December 28, 2006 Weekly Bay Area Real Estate Market Newsletter

This first set of graphs shows how current market components (inventory, sales, DUI) are doing compared to their daily norms. Each graph has a red line ('red-hot' market), a yellow line (normal market), a light blue line ('ice-cold' market), and a deep blue line (current data). These graphs still need minor adjustments as 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 to reflect our original definition of 45-90 days of unsold inventory was a balanced market.

    Inventory was essentially normal from November 2005 through mid-June 2006. Mid-June through September inventory increased above normal levels. October through December inventory is following the normal trend, albeit with more inventory (cooler) than normal. Some will think that the current reduction in inventory is an indication the market is improving. Unfortunately as this graph shows, this reduction is normal for this time of year.

    Sales VOLUME was essentially normal from December 2004 through October 2005. The sales volume normally drops dramatically at year's end making it difficult to sense any shifts. This seasonal drop in sales helps explain why many did not perceive the reduction in sales volume as it occurred from mid-October 2005 through mid-November 2005 and again during the second half of December 2005. As March 2006 arrived, the seasonal increase in sales volume made the reduced sales volume more apparent. Sales volume has been lower than normal for more than a year now.

    Days of Unsold Inventory is the most important market component because it measures the supply/demand balance. This graph is very telling. DUI frequently moves rapidly from a cool market into a hot market or visa-versa. The market remained hot through September 2005. Starting mid-October 2005 the market became normal through May 2006. By July 4th inventory grew, forcing DUI to transition into a cool market. DUI has been following the normal pattern right on top of the cool market indicator.

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 2006 and has remained there as 2006 ends. 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: The table below compares the current real estate market conditions to each of the previous 7 years. 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 sign ( + = - ) next to each year indicates whether 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 130% to 380% of previous years except 2001 (104%), 2002 (78%).  Inventory is currently decreasing, following the normal seasonal pattern. A negative sign in the table represents increasing inventory as that is typically bad news.

    sales volume:   Sales volume has fluctuated somewhat, but is clearly below normal. Sales volume appears to have stabilized in mid-September with some improvement during October and is currently declining, following the normal seasonal pattern. With respect to trends, the obvious exception was 2001, when the post 9-11 feeding frenzy rapidly spurred sales. Currently, sales volume is only at 70% to 80% of 2001, 2003 and 2004 and at 95% of 2002 and 2005 with the exceptions being 2000 at 109%.

    DAYS of UNSOLD INVENTORY: DUI is higher (worse) 134% of 2005, 148% of 2001, 169% of 2003, 223% of 2000, 314% of 2004 and 380% of 1999. Only 2002 @83% was worse than 2006. This was caused by the rapid cooling of the post 9-11 feeding frenzy. DUI is an objective measure of the supply demand balance that fundamentally drives pricing in a capitalist economy. 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 as opposed to an absolute number.

CONCLUSION: Seasonally adjusted data is more significant than the raw (unadjusted) data that follows. The seasonally adjusted indicators don't speak well of the near-term future of the SCC real estate market. There has been some improvement in sales volume during fourth quarter 2006. The reduced sales volume continues to be our biggest concern.

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 December 2006, has been one of the weakest markets since 1998 with only 2001 being weaker. There were fewer initiated sales (offers accepted) in July and November 2006 than in any year since 1998. We don't believe that the majority of the consumers understood how much the market had slowed. The concentration of the slow down was in the last 2 1/2 months of 2005. This lack of understanding 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.

Clients must 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. However, if a seller can wait until mid-April, waiting is likely the better option opposed to selling during the holidays. 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 represents a $107,000 drop in just three months. It also represents year-over-year drop for all three months. October experienced another annual depreciation despite a monthly increase in median Sold price. SMC has now had six annual depreciations since March 2006. SCC has not yet seen an annual loss 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. December 2006 will likely be unchanged from 2005.

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 should at least consider the risk interest rates may increase 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: - 2,104; Inventory started increasing on January 3, 2006. This would tend to support our belief that 2006 would 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 with 2005 being the first exception when inventory actually continued to increase. Currently, inventory is following the normal pattern and decreasing. 

Sales initiated per day: (demand) 23.3 This is the average daily number of initiated sales (offers accepted). Sales normal start increasing around January 17th. 2006 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. Because sales are normally decreasing at that time of year, flat sales were actually an improving market. Since Thanksgiving, sales appear to be dropping normally.

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: – 89.8%. This had been in the 125-150% range from June 2003 through June 2005. By mid-October 2005 it dropped somewhat, 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 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: – 90.1 What a difference a year makes. On November 30, 2005 DUI was 65. DUI improved early in 2006 ending the New Year holiday period at 50.0 on February 22, 2006, which was 11 fewer days of inventory than prior to the 2005 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 152% of the 8-year average. The balance between supply and demand is the most important factor in a capitalist economy. We measure this balance using Days of Unsold Inventory (DUI), while most areas use months of unsold inventory.

    GEOGRAPHIC SUB-MARKETS:  Santa Clara, Campbell, Cupertino, Sunnyvale, Mt View and Palo Alto are leading the way in Santa Clara County with only 37-47 DUI, still a Seller's market. Slipping into a balanced market with 62-77 DUI are areas such as Santa Teresa, North Valley, Milpitas, Willow Glen, Central San Jose, Blossom Valley, Almaden Valley, Cambrian, and Los Altos Several areas are in a Buyer's market with 92 to 163 DUI, such as: South County, Evergreen, East Valley, Central San Jose, South San Jose, Los Gatos, and Saratoga,

    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. The low priced homes (those under $600,000) have 57 DUI, which we consider a balanced market. Homes between $600,000 and $1.0 Million have 93 DUI, which is a buyers market. Homes between $1.0 M and $2.5 M have 100 DUI. Homes between $2.5M and 5.0 M have 8.5 months of unsold inventory. Finally, homes over $5 Million have over 3.5 years. We had considered 45 to 90 DUI a balanced market. But with the DUI graph above, it is now clear that DUI changes throughout the year and a different definition will need to be developed that takes time of year into consideration.

Median List Price:  (seller's expectations) $739,000. List price had remained fairly constant subsequent to dropping from $800K to $775K in just 2-weeks (July 6th to July 20th) until mid-November when List price dipped from $770K to $740K. This level was first achieved in January '06. The previous increase in median List price at a time when the buyers were leaving the market place may now cause the volume and prices to drop even more. Seller's expectations tend to lag 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) $741,000 is now dropping below the $760,000 achieved in 2005, 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 in 2007. We expect SCC to experience negative annual appreciation for much of 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.

Average Sold price to List price ratio: – 99.0% This peaked at 104.4% on April 21, 2005. SCC hadn't experienced this level since 2000, when it reached 109%. The magnitude of overbidding has decreased nearly every week from mid-October 2005 to January 5, 2006, reaching 99.7%. Then it gradually increased, reaching 100.4% on March 2nd and 100.7% on March 30th. It remained at this level through July 4th holiday. This demonstrates that buyers were still feeling some pressure to make their offers attractive to the seller. Since July 4th this has slowly dropped to the current level of 99.0%. 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. It 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) 32.3% - 1 out of 3 sellers is getting more than the 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 reaching a valley of 44.1% on February 16th. Overbidding then increased slowly along with some fluctuations reaching 53.9% on May 11th. Since then overbidding decreased gradually reaching 34.2% on October 12th and remained essentially flat since then. Even during the worst market conditions, the frequency of overbidding stays in the teens. This figure tends to reflect market conditions 45+ days earlier because of the length of escrows and the way 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 offers being accepted. The Sold price can be lower than the original List price and still count as an overbid.

Median DOM for completed sales: – 39 days. Last year DOM was 25. DOM is currently not very meaningful because the MLS is still allowing DOM to revert to zero if the listing agent re-lists the same property. Although average DOM is more commonly used, we believe median DOM is much more reflective of the market.

How are other Counties doing?:  (Based on the moving monthly data published weekly) SMC median List price is $799,00 or $96,000 BELOW the previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $871,000 off $79,000 from their new record of $950,000 set on June 29, 2005. At $739,000, SCC median List price is $61,000 below their record high $799,950 achieved on June 29, 2006. The median Sold price at $741,000 is $89,000 below their previous record high of $830,000 established on June 29, 2006. SZC's median List price at $749,000 is off $40,500 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $715,000 is off $97,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $654,500 is off $53,000 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $692,000 is $20,000 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.