November 9, 2006 Weekly Bay Area Real Estate Market Newsletter

New Graphs as of November 12, 2006
These graphs shows the current market components (inventory, sales, DUI) compared to their daily norms. This allows you to see what each component is doing and how this activity compares with their respective norm. In each graph the red line indicates a 'red-hot' market, yellow is the 'norm', the light blue is a 'ice-cold' market and the deep blue is the actual data. Being brand new, these graphs will be slightly modified in the coming weeks. For example, the growth factor of the past 8 years is calculated for today's market and needs to be reduced for previous years and the DUI graph may need to be adjusted compared to our original definition of 45-90 days of unsold inventory was normal regardless of time of year. Not to mention eliminating some data for quick loading, so be patient this week.

    Inventory was essentially normal from November 2005 through June 2006. Starting in July 2006 inventory increased into the cooler market region, but is again following the normal trend albeit cooler.

    Sales VOLUME was essentially normal from December 2004 through November 2005. The sales volume drops so dramatically at year's end it is difficult to see the shift. As March 2006 arrived the reduced sales volume is apparent. This explains why many did not perceive the reduction in volume as it occurred.

    Days of Unsold Inventory is the most important market component. This graph is very telling as the DUI data rapidly cross from a cool market in January 1999 into a hot market in February 1999 where it remained through December 2000. In January 2001 the market rapidly transitioned to a cool market where it remained until mid-December 2001. The second half of December 2001 and January 2002 saw the market transitioning back into a hot market where it remained through April 2002. May and June 2002 saw the market rapidly transition from a hot to a cold market where it remained through April 2003. May 2003 through Thanksgiving 2003 the market transitioned between a cold and hot market took a bounce back to a normal market at for the end of the year before ending up in a hot market in January 2004. The market remained hot through September 2005. Starting in October 2005 the market rapidly transitioned into a cool market for the end of the year. January saw an improvement to a normal market which remained through April 2006. May 2006 saw a rapid cooling of the market and that is where the market remains today.

We believe that these three new graphs are so informative that we may eliminate portions of the existing newsletter and would appreciate you thoughts and comments.

90-day market indicator: declined steeply from October 2005 through January 2006. During this period our indicator went from a 'good market' to a 'poor market'. Our indicator has been bouncing around the divider between a 'fair market' and 'poor market' since New Years. Since July 1993, our indicator has only been this low for approximately 10 months, December '94 through April '95, mid-March 2001 through mid June 2001, and mid-September 2001 through mid-November 2001, 

HISTORICAL COMPARISONS: Notice that number of negative signs, especially with DUI. DUI is the most import market component. Clearly, the market is weaker than any year except for 2001 and 2002. Because DUI measures the supply/demand balance it is the most significant. This seasonally adjusts the data by comparing the current year to the same period of the previous year. 100% would mean that the current year is the same as the year indicated. 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 132% to 275% of previous years except 2001 (93%), 2002 (85%).  Inventory is currently decreasing at slower pace than many previous years. Inventory normally starts decreasing by mid-July. So a slower than normal decrease in inventory at this time of year is actually an increase in the seasonally adjust inventory. That is a negative indication from the owner's/seller's point of view and therefore the negative sign is used. For inventory, a negative sign represents the increasing slope of the graphs, because increasing inventory is bad. The exceptions are: 2002 when inventory was increasing rapidly as the post 9-11 feeding frenzy slowed; and in 2005 when inventories were actually increasing contributing to the current slow-down.

    sales volume:   Sales have fluctuated but are clearly below normal and had been gradually decreasing. That appears to have stabilized since mid-September with some recent improvement. Currently sales volume are at 69% to 87% of past years with the exceptions being 2001 at 112% and 2002 at 105%.

    DAYS of UNSOLD INVENTORY: An objective measure of the supply demand balance that in turn fundamentally drives pricing in a capitalistic economy. DUI is higher (worse) 173% of 2003, 160% of 2005, and 311% to 325% for 1999, 2000 and 2004. Only 2001 @84% and 2002 @81% were worse then 2006. Unlike 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, which follow the table below. The seasonally adjusted indicators don't speak well of the near-term future of the SCC real estate market. 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 after the weather 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 our detailed analysis in 1998. July 2005 through December 2005, the market cooled significantly more than normal. December 2005 through October 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. The concentration of the slow down was in the last 2 1/2 months of 2005. This resulted in 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 around November 2006 and prices at $735,000 after that and a chance to see something approaching $720,000 by February 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, SMC had a $24,000  drop in their median Sold price from $899,000 in March 2005 to $875,000 in March 2006 followed by a $22,000  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 in 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. Additionally, October experienced annual depreciation despite a monthly increase in median Sold price. SMC has now had six 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: - 3,070; is significantly more inventory than in 1999 at 261%, 2000 at 277%, 2003 at 123%, 2004 at 203% and 2005 at 131%, about the same inventory as 2001 at 93% & 2002 at 86%. 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. 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. Currently, inventory is decreasing slightly. Inventory is normally dropping more rapidly at this time of year. Therefore, the currently slow decreasing is actually bad news when seasonally adjusted. 

Sales initiated per day: (demand) 34.2. 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. Sales dropped again in September in large part because of Labor Day and have been essentially flat since then. 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: – 88.2%. 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. This improvement was welcome even if sales remained below normal volume. Sales started a very gradual decline reaching 88% at the end of May. Since the end of May, sales have been fluctuating at 88% +/- 5%.

Days of Unsold Inventory: – 89.8 What a difference a year makes. On November 9, 2005 DUI was 57. 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 had 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 143% of the 8-year average. Based on the increase in DUI, caused by nearly flat inventory combined with almost flat sales (demand), we think there will be downward pressure in prices which is likely to show up in data for November 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 and Palo Alto are leading the way in Santa Clara County with only 40 and 41 DUI, still a Seller's market. Slipping into a balanced market with 48-87 DUI are areas such as Santa Teresa, North Valley, Milpitas, Santa Clara, Willow Glen, Central San Jose, Blossom Valley, Almaden Valley, Cambrian, Campbell, Cupertino, Sunnyvale, and Los Altos Several areas such as  South County, Evergreen, East Valley, South San Jose, Los Gatos, and Saratoga, are in a Buyer's market with 115 to 154 DUI.

    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 62 DUI, which we consider a balanced market. Homes between $600,000 and $1.0 Million have 82 DUI, which is the slow end of a balanced market. Homes between $1.0 M and $2.5 M have 105 DUI. Homes between $2.5M and 5.0 M have nearly 8 months of unsold inventory. Finally, 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) $768,000. 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 likely changed earlier in the year despite the record level pricing reported for June 2006.

Median Sold price: – (reality of the market) $779,500. 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, September, and October. This negative appreciation has not yet gotten any press coverage.

Average Sold price to List price ratio: – 99.4% 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 99.4%. 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 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) 35.6% - 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: – 36 days. Last year DOM was 22. 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 $875,000 or $20,000 BELOW their previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $860,000 off $90,000 from their new record of $950,000 set on June 29, 2005. At $768,000, SCC median List price is $32,000 below their record high $799,950 achieved on June 29, 2006. The median Sold price at $779,500 is $50,000 below their previous record high of $830,000 established on June 29, 2006. SZC's median List price at $749,000 is off $40,000 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 $675,000 is off $32,500 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $669,500 is $42,500 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.