November 30, 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 compares to their normal pattern. 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 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.

    Inventory was essentially normal from November 2005 through mid-June 2006. Mid-June through September inventory increased above normal levels. October and November 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 so dramatically at year's end it is difficult to see the shifts. This seasonal drop in sales explains why many did not perceive the reduction in 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 reduced sales volume became apparent. Sales are fewer than normal and following a post-Thanksgiving reduction.

    Days of Unsold Inventory is the most important market component as it measures the supply/demand balance. This graph is very telling. The DUI data frequently moves rapidly cross from a cool market into a hot market or visa-versa. The market remained hot through September 2005. Starting mid-October 2005 the market transitioned into a normal market through May 2006. By July 4th sales slowed, forcing DUI to transition into a cool market. Post-Thanksgiving DUI is increasing more rapidly than normal. This is not good news.

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: 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 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 123% to 311% of previous years except 2001 (97%), 2002 (84%).  Inventory is currently decreasing at a slightly slower pace than several previous years. The exceptions are: 2002 when inventory was increasing rapidly as the post 9-11 feeding frenzy slowed; and in 2005 when inventories were stable contributing to the current slow-down. For inventory, a negative sign represents increasing inventory as that is typically bad news.

    sales volume:   Sales have fluctuated but are clearly below normal and but have been gradually increasing. Sales appear to have stabilized since mid-September with some improvement since October. Sales appears to be dropping more rapidly than normal post-Thanksgiving. Currently sales volume are at 73% to 94% of past years with the exceptions being 2000 at 99%.

    DAYS of UNSOLD INVENTORY: Although DUI has dropped from 105 to 79, this is fairly normal for this time of year. DUI is higher (worse) 107% of 2001, 137% of 2005, 194% of 2003, and 274% to 352% for 1999, 2000 and 2004. Only 2002 @90% was worse then 2006. DUI is an objective measure of the supply demand balance that fundamentally drives pricing in a capitalistic 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 opposed to an absolute number.

CONCLUSION: Seasonally adjusted data is more significant than the raw (unadjusted) data that follow in the table below. 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 October and November that ended with Thanksgiving. 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 November 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 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.

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. 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 represent a $107,000 drop in just three months. It also represents year-over-year drop for all three months. Additionally, October experienced another 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: - 2,688; 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 with 2005 being the first exception when inventory actually continued to increase. Currently, inventory is decreasing; however, inventory is normally dropping more rapidly at this time of year. Therefore, the current slow decreasing is actually bad news when seasonally adjusted. 

Sales initiated per day: (demand) 31.1. 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. Because sales are normally decreasing at this time of year, flat sales are actually an improving market. Since Thanksgiving sales appear to be dropping more rapidly than is normal.

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: – 88.1%. 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: – 86.3 What a difference a year makes. On November 30, 2005 DUI was 61. 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 152% of the 8-year average. 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:  Santa Clara, Sunnyvale, and Mt View are leading the way in Santa Clara County with only 35-43 DUI, still a Seller's market. Right on the border of a Seller's and balanced market are Almaden Valley, Cambrian, Cupertino, and Palo Alto with 47 to 55 DUI. Slipping into a balanced market with 63-91 DUI are areas such as Santa Teresa, North Valley, Milpitas, Willow Glen, Central San Jose, Blossom Valley, Campbell, 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 107 to 155 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 54 DUI, which we consider a balanced market. Homes between $600,000 and $1.0 Million have 80 DUI, which is the slow end of a balanced market. Homes between $1.0 M and $2.5 M have 101 DUI. Homes between $2.5M and 5.0 M have over 8 months of unsold inventory. Finally, homes over $5 Million have 4.5 years. We had consider 45 to 90 DUI as a balanced market. But with the DUI graph above it is now clear that DUI changes though out the year and a different definition that will need to be developed that takes into consideration the time of year.

Median List Price:  (seller's expectations) $749,000. Remained fairly constant subsequent to a $25,000 drop in just 2-weeks (July 6th to July 20th) until this week when it dipped to $750,000. This level was first achieved in February '06. 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) $778,000. Remained 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 in 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: – 99.2% 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 2005 to January 5, 2006, reaching 99.7%. Then 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 99.2%. 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) 30.3% - 3 out of 10 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 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 has decreased gradually reaching 34.2% on October 12th and has remanded essentially flat until Thanksgiving. 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: – 35 days. Last year DOM was 20. 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. 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 $849,975 or $45,000 BELOW their previous record high of $895,000 set on May 4, 2006. SMC median Sold price is $870,000 off $80,000 from their new record of $950,000 set on June 29, 2005. At $749,000, SCC median List price is $51,000 below their record high $799,950 achieved on June 29, 2006. The median Sold price at $770,000 is $60,000 below their previous record high of $830,000 established on June 29, 2006. SZC's median List price at $745,000 is off $45,500 from for their record high of $789,500 set on July 14, 2005. SZC's median Sold price of $705,000 is off $107,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $699,000 is off $8,500 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $641,000 is $71,000 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.