Orange
County Housing Report: Happy New Year –
A 2016 Forecast
HAPPY NEW YEAR!!! Now, what does that mean for Orange County
real estate?
First, let’s take a
look back at what happened in 2015 in terms of the inventory, demand, expected
market time, and distressed properties.
Active Inventory: Since demand was stronger in 2015, the inventory did not grow as much.
The
year started and ended with an active inventory of 5,000 homes on the market.
In spite of the fact that sellers were inclined to initially overprice their
homes, sellers found a lot more success in 2015 compared to 2014. There were
only 888 more homes placed on the market in 2015, yet there were 2,457 more
sales, 8.7% more than the prior year.
In
January, it looked like the year was going to be a mirror image of 2014. The
inventory methodically grew in 2014 on the backs of overpriced, overzealous
sellers, finally reaching a peak of nearly 8,100 homes. Yet, by mid-February
2015, the market shifted gears and demand took off. It was noticeably stronger
than 2014, but it was not as sizzling hot as 2012 and 2013. Back then, sellers
were able to get away with aggressively stretching their price and the Orange
County housing market appreciated at a fairly rapid rate. The market was hotter
in 2015 compared to 2014, but if a seller stretched the price too much, the
home would not sell. Overzealous sellers had to adjust their asking price in
order to find success.
The first half
of the year was strong and homes appreciated nearly 5% by the end of June. Once
the summer months took hold though, the market shifted. Many homeowners
mistakenly believe that the Summer Market is the best time of the year to place
a home on the market. That’s simply not true. There are plenty of closed sales
during the summer months, a great time to move a family, but the majority of
those sales are put together and placed into escrow during the Spring Market.
The spring is the optimum time to list a home for sale. By the time summer roles
along, demand starts to drop and the inventory rises until it peaks in August.
The peak in 2015 occurred in mid-August at nearly 7,200 homes, 900 fewer than
2014. As demand began to drop, buyers focused on paying close to the Fair Market Value for a home and were reluctant to
pay much more than the most recent sale.
During the
Autumn Market, from September through Thanksgiving, fewer homeowners placed
their homes on the market, part of a normal housing cycle. Since the Spring and
Summer Markets were in the rearview mirror, many sellers opted to throw in the
towel and pull their homes off of the market. Consequently, the active
inventory dropped unabated through the end of the year. The active inventory
shed 2,195 homes, or 31%. For the most part, seller understood that they either reduced their asking price closer to their Fair Market Values or it was time to
throw in the proverbial towel.
Within
the past two weeks, the inventory shed an additional 576 homes, a 12% drop, and
now totals 4,396. Last year at this time there were 604 more homes on the
market. The current level of homes on the active listing market is extremely
anemic. Over the past eleven years, only 2013 had fewer homes to start a New
Year with 3,161. Price appreciation has everything to do with supply and
demand. With such a low supply, 2016 is definitely starting on the right foot.
Demand: This
year it was all about cashing in and purchasing a home prior to the Fed making
a move on interest rates.
The
housing market in Orange County typically revs its engine right after the Super
Bowl with a spike in demand (the number of new pending sales over the prior
month). 2015 was no different and even outpaced the surge in 2014. Demand
during the Spring Market was about 15% stronger than the year prior, 11%
stronger during the Summer Market, and 8% stronger during the Autumn Market.
Demand peaked in May at 3,138 pending sales, up 11% compared to the peak in
2014.
In
2015, buyers were taking advantage of historically low rates prior to the
Federal Reserve raising the short term interest rate for the first time in
nearly a decade. The Federal Reserve kept stalling the initial rise in rates.
Expectation of a rate hike moved from the spring to the fall to the very end of
the year. They finally did pull the trigger on an increase, but that did not
come until mid-December. The initial rate increase was more symbolic than
anything else. It meant that the Federal Reserve was in control of the monetary
system once again.
Interest
rates remained cheap, at about 4.25% by year’s end, even with the Fed making a
move. Placed in proper perspective, it was no wonder buyers were lining up to
purchase. In 1990, the interest rate was 10%. In 2000, it was 8%. And, just
prior to the Great Recession, interest rates were at 6.4%. With all of the hype
surrounding the beginning to the end of historically low interest rates, demand
surged.
During
the first half of the year, many buyers were unsuccessful after writing a
couple of offers to purchase. This explains why they were willing to stretch a
little and pay more than the most recent comparable sale. As demand slowed
during the second half, they weren’t as willing to stretch as much, desiring
instead to pay close to a home’s Fair
Market Value.
Within
the past two weeks, demand dropped by 326 pending sales, or 17%, and now sits
at 1,629. Compared to one year ago, current demand is up 10% with 151
additional pending sales.
Distressed Properties: Foreclosures and short sales played a very tiny role in the Orange
County housing market.
In
Orange County, homes have appreciated substantially since the beginning of
2012. Fewer homes are underwater, about 2.5% of all mortgage homes compared to
25% during the Great Recession. Distressed sales are now just an asterisk in
the overall housing market, insignificant and almost not worth mentioning in
reviewing 2015.
Back
in 2012, distressed homes accounted for 36% of closed sales. In 2015, it only
accounted for 5%. But, not much has changed since 2014 when 5.5% of closed
sales were distressed. The market has continued to work its way through a
similar number of distressed homes for the past two years, and the trend is
more of the same.
The
distressed inventory started the year at 262 total foreclosures and short
sales, and ended the year at 182, a difference of 81, or 43% fewer. 1.5% of all
closed sales in 2015 were foreclosures and 2.6% were short sales.
Expected Market Time: It was a seller’s market all year long with the exception of January.
In
January 2015, the market did not favor a buyer or seller. The expected market
time (the length of time it would take to sell a home based upon current supply
and demand) dipped to the seller’s favor as demand increased dramatically and
the active listing inventory only grew slightly. From February through May, the
expected market time dropped below the 60-day mark, a level where homes
appreciate at a faster clip. The expected market time slowed a bit during the
Summer Market, and from July through the end of the year, it was only a slight
seller’s market, meaning that housing was only slowly appreciating, yet sellers
get to control more of the terms of a sale during the negotiating process.
The
expected market time for all of Orange County grew to 81 days in the past two
weeks, but is still a great start to a New Year. As a matter of fact, in the
past 11 years, this year is the second best start. The best start to a year
occurred in 2013 with an expected market time of 47 days.
For
homes priced below $1 million, the expected market time is 60 days. For homes
over $1 million, the expected market time rises to 7.9 months.
The 2016 Forecast: It may be a carbon copy of 2015, it all depends upon the Federal
Reserve.
The
Federal Reserve has finally established that they are now ready to end the era
of rock bottom, historically low interest rates with a quarter percent hike in
the short term rate in mid-December. This marked the first increase in over
nine years. They also hinted at more increases in 2016, as many as three or
four. It is important to note that long term mortgage rates are not immediately
impacted by changes in the short term rate, but multiple increases will
definitely have an impact on the Orange County housing market. Here’s the
forecast:
- Interest Rates – mortgage rates have remained at historically
low levels due to the Federal Reserve’s manipulation of the monetary system,
keeping the Federal Funds Rate at zero for over seven years. Yet, that changed
last month with their first rate hike in nine years. The Federal Reserve meets
eight times per year and it will most likely pull the trigger on further
increases three more times in 2016: the first one probably in June, the second
in September, and then the third in December. Thus, long term rates will be
slow to move up and buyers will be able to cash in on interest rates in the low
fours throughout the Spring Market. By year’s end, expect interest rates to
eclipse 4.75%.
- Active Inventory – due to strong demand in the Spring Market,
the inventory will remain at anemic levels and will not begin to really rise by
much until the Summer Market. Expect the inventory to peak in August between
7,500 to 8,000 homes, well below the long term average of 8,500 homes.
- Demand – with an anemic inventory and buyers anxious to cash in
on historically low rates before they rise, demand will be strong during the
Spring Market. Buyers will be willing to stretch a bit in price over the most
recent sale; so, expect appreciation around 4% during the first 6-months of the
year. As the Fed increases rates, buyers for the second half of the year will
not want to pay too much. They will be looking to pay close to a home’s Fair Market Value. Demand will fall
slowly and appreciation will be flat for the second half of the year.
- Housing Cycle - the housing market will follow a normal
housing cycle. The strongest demand
coupled with a lot of fresh inventory will occur during the Spring Market,
followed by slightly less demand and a continued fresh supply of homes in the Summer
Market, then another drop in supply and fewer new listings in the Autumn
Market, and, finally, all the distractions of the Holiday market will be
punctuated with the lowest demand of the year and few homeowners opting to
sell.
- Closed Sales - the number of successful, closed sales will
be similar to 2015 levels. There will be a similar number of “move-up” sellers,
which will prove to be a wise decision as mortgage rates rise in the future and
affordability starts to erode.
- Distressed Inventory - the distressed inventory will remain
low with a very similar level of successful short sales and foreclosures,
representing just a few percent of all sales by year’s end.
The
bottom line, 2016 will feel a lot like 2015. Buyers will be lining up to take
advantage of the end to low rates. The Fed will make most of their moves after
the busiest season of real estate activity, the Spring Market, so the impact on
Orange County housing will be minimal in 2016. The market will move from a hot
seller’s market for the first half of the year, to a market all about price.
Pricing will be fundamental in order for sellers to find success in the second
half of the year.
Happy
New Year!
