July 20, 2006 Weekly Bay Area Real Estate Market Newsletter

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 significant seasonal fluctuations the real estate market experiences.

    Inventory was essentially 106% of the 8-year average from December 2005 through February 2006. During March until mid-April inventory decreased reaching a low of 96% of the 8-year average. Since mid-April inventory increased to 137% of the 8-year average. Approximately 105% would be normal for inventory because of the growth over the 8-years.

    Sales in January dropped to only 83% of the 8-year average. Sales improved during February reaching 92%. Although the volume of sales fluctuated in March through mid-April sales remained basically unchanged at 92%. From mid-April through June 26 sales were at 89% with some fluctuations. Then in just 2-weeks sales dropped to 82% of the 8-year average. Remember this compares the same dates each year, therefore July 4th should not impact the percentage of sales. It is likely that many made July 4th a 4day holiday opposed to the more common 3-daoy holiday. This would account for some of this drop. Approximately 105% would be normal for sales because of the growth over the 8-years.

    Days of Unsold Inventory is a measure of the supply/demand balance. Consequently, there is no growth adjustment necessary and 100% would be normal. An increasing DUI indicates worsening market conditions. From early October DUI 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 increased to 137% of the 8-year average.

90-day market indicator: This is where we expect the public perception of the local real estate market will be in another 90 days, based on today's market trends using our objective proprietary formula. These calculations have fairly accurately forecasted the local real estate market back to July 1993. Although low, this indicator improved slightly during February but has been deteriorating slowly since the beginning of March excluding the normal holiday fluctuations. There has been a fairly significant deterioration since June 24th entering the "poor" market conditions. Since July 1993 this indicator was only been this low for 8 months, the first 4 months of 1995, mid-March through May 2001 and again mid-September through October 2001.

HISTORICAL COMPARISONS: This seasonally adjust the data by comparing the same period of the current year to the previous year being used. 100% would indicate the same as that past year and a flat line would indicate that the rate of change of that component is the same as the historical year. The table below compares the current real estate market conditions to each of the last 7 years. The sign ( + = - ) next to 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.

    inventory:   Inventory is 147% to 174% of past years except 2001 (81%), 2002 (105%) 2003 (107%).  Inventory is currently increasing at a faster pace than every year as indicated by the increasing slope of the graphs, except 2002 when inventory was increasing rapidly as the post 9-11 feeding frenzy slowed.

    sales volume:   Between mid-October until end of January sales decreased compared to the past years. February sales increased more rapidly than normal but remained below normal. During March sales have been declining with 2001 being the only year with fewer sales. April saw sales stabilize some, but in general the volume of sales have continued to decease slowly. May has seen sales decrease a little more significantly. June experienced a slight improvement in sales volume. July is experiencing additional reduction in sales. Currently sales are 65% to 84% of past years with the exceptions being 2001 at 106% and 2002 at 103% and sales have been slowing more rapidly than in most years.

    DAYS of UNSOLD INVENTORY: An objective measure of the supply demand ratio that fundamentally drives pricing in a capitalism. DUI is higher 154% to 225% (worse) than any year except 2001 (74%) & 2003 (102%). Unlikely inventory and sales which should be (but are not) adjusted for growth, DUI being a ratio is self adjusting for any growth.

CONCLUSION: Real estate is seasonal. Therefore, this seasonally adjusted data is more significant than the raw (unadjusted) data that follows our conclusions. This doesn't speak well of the near-term future of the SCC real estate market. 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 didn't believe the weather was the cause of the 2006 slow-down as many speculated earlier this year. Not only did the drop in sales start back in mid-October 2005 but it has continued now that the weather has improved. Maybe the next excuse will be the unseasonably hot weather kept consumers in air conditioned buildings opposed to shopping for houses.

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 July 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 8 months with a concentration of the slow down in the last 2 1/2 months of 2005. The result has been increasing prices when all indications are prices should have been flat or decreasing. This is why we expect to see prices to return to the $750,000 or below in the not distant future.

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 but it will clearly take longer than September time frame as we originally expected. We acknowledge our forecast is not shared by others. It is noteworthy to mention that SMC has recovered and set a new record high median Sold price of $950,000 on June 29, 2006 but has dropped back to $900,000 as of July 20, 2006. This was after SMC median Sold experienced a year-over-year 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 still anticipate that the annualized appreciation will drop dramatically in the near future and that negative appreciation will reach 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 consider waiting 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. Additional background information  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. 

RAW DATA for Santa Clara County. Raw data for the other counties follow the analysis of Santa Clara County data.

Inventory: - 3,393; is significantly more inventory than in 2000 at 176%, 1999 at 168%, 2005 at 161% and 2004 at 147%, about the same inventory as 2003 at 107% and 2002 at 105% and significantly less than 2001 at 80%. From July 4th to mid-October inventory grow at a time when inventory is normally decreasing. The increase in inventory became even more significant post-Katrina. Inventory finally started decreasing in mid-October. The rate of decline was 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.

Days of Unsold Inventory: – 95.1 What a difference 1-year makes. On July 20, 2005 DUI was only 43.8.  Excluding holiday bounces, DUI has been increasing from 26.4 on February 26, 2005 until December 21, 2005 when DUI reached 61.0. DUI improved 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 (101% of the 8-year average) 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 95.1 (137% of the 8-year average) on July 20th. Based on the increase in DUI caused by increasing inventory and decreasing buyers, we think 2006 appreciation will be reduced. By year's end median Sold price will likely be below current price levels and may be approaching $725K. However, the market has been and continues to do better than we had estimated. The balance between supply and demand is the most important factor in a capitalistic economy. We measure this balance using Days of Unsold the Inventory (DUI) while most areas use months of unsold inventory.

    GEOGRAPHIC SUB-MARKETS:  Sunnyvale, Mt View  are leading the way in Santa Clara County with 43 & 44 DUI. By our definition these areas are still experiencing a seller's market. Then there are areas such as North Valley,  Santa Clara, Central San Jose, South San Jose, Blossom Valley,  Cambrian, Campbell, Cupertino, and Palo Alto and with 51 to 86 DUI, which we consider to be a balanced market. The remaining areas South County, Santa Teresa, Evergreen, East Valley, Milpitas, Willow Glen, Almaden Valley, Los Gatos, Saratoga and Los Altos, have a DUI ranging from 93 to 191.

    PRICE SUB-MARKETS:  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) have 71 DUI, which we consider a balanced market. Homes between $750,000 and $1,000,000 have 89 DUI, which is about to enter into a buyer's market. Currently, homes between $1.0 Million and $2.5 M have 125 DUI; homes between $2.5M and 5.0 M have 16 months of unsold inventory and homes over $5 Million have just under 5 years. We consider 45 to 90 DUI as a balanced market.

Median List Price:  (seller's expectations) At $775,000 this is a $25,000 drop in just 2-weeks month, back to the level first achieved in mid-April. The price spike we were expecting early in 2006 appears to be later and larger than we were expecting but may in fact be over with. The previous increases median List prices at a time when the buyers are leaving the market place may cause the volume and prices to drop even more. Seller's expectations and tends to lag the market changes. Therefore, the real estate market could have changed despite the record level pricing reported for June 2006.

Sales initiated per day: (demand) 35.7. This is the average daily number of initiated sales (offers accepted). Sales normal start increasing around January 17th. This year sales bottomed out at 19.8 on January 18th and increased rapidly to 37.3 on February 23rd. Sales continued to climb reaching 40.6 on April 6th. Sales remained flat and were still at 40.6 on June 29th. Daily sales then dropped as a result of July 4th reaching 35.7 on July 20th. This is only 82.6% of the 8-year average. This is even more significant as we do not adjust sales/day for any growth over the 8-year period. 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. This year's maximum was 43.1 sales/day reached on Memorial Day itself. Sales normally increase from January 18th until Memorial Day. However, in 2006 sales decreased between April 15th and Mary 23rd before spiking just in time to be at the high for the year of 43.1 on Memorial Day itself. This low volume concerns us. 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: – 84.6%. 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 claimed, 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 even if sales remained below normal sales volume. Sales started a gradual decline reaching 88% at the end of May. Sales then rebounded for the month of June with 92%. July as seen another sharp drop in sales currently at 85% of normal. As buyers realize that only 2001 was worse, additional buyers may be spooked out of the real estate market.

Median Sold price: – (reality of the market) $820,000. This is clearly remains above the $760,000 achieved in 2005 but below the previous record high median Sold price of $830,000 set on June 29, 2006. Despite this strong showing, we still expect a slide to about $725K near the end of 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.

Average Sold price to List price ratio: – 100.5% 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. This demonstrates that buyers are still feeling some pressure to make their offers attractive to the seller. This has only dropped since July 4th. 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. 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: – (frequency of overbidding) 48.0%  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 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 reaching 53.9% on May 11th. During June and July frequency of overbidding has decreased to only 48%. 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: – 19 days. Last year DOM was 14. 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. Shortly the MLS will be changing the rules so that the DOM will reflect the total time on the market. This returns to an old definition and will make the data more meaningful in Spring 2007. 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 is $865,000 or $30,000 BELOW their previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $900,000 off $50,000 from their new record of $950,000 set on June 29, 2005. At $775,000, SCC median List price is $25,000 below their record high surpassing $799,950 achieved on June 29, 2006. The median Sold price at $820,000 is $10,000 below their previous record high of $830,000 established on June 29, 2006. SZC's median List price at $754,500 is off $35,000 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $769,500 is off $42,500 their new record of  $812,000 set on December 8, 2005. MTY median List price at $679,000 is off $28,500 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $667,500 is $44,500 below their new all time record high of $712,000 on January 5, 2006.

It appears that the downward trend is coming back on the SMC/SCC border opposed to propagating out from this border.