Wednesday, January 9, 2008

January Silicon Valley Real Estate Market Update

This information summary and analysis uses MLS Listings Inc. (MLS) transactional data for December 2007.

For single family homes in Santa Clara County, December saw the fewest closings (closed escrow) of not only any December but any month going back to 1984, when the MLS first started publishing data! There were 488 closings in the month with 450 initiated sales (accepted offers) that indicates that closings in January will be lower still.

This lower closings record occurred in each of the counties I track closely: Santa Clara, San Mateo, Santa Cruz and Monterey.

Inventory of available homes was 4,031 in December compared to a high of 4,925 in late October. Since then, we've seen a higher than normal level of listings expire at the end of October and again at or near year-end. Normally, inventory of available homes decreases during the late fall months due to seasonal factors. I suspect that we'll see a jump in inventory either in January or February as at least some of those homes come back on the market for another try.

Days of Unsold Inventory (DUI) or the intersection of the inventory (supply) with the recent sales level (demand), shows Santa Clara County at 303, San Mateo County at 190, Santa Cruz County at 351 and Monterey County at 579. Clearly, these are all indicating a buyer's market condition as a reading of DUI above 90 depicts. For comparison, a seller's market will have a DUI of less than 45 and a balanced market will have a DUI between the two. However, real estate is local (down to the neighborhood level) and market conditions can vary within each county and even within cities by a large amount.

For instance, within Santa Clara County, the Mountain View, Los Altos and Palo Alto area has the best market climate in the county with a DUI reading of 83 while South County (Morgan Hill, San Martin and Gilroy) has the worst reading of 698 followed closely by a 662 reading for East Valley part of San Jose. In San Mateo County, the best market climate is in Foster City with a DUI reading of 70 contrasting with a 210 reading on its coast that includes Half Moon Bay and Pacifica. The following is a ranking of selected Santa Clara County cities or areas with their current DUI readings:
  • Los Altos, Mountain View, Palo Alto - 83
  • Cupertino - 94
  • Almaden Valley - 120
  • Los Gatos, Saratoga - 126
  • Campbell - 128
  • Cambrian - 148
  • Sunnyvale - 152
  • Willow Glen - 163
  • Milpitas - 210
  • North Valley - 263
  • Downtown SJ - 275
  • Evergreen - 303
  • South San Jose - 446
  • East Valley - 662
  • Morgan Hill, Gilroy, San Martin - 698

The median price for single family homes in Santa Clara County was $799,000 in December and compares to the record high reached in April 2007 of $868,400. This is a decrease of $69,000 or about 8.0%. Much of the increase to the record price was the result of a mix shift from lower priced homes to higher priced homes. In other words, less transactions out of the total occurred in lower priced homes and a higher percentage occurred in higher priced homes, resulting in an increase in the median. This mix shift was predominately caused by the mortgage problem that started in February when lenders started to increase their scrutiny of and place a higher standard on underwriting loans for borrowers hitting entry-level homes the hardest.

Median prices for single family homes by county in December 2007 were:

  • Santa Clara County - $799,000
  • San Mateo County - $875,000
  • Santa Cruz County - $546,000
  • Monterey County - $520,000

Has this drop in median prices been felt evenly throughout the county? Absolutely not. With seller's markets in the northwest portion of Santa Clara County (Palo Alto, Los Altos, Mountain View), their characteristics are price appreciation along with good demand whereas those affordable priced home communities have characteristics like a buyer's market with price depreciation and very poor demand.

We call the "sweet-spot" of the market that price range which has the lowest DUI. For December the $1,000,000 to $2,500,000 range is the most brisk. Next comes the $750,000 to $1,000,000 range and then the $2,500,000 to $5,000,000 range. This is unusual because a normal market has the more affordable priced homes with the lowest DUI.

For condo/townhouses the picture is similar but slightly better with a DUI reading of 264. Real estate investors take heart as the DUI picture has degraded substantially to a reading of 529. This means under the current rate of sales of multi-unit properties, there are about 1.5 years of supply! Even though rents have increased about 10% during both 2006 and 2007, the demand is just not there making this the best time for an investment purchase since 1994. Lenders have substantially increased the borrower's requirements to obtain a loan for investor property purchases. Does this foretell a price drop? We'll have to wait and find out.

Why follow all this, spending time dissecting statistics, reviewing trends and investing time doing old-fashioned real estate analysis? Simply, with this information I am armed with the latest information to provide my clients an advantage when it comes time to make a change in the market. Newspapers and other sources tend to generalize too much (i.e., the national real estate market, the Bay Area real estate market, etc.) and you lose the fineness of being able to use information strategically to make better decisions.

This effort forms the foundation of more effective strategies I advise my clients whether or not to buy or sell or just wait!

If you have any comments or questions, please feel free to post them here or send me an email at

Thanks for reading!

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