March 29, 2007 Weekly Bay Area Real Estate Market Newsletter

The real estate news for the past month has been focused on sub-prime lenders. The million dollar question is how big will the impact be locally. Unfortunately, the impact will be larger than some think as a first time buyer who cannot purchase prevents a trade up person from selling and purchasing the next home. The impact can be seen in many ways including:

    1) The more affordable areas have significantly higher DUI.
    2) The number of sales are flat at a time when they are normally climbing.
    3) The number of completed sales didn't jump as much as the initiated sales did indicating a higher number of escrows did not close.
    4) The median Sold price is climbed rapidly yet market area prices climbed slower indicating a shift in the market mix with the high-end becoming a larger portion.
    5) The median square footage for the completed sales is near a record high and has climber from 1,620 SF on March 1st to 1,707 on March 22nd and 1,710 this week.
    6) There is a very large discrepancy between the median price of those properties that successfully closed and those that were suppose to close but did not.
 

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 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 15 straight months. Notice the significant departure from low sales to even lower sales. This could be a direct result of the sub-prime lender issues.

    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 noticeable 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 7 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 128% to 189% of previous years except 2000 at 310%, 2001 at 85% 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 has started to decline again. The million dollar question is 'Why are buyers not buying. Currently, sales volume is only 62% to 92% of past years with the exception being 2001 at 131%.

    DAYS of UNSOLD INVENTORY: DUI is higher (worse) 143% to 264% compared to most years and 390% of 2000. The current DUI is lower (better) than 2001 @ 65% and 2003 @84%. 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 has improved and now below 90, we expect some short-term appreciation but is should be less and shorter in duration than 2006. SCC is likely to see flat year over year appreciation for most of 2007.

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 February 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. February 2007 initiated sales surpassed February 2001, however March 2007 completed sales will likely be below 2001 levels indicating a larger than normal number of failed sales.

It is noteworthy to mention that SCC's real estate market appears to be divide geographically. The northwest portion of the County (north of 280 and west of 880) is still strong and is experiencing a Seller's market. The balance of the County is experiencing balanced market conditions. Consequently, the appreciation in the northwest quadrant of SCC will be greater than the median price indicates and the rest of SCC will have lower appreciation than the median indicates. A geographically divide within SCC is not normal.

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. With the sub-prime loan issues disproportionately negatively impacting the low-end of the market, we expect that the median Sold price will actually set new record highs because of the shift in market mix. It is likely that homes in the northwest section of SCC will be at record high levels while the rest of SCC is near but below their 2006 levels.

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 except in the north west section of SCC, 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: - 2,762; 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.

Sales initiated per day: (demand) 35.6 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. 

Percentage of normal sales initiated: – 82.7%. 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 2006. Since then, sales have been fluctuating at 88% +/- 4% before spiking to 95% in January 2007 only to drop quickly to 78% at the start of February 2007 only to return to the low 80's. Because we collect data for a 5-week period, it is likely that this 2007 spike was caused by the timing of the holidays opposed to any rapid changes in the market.

Days of Unsold Inventory: – 77.7 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. DUI is not improving as much as normal, implying softer than normal appreciation.

    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. Los Altos/Palo Alto region is leading the way in Santa Clara County with only 23 DUI, a very strong Seller's market. Closely followed by the Cupertino/Sunnyvale/Mt View region with 27 DUI also a very strong Sellers' market. Santa Clara/Willow Glen/Campbell/Cambrian is a hot balanced market with 53 DUI. Slipping into a balanced market is the Santa Teresa/North Valley/Milpitas/Blossom Valley region with 70 DUI and Los Gatos/Saratoga regions with 69 DUI and also South County at 94 DUI. With Buyers' market is East Valley/Central San Jose/ South San Jose at 142 DUI. This geographic based differences is unusual. Normally Los Gatos/Saratoga region is the slowest. Clearly that is not the current situation, we believe in large part because of the super heated conditions in the Los Altos/Palo Alto region. We believe that the more affordable areas are being disproportionately negatively impacted by the current sub-prime loan issues.

    PRICE SUB-MARKETS:  It is also important to note that the different price ranges have significantly different DUI and therefore different market conditions. Currently, the hottest price range is $750,000 to $1,000,000 with a DUI of 58. 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 125 DUI. Homes between $600,000 and $750,000 have 83 DUI. Then the sweet spot at only 58 DUI for $750,000 to $1.0M range. Homes between $1.0 M and $2.5 M have 69 DUI. Homes between $2.5M and 5.0 M have just over 5.5 months of unsold inventory. Finally, homes over $5 Million have nearly 4 years. We initially considered 45 to 90 DUI a balanced market with normal appreciation. DUI graph above makes it clear that DUI is seasonal and changes throughout the year. This permits SCC to have a slower than normal year (higher DUI), especially in low and high ends while still experience appreciation in the middle.

Median List Price:  $828,888. Clearly an indication that the seasonal price appreciation is underway. This is a new record high. We believe that this is caused by the shift in the mix of what is selling, absent the sub-prime loans.

Median Sold price: – $825,000 this is approaching the 2006 peak levels but is still below the record high median Sold price of $830,000 set on June 29, 2006. We expect median List price to level off soon and believe that most of this increase is attributed to a shift in market mix. This unexpected boost in median Sold price is likely more pronounced because of the sub-prime lender issue more negatively impacting the more affordable areas causing a shift in the market mixture. This rapid increase will postpone the negative annual appreciation until June 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: – 100.1% This measures the buyers willingness to make their offers attractive to the seller. Since July 4th this had slowly dropped to the valley of 99.0% in December 2006 before increasing in mid-February 2007 as the first 2007 sales started to close. 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) 38.5% - Nearly 2 of every 5 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 11, 2006. Since then overbidding decreased gradually reaching 34.2% on October 12th and fluctuated around 32% until the 2007 sales started to close in mid-February. 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: – 23 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 remains at $899,900 for the fourth week in a row a new record high. SMC median Sold price is $880,000 off $70,000 from their new record of $950,000 set on June 29, 2005. At $828,888, SCC median List price is a new record high breaking their previous record high of $799,950 achieved on June 29, 2006. The median Sold price at $825,000 is only $5,000 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 $742,500 is off $69,500 their new record of  $812,000 set on December 8, 2005. MTY median List price at $699,000 is only off $8,500 from their record high of $707,500 set on December 1, 2005. Monterey's median Sold price of $664,000 is $48,000 below their new all time record high of $712,000 on January 5, 2006.

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