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.
