May 31, 2007 Weekly Bay Area Real Estate Market Newsletter

The real estate market is still experiencing fallout from the sub-prime loan issue. The million dollar question is how big will the impact be locally. The impact is 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 had significantly increases in DUI. DUI in East Valley increased from 109 to 311.
    2) The number of sales decreased from 36.5 sales/day to 33.0 sales/day 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 larger number of escrows failed to close. The calculated TFT rates jumped to 10%.
    4) The median Sold price 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 climbed from 1,620 SF on March 1st to 1,707 on March 22nd and 1,760 on May 3rd.
    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.
    7) The affordable areas made up 16.4% of the closings in February and only 11.8% of the closings in March.
    8) The Mt. View, Los Altos and Palo Alto areas are typically about 10% of SCC's transactions went from 9% to 25% of SCC transactions.

There is a report circulating that the median List price in SCC has fallen from $899,000 to $765,000. Although true, this is based on listings that are currently available, not those that have had offers accepted and/or completed sales (closings). This drop has little to do with values and everything to do with market mix. Normally, the more expensive homes take the longest to sell and are therefore a greater percentage of what is available. Now it is the low price listings that are taking the longest to sell and are making up a larger percentage of the available listings. Specifically, the expensive areas were 30% of the available listings in May 2006 and are now only 17% of the available listings. The inexpensive areas were 16% of the available inventory in May 2006 and are now 26% of the available inventory. A decrease in expensive available listings and an increase in inexpensive available listings both work to significantly decrease the median list price of available listings.

The median List price of available properties was $895,000 and is now $769,000 for a drop of $126,000. During the same period (March 2006 to April 2007), the median Sold price of completed sales (closings) went from $760,000 to $868,406 for a $108,406 increase. Clearly, market mix is impacting the median List price of available listings not property values.

To view how differently communities are reacting to the current situation, the link below shows the DUI for each community in SCC compared to their specific average for the same date for 6-years (1999, 2000, 2003, 2004, 2005 and 2006).

    East Valley and South San Jose have a DUI nearly double that of 9/11
    Central San Jose, Blossom Valley, Santa Teresa and Milpitas have a DUI approximately equal to 9/11
    Evergreen, North Valley, Santa Clara, Willow Glen, Cambrian, and Campbell have a DUI higher than normal but significantly lower than 9/11
    Almaden Valley, Los Gatos Mtns, Los Gatos, Saratoga, and Sunnyvale have a DUI just about equal to the 6 year average
    Cupertino, Mt View, Los Altos and Palo Alto have a DUI slightly better than their respective 6-year average.

These graphs are roughly in order of most impact to least impact. You will need to scroll the tabs on the base of the spreadsheet to get to  Cupertino, Mt View, Los Altos and Palo Alto (the least impacted areas). This data for other counties is available using a 4-year average (2003, 2004, 2005 and 2006) instead of 6-years.

What is really happening with values? The areas with the higher than normal DUI are seeing some price depreciations. Those areas with normal DUI have price stability and are essentially equal to their all time record highs. Finally, those areas with a lower than normal DUI are having price appreciation and are setting record high prices. Truly a split market within SCC.

The next 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 2006 through September 2006 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 thought 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. The Memorial Day dip appears to be following normal trends.

    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 from mid-December 2006 through March 2007. Notice the significant departure from low sales to even lower sales since March 27, 2007 through mid-April. Sales are again following the normal pattern but at a reduce level. This could be a direct result of the sub-prime lender issues and those buyers no longer making offers.

    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 4, 2006 DUI was following the normal pattern right on top of the cool market indicator and continued to do so with only minor fluctuations through April 2007. May 2007 saw DUI increase slightly more rapidly than normal, which 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' from February 2006 through December 2006.. There was a slight improvement early in January 2007 followed by a noticeable decline. February and March brought some stabilization. April saw additional decline. May has had some more stabilization followed by a gradual 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. 

The market is clearly weaker than most previous years.

    inventory:   Inventory is 130% to 203% of previous years except 2001 at 86% and 2003 at 107%. Inventory is currently following the normal seasonal pattern. A negative sign in the table represents increasing inventory as that would be bad news.

    sales volume:   Sales volume that had been declining stabilized in mid-September 2006 followed by some improvement during October 2006 through mid-January 2007 has started to decline again through April 19th. The million dollar question is 'Why are buyers not buying. Currently, sales volume is only 53% to 84% of past years with the exception being 2001 at 103%.

    DAYS of UNSOLD INVENTORY: DUI is higher (worse) 150% to 300% compared previous years, except the current DUI is lower (better) than 2001 @ 83%. 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 despite the current increase in median pricing. The continuing reduction in sales volume remains our biggest concern. Because DUI has increased and is now above 90, we expect some short-term appreciation. SCC is likely to see flat year over year appreciation for most of 2007 with the change in market mix, median prices are not reflective of values. The strength in the northwest quadrant as indicated by a DUI of only 32, would support additional appreciation in that area. The shift in the market mix will cause the median pricing to increase artificially. 

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 through May 2007 initiated sales only surpassed their respective 2001 levels.

It is noteworthy to mention that SCC's real estate market appears to be divided geographically. The northwest portion of the County (north of 280 and west of 880) with a spill over into other expensive areas are still strong and experiencing a Seller's market. Most of the County is experiencing balanced market conditions. The most affordable areas and South County are in a buyers' market. The appreciation in the northwest quadrant of SCC will likely be the greatest. The rest of SCC will likely have lower or even negative appreciation. A geographically divide within SCC is unusual.

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: - 3,799; 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. Most likely during this coming week inventory will exceed 3,822 pushing SCC to a new record high since September 28, 2001 when inventory was 3,880.

Sales initiated per day: (demand) 34.4 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. Sales have actually decreased for 3-weeeks. Sales will likely remain below the peak 2007 level of 36.5 sales/day on March 27, 2007. Normally sales increase from mid-January through Memorial Day.

Percentage of normal sales initiated: – 76.5%. Sales had been fluctuating at 88% +/- 4% for the second half of 2006 before spiking to 95% in January 2007. As February 2007 arrived initiated sales dropped quickly to 78% but soon returned to the low 80's for the most of February and March.  April and May saw the return of the high 70's. Because we collect data for a 5-week period, it is likely that the New Years spike and the Memorial Day dip are both caused by the timing of the holidays opposed to any rapid changes in the market. We would expect a value of about 107% as we do not make any adjustment for growth.

Days of Unsold Inventory: – 110.4 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 buyers market which would likely cause prices to weaken and then decrease. This will not be the case for the northwest quadrant of SCC where there are still only 33 DUI. There is about a 2-3 month lag between shifts in DUI and median Sold price. 

    GEOGRAPHIC SUB-MARKETS:  Note: As a result of another change to the MLS in January 2007 we now only report regional data opposed to individual real estate areas.  Mt View/Los Altos/Palo Alto region is leading the way in Santa Clara County with only 28 DUI. Cupertino/Sunnyvale is at 35 DUI. Both regions are a very strong Seller's market. Slipping into a balanced market is the Santa Clara/Willow Glen/Campbell/Cambrian region with 69 DUI. Los Gatos/Saratoga region has 82 DUI  Santa Teresa/North Valley/Milpitas/Blossom Valley region has bumped into a buyers market with 128 DUI. South County and East Valley/Central San Jose/ South San Jose are at 249 and 270 DUI respectively, both are clearly buyer's market. This geographic based differences is unusual. Normally Los Gatos/Saratoga region is the slowest. Clearly that is not the current situation. We believe this is because of spill over buyers from 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 $2,500,000 with a DUI of 78. 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 196 DUI. Homes between $600,000 and $750,000 have 152 DUI. $750,000 to $1.0M range have 79 DUI. The sweet spot is currently homes between $1.0 M and $2.5 M with 78 DUI. Homes between $2.5M and 5.0 M have 5 months of unsold inventory. Finally, homes over $5 Million have 3 3/4 years of inventory. We initially considered 45 to 90 DUI a balanced market with normal appreciation. The 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 and still experience appreciation.

Median List Price:  $865,000. This is a new record high, which is caused by the shift in the mix of what is selling combined with the appreciation that is occurring in the northwest quadrant. 

Median Sold price: – $865,000 This is $15,000 below the new all time record high of $880,000 set on May 24, 2007. We believe that the new record is a direct result of the market mix change caused by the sub-prime loan issue combined with a strong market in the more expensive northwest quadrant of SCC. It is likely that the historical market mix will not return until the sub-prime loan situation improves significantly. Although SMC had negative year over year appreciation for several months in 2006, SMC has set new all time record high median Sold prices in 2007.

Average Sold price to List price ratio: – 101.2% 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%. The usefulness of this statistic may be in jeopardy as a new business model has properties listed at $1,000 regardless of their value. Just one of these properties slipping through causes a 70% jump in the value. Although simple to find it is a time consuming process. Where the real issue will be is if listings listed for something like 80% of their market value.

Percentage of completed Sales where Sold price was greater than List price: – (frequency of overbidding) 43.5% - Two out of every five 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 gradually decreased to 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: – 15 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 at $942,500 is just $7,000 below their all time high of $949,744 set on April 19, 2007. SMC median Sold price is $950,000 is off $30,000 from their all time record high of $980,000 set on May 3, 2007. At $865,000, SCC median List price is setting another new record high on May 31, 2007. The median Sold price at $865,000 is $15,000 below the new record high of $880,000 set on May 24, 2007. SZC's median List price at $785,000 is off $14,000 off their new record high of $799,000 set on May 17, 2007.  SZC's median Sold price of $757,000 is off $55,000 their new record of  $812,000 set on December 8, 2005. MTY median List price at $698,000 is off $49,000 from their record high of $746,750 set on May 17, 2007. Monterey's median Sold price of $697,000 is $74,000 below their all time record high of $771,020 set on May 3, 2007. $100,000 jumps in median price in just 7-days when using 30-days of data (only 25% of the data is new) is the kind of statistical fluctuations that occur as the sample size drops below 200. Although accurate, these wild swings do not reflect appreciation. Instead, just a larger number of high priced homes closed during the period.

It appears that the downward trend in real estate is moving toward the SMC/SCC border opposed to propagating out from this border. Areas close to this border are still doing well and setting record high prices.