August 18, 2005 Weekly Bay Area Real Estate Market Newsletter

July's median Sold price dipped to $750,000. The $750,000 mark was first achieved in April. The 30-day median Sold price had been increasing every week between February 17, 2005 and April 21, 2005. The 30-day median Sold price has been fluctuating between $745,000 and $760,000 since April 21, 2005. The Sold prices are determined when the contract is negotiated, which is typically 30-days earlier. Therefore, the median Sold prices started increasing 2-weeks after New Years and has been flat for the last 5 months. We expect to see a minor price drip to about $735K as Fall approaches. This dip will be short in duration and it is likely that the 2006 appreciation cycle with appear during the last several months of 2005.

The market fundamentals (supply, demand, and most importantly the supply/demand ratio) continue performing very similarly to 2004 and 1999. The low-end is hotter and the high-end cooler than in 1999. Both 1999 and 2004 were good years followed by a good year.  (1999) (2004).  Both years experienced price dips during the summer.

DUI has climbed from 27.3 on March 23, 2005 to 38.3 on July 7 reaching 44.0 this week. This climb is far below the 1 day increase in DUI per day that we use as a benchmark of a changing market. SCC is approaching a balanced market, which we consider to be 45-90 days. A cooling market is normal behavior at this time of the year in order to set the market up for the summer cool down. The market was slowing less than is normal earlier this year making May through mid-July 2005 the hottest market since 1998, which is when we started collecting data. Starting around July 12th the market started cooling more rapidly than normal. So in 2005 SCC has gone from the second hottest year to the hottest year to the fourth hottest year. But in fairness, 2005 is essentially tied with 1999, 2000, 2004. The reason for this extra slow-down appears to be an increase inventory.

The magnitude of overbidding peaked 4/21/2005 and frequency of overbidding peaked 5/12/2005. Both the magnitude and frequency of overbidding have been decreasing every week since then.

There continues to be a significant increase in the number of properties getting re-listed and/or having their asking price reduced. This is an indication that the listing agents are realizing that their listings are not selling as quickly as they thought they would. It is clear that the current peak has past. Sellers that are planning on selling in the near-term should consider moving forward now as we don't believe the market conditions will improve until the second half of January 2006. There will likely be higher prices as Thanksgiving approaches but with longer marketing times and greater disruption on home life. Buyer's should be careful not to over pay at the peak. Remember real estate remains a good long-term investment. Our bigger concern currently is increases in interest rates. We are NOT expecting a popping of any bubble as we don't believe a bubble currently exists in SCC. Check out these claims of a bubble dating back to 1947. One of the biggest issues with those that believe in the bubble is they compare housing prices to income. We believe it is more important to look at affordability of the housing payments to income. Interest only loans and higher debt ratios allowed by the lenders combined with the lower interest rates provide more room for appreciation. According to Dataquick the typical monthly mortgage payment made in April 1990 was finally reached again in November 2004. Think of how much incomes have increased in the last 15-years.

Even though the median price for SCC appears set for a minor price correction the media will remain positive because the media focuses on the annual appreciation which will be significant for the foreseeable future. Because of the time lag in closing escrows we believe the near term peak of the market is already past. The near-term peak was likely back on Mother's Day just like last year.

The market has experienced some strong price increases that are typical for February-April. SCC's median Sold price increased from $664,000 in January to $750,000 by April. $760,000 in June but back to $750,000 for July. Prices are likely to continue to remain strong but flat until the DUI increases significantly. There continues to be fluctuations in the data. One of these fluctuations was caused by REIL when it released LM 1.8 on May 10th. The software fails to enter leading zero(s) for the real estate area number. This causes REIL's software not to find these listings because they are sorted as if the area number were a word opposed to a number. This means that area 27 is after 269 and before 270. This effectively moves many Alameda County properties into San Mateo County. We caught and have been compensating for this error. REIL made the correction on July 11th, 2-months after REIL introduced the error.

The table below compares the current real estate market conditions to each of the past 6 years. The sign ( + = - ) next each year indicates if the current market trends are improving(+), staying the same(=), or getting worse(-) compared to that specific year. You can view the graphs of each market indicator by clicking on the column headings in the table below.

Notice the minus signs on inventory indicates growing inventory which is typically associated with weaker market conditions. It is not that inventory is growing rapidly but that inventory normal is falling by the middle of July. The market will have to weaken more before there is any real softening of prices. Notice the number of equal signs for sales. This indicates that sales are changing normally for this time of the year. Typically means a flattening of median Sold prices. Price increases early in 2005 have clearly shown up in the Sold data and now so have the prices (April=$750,000, May=$749,000, June=$760,000 and July $750,000 with August estimate at $745K). Using DUI as the primary indicator of the real estate market's health, there is no question the market is strong. It is equally clear that the market is no longer improving compared to other years, but is now behaving normally or even getting slightly worse because inventory is increasing slightly at a time of year when inventory is normally decreasing. Normal for this time of year includes a price correction. Peak pricing occurred in August 1999, April 2000, and June 2004. We believe that the stronger than normal market explains why prices are flat for April-June versus dipping. July did see a dip and we expect to see another dip in August and September but only to about $735K. 

Using a 5-year average (graph) as a norm, allows us to better understand the behavior of the real estate market while viewing just one graph. Inventory had been following normal patterns, although only at 70% of the normal level. Since July inventory has increased from 68% to 75% of the 5-year norm.

There have been four significant drops in initiated sales volume using the 5-year norm:
    1) the month of June 2004, 153% to 131%;
    2) mid-November through mid-December 2004, 130% to 110%;
    3) the second half of January 2005, 119% to 92%; and
    4) July 2005, 125% to 117%.

The recent fluctuations in DUI compared to the 5-year average have been replaced with an increasing DUI or slowing market. DUI reached 60% of normal. DUI has shown a decrease (improvement) to 59% this week. DUI of less than 100% means a stronger/hotter than normal market conditions. Earlier in 2005 the market slowed less than normal causing 2005 that had been the second strongest year since 1998 to become the strongest year from May through mid-July. DUI has been increasing at a more rapidly pace after the July 4th holiday and has reached 44.0. The increase to 45.0 on August 4th was caused be that being the last week that used the low sales volume associated with July 4th. This has caused 2005 to drop to the 4th best year being beating 1999, 2000, and 2004. Significant price decreases should not happen until DUI is approaching 90. We think this is unlikely to happen any time soon. Although we expected a 2-4% price correction going into late Summer or early Fall.

Viewing the raw sales volumedata is eye opening. The deep blue line shows the significant drops in number of transactions. It is the vertical separation between the two lines that shows the "extra" transactions in 2004 when compared to the 10-year average. Notice that volume of initiated sales dipped below the 10-year average reaching a low of only 98% in January 2005. This appears to have been caused by a 1-week delay in the low point in the volume of sales. This corresponds to a horizontal shift of 10-year average graph 1-week to the right. We have the sales volume data going back to July 1992 and this is the first time we have noticed a time shift. Sales volume is again above the 10-year average.

2004 experienced the greatest percentage reduction in sales volume based on a percentage of the summer's peak volume. The end of 2004 experienced sales of only 44% of that summer's peak. Other years were 2003=55%, 2002=54%, 2001=95% (fueled by the post 9/11 feeding frenzy), 2000=47%, 1999=48%, 1998=62%, 1997=63%,1996=47%, 1995=61%, 1994=48%. Clearly something to monitor even though sales volume is currently at 117.4% of the 10-year average.

Sales increased more rapidly than normal climbing from 98% of normal in January to 128% just prior to Memorial Day. Sales then declined at a faster than normal rate reaching 111% of the 10-year average on July 21, 2005. Sales have been increasing in recent weeks and are now at 117.4% of the 10-year norm. These percentages are not adjusted for growth. The fluctuation in the sales volume remains our biggest concern. We believe that some of the robust sales in 2004 and even now may be partially explained by issues with the MLS software. The recently decline in sales volume deserves close attention, especially, considering the inventory increase that started in mid-July.

With the passing of New Year's, the 2004 to 1999 comparison changes to the 2005 to 2000 comparison. Comparing 2005 to 2000 seemed logical as the real estate market conditions had been similar and the calendars were identical. It is apparent that something very different started after the 2004 Presidential election. It turns out that 2005 is repeating 1999. Check out the how all three components (inventory, sales & DUI) are all close to 100%. 2000 slowed relative to 1999 and 2004 so these two years are essentially tied with 2005. 2005 appreciation of median Sold price for completed sales has reached 21.1% (760/635) with indications that this is it. With a current DUI of only 44.0, 2005 has become slightly cooler than 1999 with 43.4 DUI, 2000 that had 35.5 DUI and 2004 with 41.0 DUI. This drops 2005 to the fourth strongest year since we started gathering data in 1998. This is comparing the same dates. 

Because people remember last year the most clearly, here is a comparison between 2005 to 2004. The lack of inventory that many have complained about has climbed steadily from 55% at the beginning of the year to 98% now. Sales were at about the same level until the second half of January when 2005 sales started to drop off significantly reaching 82% compared with 2004. The rate of decline in sales has slowed and even recovered some. Sales volume is now performing similarly to  2004 but with 2005 still having 8% fewer transactions. With the increased inventory and roughly constant sales DUI has climbed from 52% at the beginning of the year to 86% by Valentines day, 95% by tax day and 110% now. This means the market is now less robust than in 2004.

Although not very satisfying, the best explanation we've heard remains that consumers were racing to beat the election out of fear something would change. When nothing changed after the election there was no longer a need to race, so the demand dropped to normal. However, this explanation does not shed any light on the third deterioration that occurred during the second half of January 2005, nor the first drop in initiated sales during June 2004 nor the fourth drop in July 2005. The June 2004 decrease might be associated with the MLS correcting some of its issues. Currently, buyers could be racing to beat the increasing interest rates. This might explain the increasing initiated sales compared to normal.

If asked to provide guidance, we would suggest that the April through July was the price plateau and we now expect this to be followed by small reductions in price (about 2-4%) as the year progresses, ending the year at approximately $735K. We currently believe that the appreciation for 2006 with start out strong like 2005, including bring some of the 2006 appreciation into 2005. So we expect a price dip in August and September with a chance that October through December will start to see some of the 2006 appreciation. We believe the low DUI is more important than the drop in sales volume or increase in inventory when determining price appreciation. We remain concerned about the fluctuation in sales volume, which represents buyer demand. We also don't understand the increase in inventory since mid-July. Keep in mind any interest rates increase have significant impact on affordability.

Real estate remains a great long-term investment. With the current behavior in the SCC real estate market statistics, we would recommend rational behavior, making plans for long-term and not the short term gains. We believe buyers should be very careful not to over pay as it appears we are at or at least close to the near-term peak. We believe that sellers should sell now or shortly if they need to sell in the next 6-moths. Both buyers and sellers should watch the market conditions for additional indications that the market is peaking. 

This weekly analysis is based on the overall real estate market conditions of single family homes in Santa Clara County. 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. 

Conclusion - We consider the market fundamentals to be; supply (inventory), demand (initiated sales) and supply/demand ratio (DUI). Until mid-November 2004, these market fundamentals had been very similar to their 1999 levels. What is interesting is that the market is appearing to repeat 1999 for a second year in a row. Inventory is now at 111.6% of the 1999 level. Many agents are still claiming that there is no inventory. Sales are at 105.1% of the 1999 level. The most important factor, DUI is at 106.2% of the 1999 level. (graphic) This indicates that the 2005 market has a little less intensity than the 1999 market. So 2005 is now similar to 1999 which experienced 12.6% appreciation with a peak in August followed by a 4.8% correction in October 1999 before shooting up 33% in early 2000.

The three market fundamentals began duplicating a previous year's pattern in the Fall 2003 by duplicating the Fall of 1998. As 2004 arrived, market conditions continued repeating the past by duplicating the 1999 market conditions. Then starting November 12, 2004 there was a sharp departure from this established  pattern. We think that this means SCC will see less than the 33% appreciation that 2000 experience, which is actually good. The market conditions are similar to the 1999 & 2004 and following the 1999 & 2004 patterns with similar appreciation.

There is little doubt the real estate market slowed for the third time in the second half of January 2005. Even if most others don't recognize the slow-down it was real. February, March and April saw initiated sales volume recover, but we remain concerned especially now that sales volume has been decreasing more rapidly than normal since Memorial Day. Is this a fourth slow-down? Will a fourth slow-down be long enough to reach a balanced or buyer's market? The market conditions are still strong and now that sales are increasing again, it looks like SCC survived a fourth slow-down in volume. There is typically a mild slowing at this time of the year and SCC is experiencing an even more mild slowing.

Sellers should be ready to go on the market, as the market may change very rapidly. Sellers should watch the market for signs of strength or weakness and act accordingly. If a seller needs to sell during the next 6-months now might be the ideal time to sell. If a Seller can wait until Valentine's Day 2006, waiting is likely the better option, but of course no guarantee. HOWEVER, if the market shows signs of weaken moving forward rapidly will be key. For now, the change appears to be gradual so no need to race forward. On the other hand, Buyers should still move forward because of fears that interest rates will increase but being careful not to overpay too much or settle too much as the bulk of the price increase for 2005 has already occurred. This means buyers need to exercise some caution in the bidding frenzies that are so common. Buyers need to be willing to compete, but not go crazy. Ideally buyers can purchase in late August to Halloween and definitely before New Years 2006. Again, our biggest concern is increasing interest rates, which increase the cost of homeownership not increasing prices.

Inventory – 2167; 2005 has more inventory than in 1999 & 2000 at 117%, same inventory than 2004 at 98% and significantly lower than 2002, 2004 (65%) and only half the 2001 inventory. The gradual elimination of surplus inventory during 2004 caused a shortage of inventory in 2005 and contributed to our belief that 2005 would likely be similar to or stronger than 1999. But now with the increase in inventory 2006 may be less robust than 2005. From November 12, 2004 through January 2005, inventory had been growing significantly when compared to 1999/2000. This indicates that there are more sellers ready to sell until about mid-May. From mid-May until July 4th inventory was actually decreasing slightly. Since July 4th inventory has been again growing at a time when it is normally decreasing slightly. The general perception of limited inventory contributed to the price firming. If inventory continues to grow, it will contribute to price stablization.

Days of Unsold Inventory – 44.0. We believe that the DUI continues to increase despite the dip we attribute to the July 4th holiday. The balance between supply and demand is the most important factor in a free economy. We measure this balance using Days of Unsold the Inventory (DUI). Most areas in the nation use "months of unsold inventory." With the arrival of October 2004, DUI finally started its annual Fall decline. There has been an unexpected hiccup in DUI as a result of the November 12th change that was initially masked by Thanksgiving. DUI turned the post-holiday corner and dropped and nearly matched the pre-holiday level. Since February 26, 2005 when DUI was only 26.4, DUI has been increasing slowly, except for the holiday bounces. DUI has been increasing more rapidly since July 4th, but still nothing to be concerned about.

Many areas such as Santa Teresa, North Valley, Milpitas, Santa Clara, Central San Jose, Willow Glen, South San Jose, Blossom Valley, Cambrian, Campbell, Cupertino, Sunnyvale, Mt. View and Palo Alto are leading the way in Santa Clara County with 25 to 43 DUI. The DUI for these fast areas is 34. This puts much of Santa Clara County squarely in a Seller's market. Other areas such as Los Altos, Saratoga and Los Gatos which are almost always the slowest two areas, are lagging behind with 68 to 130 DUI.

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. So, in the more expensive areas the prices that represent low, middle and high are higher. The low priced homes (those under $750,000) only have 31.0 DUI. Homes between $750,000 and $1,000,000 have only 39.2 DUI. Clearly, both of these markets are hot. Even the high-end had started to improve and entered a balanced market before slowing again. Currently, homes between $1.0 Million and $2.5 M have 67 DUI (that's 2 1/5 months); homes between $2.5M and 5.0 M have 9 months of unsold inventory and homes over $5 Million have almost 3 1/2 years. 

Median List Price - $738,000 Median List price has been essentially flat and tied with the new record high of $738,000 initially set on May 19 put actually peaked at $742,000 July 28, 2005. On December 23, 2004, the median List price increased to $663,500. It is surprising, but not unheard of, to set a new record high for List price in December. The List price stayed flat through February 3, 2005 and then jumped upward in February. It seems that the consumers anticipated the price increase that we were expecting to happen early in 2005. This caused the prices to increase during the end of 2004 and for List price to be stable at the beginning of 2005 before resuming the climb in February. List price reached $710,000 on March 3, 2005 and stayed there through May 5th. List price again jumped $14,000 on May 12th and again on 19th and has been essentially flat since May 19, 2005. Not the smooth increase most people expect.

Number of initiated Sales per day – 49.3 Buyers were coming back at a normal pace. With the passage of Memorial Day the Buyers were leaving at the normal pace. But then something happened around July 11th that caused the buyers to leave the market at a faster pace. Unfortunately, this exactly matches with the release of LM1.8.2 (Listing Management software used by REIL to report sales.) Our concern is REIL has a track record of causing a new mistake when fixing an old mistake. At this time we are uncomfortable guessing if there is a bug in the new software or a change in the market. It is starting to appear that inventory is growing slightly more than normal, which is hard to attribute to a MLS issue. The all time record high level of 66.7 was reached 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 reached just prior to Memorial Day but back in 1999. We believe that part of the record volume in 2004 and 2005 is a direct result of issues with the MLS database that continue two years after the disastrous migration in July 2003.

It will likely take years of growth before SCC beats the record of sales (2,337) set on May 29, 2004. Sales dropped to 1,885 on July 23, 2004. This means that 20% of the sales volume disappeared in under 2 months. We attribute a lot of this lose in sales volume to correcting of software issues. This initial radical drop in sales leveled off. Initiated sales have been basically flat at 1,854 until September 6, 2004. As Labor Day sales entered the data sales volume dropped to 1,681. On October 6, 2004, as the Labor Day sales are leaving the data, initiated sales increased to 1,768. There was a second radical drop in sales starting November 12, 2004 when sales dropped from 49.3 sales/day to only 38.3 sales/day. This represents a second 20% drop in 3-weeks but during a period when sales started to drop significantly because of the annual holidays. Sales volume continued to drop from their reduced levels as we would expect because of the holidays. The 2004 slow-downs appear to be the more significant reduction in sales volume even when expressed in terms of a percentage of the peak. Clearly, this reduction is more than the seasonal slow-down. Fortunately, buyers seem to have returned to the market place until Memorial Day. Buyers then left the market for 6-weeks starting with the MLS software change. We believe it is the correction to the software not a change in the market that caused this drop in number of sales being reported.

Percentage of normal sales initiated – 117.4%. A third drop in percentage of normal sales from 114% to 96% occurred during the second half of January 2005. Percentage of normal sales has been climbing more or less since February 1, 2005. But saw flattening out immediately following the release of Listing Management 1.8 on May 10th. This is the portion of the software used to report sales. We believe that there is a direct connection between these two events. So even though sales were dropping more rapidly than normal based on the MLS data, we believe that this is simply eliminating the fictitious sales that were never there. In any case, sales have increased slightly the last two weeks. This coincides with the all the data going through the MLS's new LM1.8.2

Median Sold price – $755,000. This essentially ties the record high of May 19, 2005 at $759,000. May's median sold price was $749,000. June's median came in at $760,000. July's is $750,000, We would now expect a slow drift downward in price as Fall approaches. The dip will likely be just for August and September 2005, as we expect by October or November some of 2006's appreciation will be pulled forward. The fact 2005 is the hottest June since 1998 may have stabilize prices but we don't expect any upward movement. The market has cooled and 2005 is now being beaten by 3 other years (1999, 2000 & 2004) the Fall dip in prices is more likely. Based on the flat median List Price, the flat median Sold price it would make sense to estimate a flat median Sold price for August. Instead we are going to estimate the median Sold price for August to be $745K.  

Prices increased for 8 straight months $630,000 in September, $636,000, $649,000, $661,000, $664,000, $705,000, $733,000, $750,000. This longest duration of monthly price increases got broken with May's value of $749,000. June's median did increase to  $760,000 but only after May broke the trend. July clearly broke the pattern with a drop from $760,000 it $750,000. We believe that the limited inventory on strong market pulled some of 2005's appreciation forward into late 2004. Mother's Day was the true market peak for 2004. Despite the weakness in the market back in January we believe that the peak for 2005 market occurred at about the same time, Mother's Day 2005. After a robust May and June, July and August are showing some weakness.

Average Sold price to List price ratio – 101.7% This means on average Sellers are getting more than they are asking at the time the offer is accepted. This had been relatively flat August 20. 2004 until February 2005. Recent increase has pushed the ratio above the recent record of 102.0% set on May 7, 2004, peaking at 104.4% on April 21, 2005. SCC hasn't experienced this level since back in 2000, when it reached 109%. The magnitude of overbidding has been decreasing weekly since April 21, 2005 which an indication that buyers are not feeling as much pressure and/or that sellers are expecting more and have raised their asking prices. 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 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 – 61.0% The all time record high of 75.2% was set May 12, 2005 beating the 74.8 level reached in April 2000. The frequency of overbidding had been increasing more or less at a constant rate between Valentines Day 2003 to Valentines Day 2004. From Valentines Day 2004 to mid-June 2004 the increase was much more significant and pretty constant. Then there was a reversal mid-June 2004 through September 2004 where the frequency of overbidding actually decreased. Then overbidding increased in October and November 2004. Before dipping for December and January. Starting in February 2005 through May 12, 2005 the frequency of overbidding has been increasing again. But starting May 19, 2005 the frequency of overbidding has been declining again. Currently 3 out of every 5 sellers are getting more than their asking price, at the time the offers accepted. The Sold price could be less than the seller's initial asking price, but is more than the price at the time the offer is accepted. It is like we are in 1999 all over again despite a weaker economic conditions. It is no surprise that the dips in overbidding follow the dips in volume of sales because overbidding is a measure of the amount of unsatisfied buyer demand.

Median DOM for completed sales – 16 days. This is the sixth increase since mid-February. An indication that the market started slowing down 30 days ago. Not currently very interesting because the MLS is allowing DOM to revert to zero.

How are the other Counties doing? Based on the moving monthly data published weekly, SMC median List price dipped slightly to $845,000 and is down $14,000 from their record high of $859,000 set on May 12, 2005. SMC median Sold price is $875,000 off $50,000 from their new record of $925,000 set on May 5, 2005. At $738,000, SCC median List price is still tied with their price achieved on May 19, 2005 although $742,000 is the current record achieved on July 28th. The median Sold price at $755,000 off $5,000 from the record high of $760,000 established on June 30, 2005. SZC's median List price at $765,500 is off $24,000 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $775,000 is $46,500 off their new record of  $791,500 set on June 30, 2005. MTY median List price at $690,000 is off their record high of $699,000 set on June 23, 2005. Monterey's median Sold price of $678,300 is off $30,600 their record high of $708,900 on July 28, 2005.

Additional background information