February 1, 2007 Weekly Bay Area Real Estate Market Newsletter

NOTICE: REIL (the MLS) has again changed the front-end used to access the MLS database. This has forced us to reduce the amount of data that we collect. Additionally, we are concerned about some discrepancies and are still verifying the accuracy of the data. Consequently, the data presented here may not be entirely accurate.

This first set of graphs shows how the current market components (inventory, sales, DUI) are doing compared to their historical norms. Each graph has a red line ('red-hot' market), a green line (normal market), a light blue line ('ice-cold' market), and a deep blue line (current data). (Note: 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 May 2006. June through September inventory increased more rapidly than normal, moving above normal levels. Since October 2006, inventory is following the normal trend, albeit with more inventory (cooler) than normal. Some think that the reduction in inventory was an indication the market was improving. Unfortunately as this graph shows, the reduction was normal for the end of the year.

    Sales VOLUME was essentially normal from December 2004 through October 2005 with some extra sales in April through June 2006. 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-December 2005. As March 2006 arrived, the seasonal increase in sales volume made the reduced sales volume more apparent. Sales volume has been significantly lower than normal, essentially tracing the cool market trend line for more than 13 straight months.

    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 shifted from a hot to cooler than normal. During March and April 2006 the market improved to normal before slowing rapidly in May and June 2006. By July 4th DUI was 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. There was a slight improvement early in January 2007 followed by a steep decline. 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 8 years. This seasonally adjusts the data by comparing the current year to the same period of the historical 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 123% to 204% of previous years except 2000 at 353% and 2003 at 78%.  Inventory is currently following the normal seasonal pattern. A negative sign in the table represents increasing inventory as that is typically bad news.

    sales volume:   Sales volume that had been declining stabilized in mid-September followed by some improvement during October through mid-January. There has been a dramatic decline in the seasonally adjusted sales since the old MLS front-end was discontinued on January 9th. We are still trying to determine if this is coincidental or an indication of a systemic issue. The million dollar question is assuming this dramatic decline is real, how long with this negative trend continue and what caused it. Currently, sales volume is only 65% to 88% of past years with the exceptions being 2006 at 94% and 2001 at 110%.

    DAYS of UNSOLD INVENTORY: DUI is higher (worse) 130% to 237% compared to most years and 409% of 2000. Only 2003 @86% was worse than 2007. 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. The dramatic reduction in sales volume in January 2007 is 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 January 2007, 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. January 2007 will likely also be the worst year since September 1998. We don't believe that the majority of the consumers understand 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, especially if sales continue to be weak. At some point we expect to see a downward price trend to about $720K, We acknowledge our forecast is not shared by others.

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: - 2,214; Inventory started increasing on January 3, 2007. This would tend to support our belief that 2007 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 with 2005 being the first exception when inventory actually continued to increase. 

Sales initiated per day: (demand) 23.6 This is the average daily number of initiated sales (offers accepted). Sales normal start increasing around January 17th. 2007 sales bottomed out at 19.7 on January 17th but remained there through January 23rd before increasing slower than normal. Currently at 23.6 sales per day. This is even more significant, as we do not adjust sales/day for any growth over the 8-year period.

Percentage of normal sales initiated: – 84.3%. With a drop of 20+% in 2 months late in 2005 followed by another 10% drop in 2 weeks in mid-January 2006, it was clearly a more significant slowdown than normal. There was improvement in offers accepted rebounding to 95% of normal on February 22, 2006. Then sales started a very gradual decline reaching 88% at the end of May. Since the end of May, sales have been fluctuating at 88% +/- 4% before increasing to 96% in January 2007 only to drop quickly to 84% at the start of February 2007.

Days of Unsold Inventory: – 93.7 Starting with Easter '06 DUI increased more rapidly (worsening market) than the 8-year average reaching 142% of the 8-year average on July 28, 2006. Ever since, DUI has basically fluctuated between 130 and 150% 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:  Note: As a result of another change to the MLS in January 2007 we will report only regional data opposed to individual real estate areas. Cupertino/Sunnyvale/Mt View,  Santa Clara/Willow Glen/Campbell/Cambrian and Los/Altos/Palo Alto regions are leading the way in Santa Clara County with only 50-55 DUI, a warm balanced market. Slipping solidly into a balanced market is the Santa Teresa/North Valley/Milpitas/Blossom Valley region with 70 DUI. East Valley/Central San Jose/ South San Jose and Los Gatos/Saratoga regions are in Buyer's market with 129 DUI and finally South County at 144 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. The low priced homes (those under $600,000) have 77 DUI, which we consider a balanced market. Homes between $600,000 and $1.0 Million have 84 DUI, also a balanced market. Homes between $1.0 M and $2.5 M have 109 DUI. Homes between $2.5M and 5.0 M have 10 months of unsold inventory. Finally, homes over $5 Million have over 4 years. The hottest price range in SCC is currently $750,000 to $1.0 Million with 71 DUI. We had considered 45 to 90 DUI a balanced market. The DUI graph above makes it clear that DUI changes throughout the year and a new definition will need to be developed that takes the seasonal fluctuation into consideration.

Median List Price:  (seller's expectations) $760,000. 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%  Gradually increased, reaching 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) 33.3% - 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: – 56 days. DOM is finally becoming more meaningful because the MLS is no longer allowing DOM to revert to zero if the listing agent re-lists the same property. This is a return to the rules that existed prior to July 2003. 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 $843,475 or $52,500 BELOW the previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $841,500 off $108,500 from their new record of $950,000 set on June 29, 2005. At $760,000, SCC median List price is $40,000 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 $697,000 is off $115,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $659,450 is off $48,000 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $650,000 is $62,000 below their new all time record high of $712,000 on January 5, 2006.

Santa Cruz County median sold price for January 2007 will likely not only be below the January 2006 level but will likely be slightly below the level back in 2005. It is noteworthy to mention, 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.

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