median Sold price of $775,000 set on March 16, 2006 and even the $780,000 level just set on May 11, 2006. Despite this new record, we still expect a slide to about $725K by September 2006. Negative year over year appreciation occurred in San Mateo County in both 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 with May and June 2005 being the hottest market 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 May 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% This peaked 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 has gradually increased reaching 100.4% on March 2nd and 100.7% on March 30th. Finally climbing to 100.8% both last week and this week. This demonstrates that buyers are still feeling some pressure to make their offers attractive to the seller. 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%. 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 – 53.6%  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 the all time record high of 75.2% that was set May 12, 2005 beating the previous record of 74.8% reached in April 2000. 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 recent low of 44.1% on February 16th. Before again climbing slowly with some fluctuations. 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. This tends to reflect market conditions 45+ days earlier because of the length of escrows and how the data is gathered. 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.

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 same property. 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 $879,000 or $16,000 BELOW their previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $892,500 off $32,500 from their new record of $925,000 set on May 5, 2005. At $794,975, SCC median List price is setting their record high surpassing $780,000 achieved on April 27, 2006. The median Sold price at $790,000 is $10,000 above their previous record high of $780,000 established on May 11, 2006. 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 $757,000 is off $65,000 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 $675,000 is $37,000 below their new all time record high of $712,000 on January 5, 2006.

Additional background information