DRAFT  October 5, 2006 Weekly Bay Area Real Estate Market Newsletter  DRAFT

90-day market indicator: This is where we expect public perception will be in another 90 days. This is based on today's market trends using our objective proprietary formula. These calculations have fairly accurately modeled and then forecasted the 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. Our indicator experienced some improvement during the first half of August and fluctuated on the threshold between a fair and poor market conditions. In September, the indicator moved back into the poor market conditions area. Since July 1993, our indicator has only been this low for approximately 6 months, January '95 through February '95, mid-March 2001 through May 2001, and October 2001, 

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 the real estate market experiences.

    Inventory (131%) was essentially 110% 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 has been increasing reaching 130% of the 8-year average. Approximately 105% would be normal for inventory because of the growth over the 8-years.

    Sales VOLUME (83.6%) in January dropped to only 83% of the 8-year average. During February, sales volume improved reaching 92%. March through mid-April, sales volume fluctuated but remained basically unchanged at 92%. From mid-April through June 26, sales volume was at 89% with some fluctuations. Then in just 2-weeks sales volume dropped to 82% of the 8-year average and remained there through July. This might be explained in part by the fact that July 4th was a Tuesday this year making it a 4-day weekend for many and thus a more significant holiday than normal. Holidays negatively impact sales volume based on their significance. During the first 3-weeks of August, sales volume improved to about 88% of the 8-years sales average. In September, sales volume dropped to 83% of the 8-year average. Approximately 105% would be normal for sales because of the growth over the 8-years.

    Days of Unsold Inventory (141%) is an objective ratio of the supply/demand and measures the balance of the market. Consequently, no growth adjustment is necessary and 100% would be always normal. An increasing DUI indicates worsening market conditions. Between early October 2005 and February 1, 2006, DUI increased from 68% to 133% of the 8-year average. Between February 1st and April 18th, DUI decreased (improved) to 90%. From April 18th through the end of July, DUI increased reaching 142% of the 8-year average. During the first 2-weeks in August, DUI improved to 129% before reversing direction and increasing to 137% during the second half of August. DUI then dipped to 134% before increasing reaching 145% before improving to its current level.

HISTORICAL COMPARISONS: Notice that number of negative signs. Clearly, the market is weaker than any year except for 2001 and 2001. Because DUI measures the supply/demand balance it is the most significant and has several negative signs with zero positive signs. This seasonally adjusts the data by comparing the current year to the same period of the previous year. 100% would indicate the current year is the same as the year indicated, and a flat line would indicate that the rate of change is the same as the base year. The table below compares the current real estate market conditions to each of the previous 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/seller's point of view. 

    inventory:   Inventory is 144% to 258% of previous years except 2001 (89%), 2002 (90%) 2003 (123%).  Inventory is currently decreasing at slower pace than many previous years. In fact, so slowly that inventory is essentially flat in raw count. Flat inventory is actually an increase in the seasonally adjust inventory levels for this time of year. That is a negative indication from the owner's/seller's point of view and therefore the negative signs is used. For inventory a negative sign represents the increasing slope of the graphs. The exceptions are: 2001 when inventory was increasing post 9-11; 2002 when inventory was increasing rapidly as the post 9-11 feeding frenzy slowed; and in 2005 as inventories were growing contributing to the current slow-down.

    sales volume:   During February, sales increased more rapidly than normal yet sales remained below their normal volume. During March, sales declined. Only 2001 had fewer sales. During April, sales stabilize some but not enough to completely stop the general decline in the volume of sales continued. May, experienced a little more significantly decrease in sales. June, volume of sales experienced a slight improvement. July, volumes of sales experienced a reduction. August, experienced some improvement in sales volume. The first half of September saw sales volume declining more rapidly than normal. The second half of September and into October as seen sales slow at the normal pace. Currently, sales volume remains below normal, currently sales volume is at 68% to 79% of past years with the exceptions being 2001 at 132% and 2002 at 102%.

    DAYS of UNSOLD INVENTORY: An objective measure of the supply demand ratio which in turn fundamentally drives pricing in a capitalistic economy. DUI is higher (worse) 172% of 2003, 198% to 343% than 1999, 2000, 2004 and 2005. Only 2001 @67% and 2002 @88% were worse then 2006. Unlikely inventory and sales which should be (but are not) adjusted for growth, DUI is self adjusting for any growth because it is a ratio opposed to an absolute number.

CONCLUSION: Seasonally adjusted data is more significant than the raw (unadjusted) data that follows our conclusion. The seasonally adjusted indicators don't speak well of the near-term future of the SCC real estate market. The strength of the real estate market is definitely below recent levels. The reduced sales volume has us the most concerned. We didn't believe the weather was the cause of the early 2006 slow-down, as many speculated earlier this year. Not only did the drop in sales start back in mid-October 2005, but the drop in sales has also continued now that the weather has improved.

We believe that the peak for 2005 market occurred at around Mother's Day 2005. May and June 2005, were the hottest market since we started the detailed analysis in 1998. July 2005 through December 2005, the market cooled significantly more than normal. December 2005 through September 2006, has been one of the weakest markets we have had since 1998 with only 2001 being weaker.  There was even fewer initiated sales (offers accepted) in July 2006 than July 2001. We don't believe that the majority of the consumers understand how much the market has slowed in the last 9 months. The concentration of the slow down was in the last 2 1/2 months of 2005. The result had been increasing prices when all indications were that prices should have been flat or decreasing. Consequently, we expect to see prices to return to the $750,000 or below in the not distant future and prices at $735,000 after that and a chance to see something approaching $720,000 by early 2007.

Each client has to make their own decision on when to buy and sell real estate. We believe real estate will continue to be a good long term investment. We believe sellers should place their homes on the market sooner as opposed to later. At some point we expect to see a downward price trend to about $720K, but it will clearly take longer than the September time frame we originally expected. We acknowledge our forecast is not shared by others.

It is noteworthy to mention that SMC median Sold experienced a year-over-year price drop from $899,000 in March 2005 to $875,000 in March 2006. SMC had a $22,000 and a $24,000 drop in their median Sold price from $922,000 in April 2005 to $900,000 in April 2006. Then SMC recovered and set a new record high median Sold price of $940,000 for June 2006. This was followed by 3 consecutive monthly drops: $875,000, $850,000 and $833,000. This represent at $107,000 drop in just three months. It also represents year-over-year drop for all three months. SMC has now had five annual depreciation since March 2006. SCC has not yet seen an annual lose but the appreciation from August 2005 to August 2006 was down to just $10,000. We expect it is only a mater of time (about January 2007) before SCC experiences the annual depreciation.

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 fixed interest rate. 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: - 3,389; is significantly more inventory than in 2000 at 258%, 1999 at 220%, 2004 at 184% and 2005 at 144%, about the same inventory as 2003 at 123%, 2002 at 90% and 2001 at 90%. From July 4th 2005 to mid-October '05, inventory grew at a time when inventory normally decreases. The increase in inventory became 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 earlier in the year inventory starts to increase the softer that year is. Inventory is normally falling by mid-July. 2005 was the first exception and inventory actually increased. This year inventory is essentially flat. Inventory is normally dropping at this time of year, so a flat inventory is actually bad news when seasonally adjusted. 

Days of Unsold Inventory: – 102.8 What a difference a year makes. On October 5, 2005 DUI was 51.3. 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. February 22, 2006 through April 7, 2006, DUI has been increasing essentially matching the 8-year average @101% with a DUI of 55.1. Between Easter and July 28, 2006, DUI increased more rapidly (worsening market) than the 8-year average reaching 142% of the 8-year average with a DUI of 101. By mid-August, DUI improved slightly reaching 129% of the 8-year average with a DUI of 88.6. DUI then started increasing currently at 140% of the 8-year average. Based on the increase in DUI, caused by flat inventory combined with decreasing sales (demand), we think there will be downward pressure in prices which is likely to show up in data for October 2006 closes. By year's end, median Sold price will likely drop below current price levels and may approach $725K. However, the market 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:  Mt View is leading the way in Santa Clara County with only 40 DUI still in a Seller's market. Slipping into a balanced market with 55-72 DUI are areas such as Santa Clara, Cambrian, Cupertino, Sunnyvale, and Palo Alto. Many areas Santa Teresa, Evergreen, East Valley, North Valley, Milpitas, Central San Jose, Willow Glen, South San Jose, Blossom Valley, Almaden Valley, Campbell, Los Gatos, and Los Altos are in a Buyer's market with 86 to 128 DUI. Finally comes South County, and Saratoga that have a DUI ranging from 173 to 190, which we consider a strong buyer's market.

    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. In the more expensive areas, the prices that represent low, middle and high are higher. The low priced homes (those under $600,000) have 64 DUI, which we consider a balanced market. Homes between $600,000 and $1,000,000 have 95 DUI, which has crossed over into a Buyer's market. Homes between $1.0 Million and $2.5 M have 112 DUI. Homes between $2.5M and 5.0 M have 14 months of unsold inventory. Finally, homes over $5 Million have 5.25 years. We consider 45 to 90 DUI as a balanced market.

Median List Price:  (seller's expectations) $769,000. This has remained fairly constant subsequent to a $25,000 drop in just 2-weeks (July 6th to July 20th) and is back to the level first achieved in February '06. The price spike we were expecting early in 2006 appears to be later and higher than we were expecting but is likely over. This previous increase in median List price at a time when the buyers were 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 earlier in the year despite the record level pricing reported for June 2006.

Sales initiated per day: (demand) 33.0. 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 34.7 on July 27th. This was only 82.0% 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. Sales increased during the first half of August and decreased during the second half of August. Sales dropped again in September in large part because of Labor Day. 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 just prior to Memorial Day 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 was 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: – 85.0%. This had been in the 125-150% range from June 2003 through June 2005. By mid-October 2005 it dropped some but it was 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 buyers left the market in significant numbers at specific times. 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 accepted rebounding to 95% of normal on February 22, 2006. Any improvement is welcome even if sales remained below normal volume. Sales started a very gradual decline reaching 88% at the end of May. Sales then rebounded for the month of June with 92%. July saw another sharp drop in sales to 82% of normal. August as seen a slow climb to the current level of 88.8%. With Labor Day being a 4-day weekend the negative impact on sales was greater than normal.

Median Sold price: – (reality of the market) $770,000. This remains above the $760,000 achieved in 2005 but also well below the record high median Sold price of $830,000 set on June 29, 2006. We still expect a slide to about $720K early 2007. Negative year over year appreciation occurred in San Mateo County in March, April with nearly 3% negative appreciation. SMC then set an all time record high in June 2006, before experiencing negative annual appreciation in July, August, and September. This negative appreciation has not yet gotten any press coverage.

Average Sold price to List price ratio: – 99.6% This peaked at 104.4% on April 21, 2005. SCC hadn't experienced this level since back in 2000, when it reached 109%. The magnitude of overbidding has decreased nearly every week from mid-October to January 5, 2006, reaching 99.7%. Then gradually increased reaching 100.4% on March 2nd and 100.7% on March 30th. This demonstrates that buyers were still feeling some pressure to make their offers attractive to the seller. This has dropped since July 4th to the current level of 99.6%. It is noteworthy that the magnitude of overbidding dropped below 100% for the first time since March 5, 2003 reaching 99.9% on February 9, 2006 and now again on September 9, 2006. 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) 36.0% - 1 out of 3 sellers are 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. Overbidding dropped every week between November 10, 2005 through the first week of 2006, followed by fluctuation before reaching a valley of 44.1% on February 16th. Overbidding then increased slowly along with some fluctuations reaching 53.9% on May 11th. Since June overbidding has decreased to under 40%. Even during the worst market conditions, the frequency of overbidding stays in the teens. 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: – 34 days. Last year DOM was 18. 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 revising their rules so that the DOM will reflect the total time on the market. This returns to a previous definition and will make the data more meaningful in Spring 2007. Although average DOM is more commonly used, we believe 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 is $858,000 or $37,000 BELOW their previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $844,000 off $106,000 from their new record of $950,000 set on June 29, 2005. At $769,000, SCC median List price is $31,000 below their record high $799,950 achieved on June 29, 2006. The median Sold price at $770,000 is $60,000 below their previous record high of $830,000 established on June 29, 2006. SZC's median List price at $749,000 is off $39,500 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $750,000 is off $62,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $669,000 is off $38,500 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $680,000 is $32,000 below their new all time record high of $712,000 on January 5, 2006.

It appears that the downward trend is moving toward the SMC/SCC border opposed to propagating out from this border.