February 8, 2007 Weekly Bay Area Real Estate Market Newsletter

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 as is the current increase in inventory.

    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 14 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 3 months, April March and October 2001. With the degree of accuracy this model has had since 1992 we suspect that the current increase in the market will be short lived.  

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 122% to 200% of previous years except 2000 at 340% and 2003 at 77%.  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. 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 89% of past years with the exception being 2001 at 104%.

    DAYS of UNSOLD INVENTORY: DUI is higher (worse) 127% to 248% compared to most years and 406% of 2000. Only 2003 @85% 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 continuing reduction in sales volume remains our biggest concern. Because DUI is improving and below 90, we expect some short-term appreciation but is should be less and shorter in duration than 2006.

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 was the second 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. SCC hit $724,000 on January 18, 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 price to peak out at around $780,000 before a downward price trend to about $720K and maybe lower by early 2008. 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: - 2,238; 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) 28.6 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.  The increase from 23.6 last week to 28.6 this week was in part due to a bug in the new MLS software that does not include sales that occurred on the last date requested.

Percentage of normal sales initiated: – 80.3%. 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: – 78.3 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. The market has moved back to a balanced market which would likely cause prices to firm up and then increase.

    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 and Los/Altos/Palo Alto regions are leading the way in Santa Clara County with only 30 DUI, a Seller's market. Santa Clara/Willow Glen/Campbell/Cambrian is a warm balanced market with 46 DUI.   Slipping solidly into a balanced market is the Santa Teresa/North Valley/Milpitas/Blossom Valley region with 65 DUI. East Valley/Central San Jose/ South San Jose and Los Gatos/Saratoga regions are in Buyer's market with 87-123 DUI and finally South County at 133 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 80 DUI, which we consider a balanced market. Homes between $600,000 and $1.0 Million have 70 DUI, which is currently the hottest price range. Homes between $1.0 M and $2.5 M have 78 DUI. Homes between $2.5M and 5.0 M have 8 months of unsold inventory. Finally, homes over $5 Million have over 3.5 years. It is noteworthy that the homes priced between $750,000 and $2,500,000 have a combined DUI of only 80. 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) $773,000. This is a $39,000 climb in just 4-weeks and an indication that the seasonal price appreciation is underway. In mid-November 2006 List price dipped from $770K to $740K. This level was first achieved in January '06. We now expect prices to climb to around $780K before dropping again to the $720K level or maybe lower. Seller's expectations tend to lag market changes.

Median Sold price: – (reality of the market) $743,975 is still 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 expected a slide to about $720K early in 2007 and reached a low of $724,000 on January 18, 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%. We expect this to start increasing in the near future. 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) 31.8% - 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 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: – 47 days. The current drop in DOM is caused by the seasonal influx of new listings. 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 $858,000 or $37,000 BELOW the previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $835,500 off $114,500 from their new record of $950,000 set on June 29, 2005. At $773,000, SCC median List price is $27,000 below their record high $799,950 achieved on June 29, 2006. The median Sold price at $743,975 is $86,000 below their previous record high of $830,000 established on June 29, 2006. SZC's median List price at $699,000 is off $90,500 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $695,000 is off $117,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $677,000 is off $30,500 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.

At $715,000 Santa Cruz County median sold price for January 2007 is not only be below the January 2006 level but also tied with their level of $715,000 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. SCC's median Sold price for January 2007 at $740,000 exactly equaled the 2006 level. We expect that it is only a mater of time 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.