Orange County Housing Report: Right NOW!
The window of opportunity to take advantage of today’s
historically low
interest rates is starting to close.
Interest Rates: after a couple of years of hinting at an
eventual hike in rates, the Federal Reserve appears ready to make a move and
raise the short term rate for the first time in nine years.
The Federal Reserve has been talking about raising the
short term rate for a couple of years now. They kept kicking the proverbial can
further down the road. It was supposed to be at the end of last year, then it
was going to be the Spring of 2015, then in the Autumn, but they never pulled
the trigger.
They have fooled just about everybody, from experts to the
average person on the street. They seem to be talking out of both sides of
their mouths. By mid-September of this year, the entire world had already
factored in an increase in the short term rate. Instead, the Federal Reserve
pointed out instability in China and other global markets and decided to
maintain the status quo. The U.S. and world stock markets were already volatile
and they responded negatively, dropping like a rock.
The following week, Janet Yellen, the Chair of the Federal
Reserve, delivered a speech at the University of Massachusetts, and, out of
character for the Fed, stated something of profound substance. She said that
they were going to raise the rate by the end of the year as long as there
weren’t any major changes to the economic landscape. The U.S. and world stock
markets soared after her speech.
The reason the world sees a rise in our rates as something
good is because it indicates that the Federal Reserve has faith in the U.S.
economy. Their lack of action, especially in September, proved to be too much
for the worldwide psyche. “Do they know something we don’t know?” They used to
change the rate every other month and sometimes in between. It would go up,
down, up, up, down, up, down, etcetera. It felt as if somebody was behind the
wheel of the U.S. economic bus.
They did not pull the trigger in mid-October,
but all indicators are “go” for mid-December. They are looking at a quarter of
a percent hike in the short term rate. They are moving off of zero for the
first time in seven years and getting back behind the wheel of the U.S.
economic bus. The changes in the short term rate will not be as swift as prior
Federal Reserve movements in the past, but nonetheless, they are moving in a
positive direction. The short term rate effects savings accounts, CD’s, commercial loans, and the rate at which
banks borrow money from the Federal Bank window. As banks are charged more,
long term rates, mortgages for homes, eventually go up as well.
An increase of a quarter of a point does not drastically
change the monthly mortgage payment. But, as interest rates continue to climb,
it certainly will put a dent in a borrower’s wallet. Remember, this is a
monthly payment. So, for a $750,000 mortgage payment, the payment increases
$109 per month every single month when
the interest rate rises by just a quarter of a point. That’s an extra $1,308
per year. And, if the Fed continues to increase rates, we could find rates
rising to 4.75% by the end of 2016. If that happens, the monthly mortgage
payment for a $750,000 mortgage climbs by an extra $331 per month compared to
today, or nearly $4,000 a year. That’s a lot of money. For a $500,000 mortgage
at 4.75%, the monthly payment increases by $220 per month compared to today, or
$2,640 per year. That’s a lot of money for the middle class family.
Keep in mind, historically speaking, 4.75% and 5% are not
bad rates. We have just become accustom to ridiculously low rates complements
of the Federal Reserve stimulating the U.S. economic engine for nearly a
decade. The long term average for interest rates since 1972 is 8.5% and since
1990 it’s 6.6%. Eventually, down the road, interest rates will hit 5% and
beyond, most likely topping at around 5.25%. For the $500,000 middle class
borrower, a 5% interest rates means an extra $296 per month more compared to
today. That’s $3,552 extra every single year, equivalent to a nice Hawaiian
vacation every year for the term of the loan if a buyer acts NOW.
That’s right, NOW is the time to take advantage of
today’s rock bottom rates. They might not be as low as they were earlier in the
year, but the gift from the Federal Reserve is coming to an end.
Active Inventory: the
inventory dropped by 10% in the past month.
In the past month, the active inventory dropped by 624
homes, or 10%, and now sits at 5,885. The Holiday Market has officially begun
with Thanksgiving just a few days away. This is the slowest season for Orange
County real estate. It’s when both supply, the active inventory, and demand,
new escrows, drop to their lowest point of the year. The active inventory will
continue to fall like a rock and will reach its lowest point of the year on
December 31st. The season continues through Super Bowl Sunday, when
Orange County begins its transition into the Spring Market.
Last year at this time the inventory totaled 6,484 homes, 599
more than today, with an expected market time of 2.9 months, or 87 days, nearly
a balanced market that does not favor a buyer or seller. In comparison, today’s
expected market time is 72 days, a slight seller’s market. A slight seller’s
market means that there is not much price appreciation, but sellers are able to
call more of the shots.
Demand: Demand increased by 5% in the
past month.
Demand, the number of new pending sales over the prior
month, increased by 114 homes in the past month and now totals 2,447 pending
homes. This bump in demand is typical for this time of the year as buyers are
poised to take advantage of closing just prior to the New Year, an okay time to
move a family while the kids are on Winter Break.
Now that we have entered the Holiday Market, demand will
drop to its lowest level of the year by year’s end. It will start to rise at
the start of 2016, but will not start its Spring Market surge until after Super
Bowl weekend.
Last year at this time there were 213 fewer pending sales,
10% less, totaling 2,234.
