Orange County Housing Report: A Price Correction… Keep Dreaming!
It seems that every year after we jump into the slower Autumn
Market,
buyers start talking about a housing price correction.
A Price Correction: because the median price is within 6% of the record established in June of
2007, many buyers feel a correction is near.
As soon as the kids go back to school the housing market
shifts gears and we enter a new season, the Autumn Market. The inventory slowly
drifts downward as fewer homes come on the market and many sellers throw in the
towel; the best time of the year to sell a home is in the rearview mirror.
Demand downshifts and slows as well. Buyers are no longer lunging over each
other and getting caught up in bidding wars in order to purchase a home.
Buyers often mistaken this slower season as the beginning
of a major market slowdown, one that will ultimately lead to a price
correction. As we inch closer and closer to the Orange County median sales
price record established last decade, their simple logic prevails. The last
time prices were this high it lead to a major housing price correction.
Logically, prices are about to drop again, right? Not necessarily.
The prior median sales price record was established in
June 2007 at $645,000. The median sales price last month was at $610,000.
During the Great Recession, the median low hit $370,000 in January 2009. So,
August’s level is 65% above the recession low and just 5.4% away from matching
Orange County’s record height. Buyers from the trenches are squawking that
prices are just too high, so they feel that prices must be on the verge of
dropping. Don’t bet on it.
The prior height was established 8 years ago. Even though
inflation has been extremely mild, the Consumer Price Index in Orange County
has been positive for years. Taking into consideration the slower, mild growth
in overall prices, Orange County is closer to 15% off the prior peak, not 5%.
Buyers are mistakenly comparing today’s prices to 2007, that’s 8 years ago, a
long time ago.
Current data and trends simply do not support a housing
correction anytime soon. Yes, we have cooled considerable from the red hot
Spring Market. Back in April, the expected market time for homes on the market
was a low 1.8 months, or 54 days. Today’s expected market time has increased to
2.7 months, or 82 days. Even with the increase, it is nowhere near a market
that favor’s buyers. Last year at this time, Orange County was enjoying a
balanced market, 3.33 months, or 100 days, one that did not favor buyers or
sellers. A market is balanced when it sits between three and four months of
inventory. Even though Orange County is now approaching balance, it is still a
slight seller’s market, one where sellers can call more of the shots when it
comes to the terms of a contract, but appreciation slows considerably. Home
prices only appreciate rapidly when the expected market time drops to
one-and-a-half months or less.
Orange County has not experienced a buyer’s market since
the beginning of 2011. Back then there were over 10,000 homes on the market and
demand was similar to today. The supply of homes was much greater than today.
When too many homes are left on the market, there is a lot more competition
between sellers. When supply is high and demand is low, the biggest
differentiator for a seller to make their home stand out among the competition
is price. The more attractive the price, the quicker a home sells. That’s when
prices drop. Back in 2007, the active inventory reached 17,898 homes and prices
were falling like a rock.
Today there are 6,959 homes on the market, 30% fewer than
the 10,000 home level back in 2011. The long term average for the active
listing inventory is actually 8,500 homes. The current inventory trend is to
drop through the end of the year. Even with an anticipated drop in demand as we
approach the end of the year and eventually move into the Holiday Market, the
drop in demand will be offset by a simultaneous drop in the inventory. The
expected market time is projected to remain relatively flat through the end of
2015. Do not expect any major change in Orange County real estate market trends
anytime soon.
For 2016, the Federal Reserve is posturing to slowly and
methodically increase the short term rate, which ultimately affects mortgage
rates. Since their moves will be deliberately slower, buyers will continue to
flood the market to cash in on today’s historically low rates. Next year
promises to be very similar to 2015 with increased demand and an inventory well
below the long term average. It will once again be a sellers’ market.
The bottom line: in Orange County, do not expect a
correction in home values anytime soon.
Active Inventory: as is
normal for the Autumn Market, the inventory continued to drop.
After peaking a month ago, the active inventory shed an
additional 81 homes, or 1%, in the past couple of weeks, now sitting at 6,959.
It was only above the 7,000 home mark for two months this year compared to
five-and-a-half months in 2014. As we progress deeper into autumn, the days get
shorter and the number of homes that come on the market drops as well. Just
around the corner are the holidays, the biggest drops in the inventory each
year. The inventory typically reaches a new bottom at the turning of the New
Year. From there it will begin to rise.
Last year at this time the inventory totaled 7,663 homes, 704
more than today, with an expected market time of 3.33 months, or 100 days.
That’s 18 additional days compared to today.
Demand: Demand decreased by 4% in the
past couple of weeks.
Demand, the number of new pending sales over the prior
month, decreased by 108 homes in just two weeks and now totals 2,537 homes.
Demand was last at this level back in January of this year. Just as there are
fewer sellers coming on the market, there are also fewer buyers looking to buy
right now.
Last year at this time there were 236 fewer pending sales,
totaling 2,301.
Distressed Breakdown: The distressed inventory decreased by 12
home in the past couple of weeks.
The distressed inventory, foreclosures and short sales
combined, decreased by 12 homes in the past two weeks, a 5% drop, and now
totals 220. The up and down swings of the distressed inventory has continued
for a few months now. Even with these fluctuations, there really are not that
many distressed homes hitting the market. With only 2.5% of all mortgage homes
in Orange County currently upside down, there are far fewer homeowners in a
precarious position compared to the days of the Great Recession when 25% of all
mortgaged homes were upside down.
In the past two weeks, the foreclosure inventory decreased
by 8 homes and now totals 65. Less than 1% of the total active inventory is a
foreclosure. The expected market time for foreclosures is 61 days. The short sale
inventory decreased by 4 homes in the past two weeks and now totals 155. The
expected market time is 48 days. Short sales represent just 2% of the total
active inventory.
Orange County Housing Report: FALL BACK… Like Usual
We have officially transitioned into the Autumn Market, leaving
both the
Spring and Summer Markets in the rearview mirror.
The Autumn Market: the Orange County housing market just
downshifted into a lower gear, part of a normal housing cycle.
The initial school bell just rang and families are getting
back into their daily ritual of making lunches, participating in carpools, and
getting up at the crack of dawn. That initial bell also indicated the start of
housing’s Autumn Market. Buyers and sellers can expect a lot of changes. The
key to success is having the right expectations.
First, expect the active listing inventory to drop from
today’s level as fewer and fewer homeowners place their homes on the market.
Combine that with the fact that many unsuccessful sellers will throw in the
towel and pull their homes off of the market. Over the past five years, on
average the active listing inventory has dropped by 12% from the end of August
through mid-November when we transition into the Holiday Market. A 12% drop
would mean that today’s 7,178 mark would decline to 6,308.
Along with the drop in the inventory, expect a significant
drop in demand as well. It’s just not the best time of the year to make a move.
Families generally want to make a move during the summer months. When you take
into consideration that homes can take a couple of months to close, it’s no
wonder that so many homes are placed under contract in the spring and close in
the summer. It is much easier for kids to transition into a new school with a
summer move. Moving in the middle of the school year is a lot more challenging.
Over the past five years (from August through mid-November), on average demand
has dropped by 10%. That represents a drop from 2,722 pending sales to 2,460.
Taking into consideration he drop in both the inventory
and demand, the expected market time for newly listed homes in Orange County is
expected to change very little from its current 2.64 month mark, or 79 days.
That means that the overall feel of the housing market is not going to change
much from where it stands today. It will remain HOT in the lower ranges, below
$500,000, a seller’s market. For homes priced between $500,000 and $1,000,000,
it will be a slight seller’s market towards the bottom of that range, but will
be very close to a balanced market towards the top of the range. A balanced
market does not favor buyers or sellers. For homes priced above $1,000,000, it
will be a slow go. The expected market time is currently at 8.5 months and will
not change much over the course of the Autumn Market.
The best approach for sellers is to know the current
landscape of the local housing market. It’s also a given, the higher the price,
the longer the home is going to take to sell. Homes are no longer flying off
the market like they did months ago. There are fewer buyers looking to buy, so
there will be fewer showings. There may be fewer sellers to compete with, but
that will be offset by softer demand.
For sellers, it boils down to price and condition, the two
factors that they have control over. For the rest of the year, many overzealous
sellers will learn the hard way that they will not find success without
carefully honing in on price, bringing the price as close to their Fair Market Value as possible. With
less buyer competition, buyers really do not want to pay much more than the
last comparable sale. Multiple offers will no longer be the norm, so buyers
will not be tripping over each other to purchase a home like they did in May.
Since many new sellers will hit the market overpriced, ignoring basic market
fundamentals and the slower autumn season, they will sit on the market with
very few showings and no offers.
The best approach for buyers is to understand that while
there are fewer buyers competing to purchase, it is NOT a buyer’s market. On
the contrary, for all of Orange County, it is still a slight seller’s market
and will remain that way for the remainder of the year. Buyers cannot afford to
be too uncompromising in their quest to find a deal. During this time of the
year many buyers mistakenly feel that because it is no longer the spring or
summer that it is the best time to buy, the best time to “get a deal.” Buyers
that make it their mission, like so many do every year, will not be able to
achieve their goal in isolating a home. The housing market is far too healthy
for sellers to make exceptions and start discounting the price just because
housing is not as hot as earlier in the year.
Instead, buyers really need to stick to the sound strategy
of isolating the home that best fits their needs and then offering to pay close
to the home’s Fair Market Value.
Remember, there will still be plenty of overpriced, overly optimistic sellers
looking to get a lot more than the last closed sale. They too will not find
success until they lower the price and succumb to being a bit more realistic.
Until then, ignore these homes and continue the search.
Ultimately, buyers and sellers will find success by being
realistic and not trying to overreach. There will be plenty of buyers and
sellers who will find success for the remainder of the year, but that is
predicated on having the right approach.
Active Inventory: It
looks as if the active inventory has reached a peak for the year.
In the past two weeks, the active inventory has grown by
only 11 homes and now sits at 7,178. Now that school has started, this level is
most likely the peak for the inventory in 2015. We can expect the inventory to
slowing drop over the coming months as fewer sellers enter the fray and many
sellers who have not found success will ultimately throw in the towel, pulling
their homes off of the market.
Last year at this time the inventory totaled 8,084 homes, 708
more than today, with an expected market time of 3.16 months, or 95 days.
That’s 16 additional days compared to today.
Demand: Demand decreased by 1% in the
past couple of weeks.
Demand, the number of new pending sales over the prior
month, decreased by 40 homes in the past two weeks and now totals 2,722 homes.
Even with the increase, February levels. Demand will slowly drop for the rest
of 2015.
Last year at this time there were 223 fewer pending sales,
totaling 2,499.
Distressed Breakdown: The distressed inventory decreased by 7 home
in the past couple of weeks.
The distressed inventory, foreclosures and short sales
combined, decreased by 7 homes in the past two weeks, a 3% drop, and now totals
219. Two weeks ago, the inventory grew by 24 homes, but that turned out to be
more of an anomaly than a trend, as it quickly reversed course this week. Year
over year, there are 21% fewer distressed homes today.
In the past two weeks, the foreclosure inventory increased
by 4 homes and now totals 64. Less than 1% of the inventory is a foreclosure.
The expected market time for foreclosures is 64 days. The short sale inventory
decreased by 11 homes in the past two weeks and now totals 155. The expected
market time is 56 days. Short sales represent just 2% of the total active
inventory.
