Santa Clara Valley Real Estate Report October/November 2010

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Sales momentum for single-family, re-sale homes in Santa Clara County dipped into negative territory in October for the first time since November 2008.

We calculate…

sales momentum by using a 12-month moving average to eliminate seasonality. By comparing this year’s 12-month moving average to last year’s, we get a percentage showing market momentum.

In the chart on my on-line site…

are two of the most important statistics determining market momentum. The blue shows momentum for home sales while the red line shows momentum for pending home sales.

Sales momentum peaked last July and has been trending down ever since. Pending sales, which normally track closed sales closely, have jumped out of the norm due to the large number of foreclosure and short sales in the past two years.

In a normal market…

pending sales close within 60 days. In today’s market, pending sales are taking much longer due to the high number of foreclosure and short sales, which require lender approval. This has pumped up the number of pending sales, which, in a normal market would indicate increasing sales in the coming two months. But, because a majority of pending sales are foreclosure or short sales, a greater potion of these sales never close.

Pricing momentum…

on the other hand, generally lags the buying and selling indicators provided by the sales momentum trend. In the chart below, the purple line shows the median price momentum indicator.

As you can see, when the sales momentum indicator changed to a sell signal in June 2005, prices didn’t peak until November, when they started a gradual decline. The median price indicator really started falling when it crossed the 0 axis in August 2008.

The sales momentum indicator turned up in December 2008 and the price indicator kept falling until sales momentum peaked in July 2009, when pricing momentum started picking up.

More statistics…

The median sales price for single-family, re-sale homes, after falling for the previous three months, turned upward in October by 1.8% from September. Year-over-year, the median price was up 7.4%. This is the thirteenth month in a row the median price has been higher than the year before.

Inventory turned downward, as is its wont this time of year, dropping 8.4% from September. Year-over-year, inventory was up for the fourth month in a row: 30.7%.

The sales price to list price ratio continued slipping last month, down 0.2 of a point to 99%. This is the sixth month in a row the ratio has dropped. Since January 2000, the median ratio has been 99.8%, which is incredibly high. A falling ratio also indicates that momentum is faltering.

Statistics: Tracking Momentum

As we mentioned last month, the Internet is strewn with statistics, some good, some bad, and some downright ugly. So, what are statistics for?

Statistics are for…

determining the best time to buy or sell real estate. If the statistics you are tracking do that, they’re good. If they don’t, they’re misleading, at best.

Tracking momentum…

is the best way to determine when to buy or sell real estate. The question becomes which statistics to track.

Robert Campbell, a San Diego based real estate investor, in his 2004 book “Timing the Real Estate Market”, lists five “vital signs” he tracks to time the market, in order from strongest to weakest:

1.  Existing home sales

2.  New home building permits

3.  Mortgage loan defaults

4.  Foreclosure sales, and

5.  Interest rates

He uses the same basic formula for all five: (current 12-month moving average—previous 12-month moving)/current 12-month moving average.

Finding the data…

means tapping into a variety of sources.

Sales data is the easiest to track. Local newspapers publish this data each month. If you want historical sales data, you can call us and we’ll provide it for you.

In California, new home building permits are tracked by the Construction Industry Research Board. The board charges for their data. (http://cirbdata.com)

There are a variety of sources for mortgage loan default and foreclosure sales data starting with the county recorder’s office. Other sources, for which you will have to pay are: http://dataquick.com, and http://foreclosureradar.com.

Interest rate data can be had at a number of different sites: http://hsh.comhttp://bankrate.com, or http://federalreserve.gov. While Campbell tracks 1-year t-bills, monthly mortgage rates can also be used.

Next month, we will review the timing method Craig Hall uses in his 2003 book, “Timing the Real Estate Market: How to Buy Low and Sell High in Real Estate.”

This author identifies seven trends to track to determine when real estate cycles are about to turn.

Go to my on-line site SCVReport.com for the full report, plus a city-by-city breakdown.

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