Orange County Housing Report: Waiting on Stimulus

With only a small change in the past two weeks, the official beginning of the Spring market will most likely be delayed until the MAJOR stimulus package that the Obama administration and Congress are currently working on is revealed. The stimulus package is targeted for a mid-February launch. Currently everybody seems to be cautiously waiting for change. The stimulus package promises to be nuclear in its reach, and it needs to be to begin to turn around the current economic situation. In 2009, the United States government is poised to be vigilante and relentless in their pursuit to turn things around. We will see foreclosure aid, more financing aid, job creation, tax breaks, small business incentives and more. Legislation and Federal Reserve involvement will be aimed at reducing interest rates and narrow the spread from the low rate that banks borrow money to the much higher interest rates that are passed onto consumers. The good old fashioned pendulum has been out of control. For years, lenders were carelessly lending with no restrictions and now they have battened down the hatches to the point that only the best of the best can qualify for anything outside of a government backed conventional or FHA loan, loans up to $625,500. So, the lending pendulum has swung from out of control lending to too many restrictions and hurdles to adequately meet real lending demand. That is the crux of the issue that our government is painstakingly trying to change. In sticking with the pendulum analogy, the financial market would be much healthier somewhere in between. The real question is just how long it is going to take for the financial markets to thaw and restore the backbone of our economy. One thing is for certain, the government is about to apply a relentless full court press until they have applied enough stimulus to turn the tide. Stay tuned, the government is working on giving the ailing economy a major Valentine’s Day gift.

So, what do the current numbers look like? In the past couple of weeks, the active inventory has increased by 273 homes to 11,560. Last year at this time there were 15,245 homes, a difference of 3,685. Two years ago there were 11,895, 335 additional homes compared to today. Demand, the number of new pending sales within the prior month, increased by 138 in the past two weeks, sitting today at 2,146 pending sales, an increase of 7%. Last year, demand was at 1,219, 927 fewer than today. Two years ago, there were 216 fewer pending sales, totaling 1,930. The expected market time dropped slightly in the past couple of weeks from 5.62 months to 5.39. Last year, the expected market time was at 12.51 months, and two years ago it was at 6.16 months. One thing is for certain, all of the numbers today illustrate a much better start to a New Year compared to both 2007 and 2008. Here’s how Orange County compares to the rest of Southern California:

The number of distressed homes, foreclosures and short sales, dropped by 14 homes in the past two weeks, totaling 5,104, 44.2% of the active listing inventory. Here’s a county comparison of distressed sales:

In Orange County, distressed homes are fueling a majority of the current activity. 77% of all distressed sales are below $500,000 and 90% are below $750,000.

The government is basically underwriting most of the current demand since they are propping up conventional and FHA financing, loan limits up to $625,500. All homes below $750,000 account for 71% of the current active inventory and 91% of demand. So even though 29% of the active inventory is above $750,000, it accounts for only 9% of demand. This is primarily due to the current financial crunch where financing outside of conventional and FHA loans has become very difficult to obtain. Since the government is currently doing nothing to help jumbo financing, these loans are sitting on a lender’s balance sheet. With conventional and FHA financing, the government is currently purchasing these loans to revitalize the flow of financing below the $625,500 limit. Investors are virtually sitting on the sidelines; only the government is currently propping up demand. Homes that fall within jumbo financing parameters, above $750,000, are suffering from no government intervention. This phenomenon will continue until either investors’ confidence is restored or the government steps in. The higher the price range, the slower the market. For homes between $750,000 and $1 million, the expected market time is 8.87 months. For homes between $1 million and $1.5 million, the expected market time is 17.88 months. For homes above $4 million, the expected market time is 116.67 months. There are 350 homes on the market above $4 million and demand is only at 3. In 2008, this range posted its best expected market time in March at 17.67 months. Until jumbo financing improves through government intervention or investor confidence is restored, the upper ranges can expect only slight improvements.

What can we expect in the Orange County real estate market from here? The Spring market will most likely take off after the major stimulus package is passed in mid-February. Demand will continue to improve, the inventory will rise slightly, and the expected market time will drop. Good news for the health of the real estate market is the fact that discretionary homeowners are not being fooled by aspirations of a strong Spring market; instead, most are choosing to not compete. Historically low interest rates will fuel demand as well, and we can expect rates to eventually remain in the mid-4’s, which is unprecedented. Distressed sales will also continue to fuel demand as more and more new distressed properties hit the market. We can expect strong numbers of distressed sales throughout 2009 with the distressed inventory falling slowly but surely. With so much stimulus, low interest rates and increased affordability, the current down cycle, now going on its third year, has a strong chance of bottoming as early as the middle of the year.

Orange County Housing Report: A Much Better Start

The Orange County housing market is in a much better place in starting 2009 compared to the last couple of New Years. Prices are down, affordability is up and interest rates are at historically low levels. The housing market and the financial markets have the attention of every corner of the government. The Federal Reserve, Congress, the Bush Administration, the incoming Obama Administration, Democrats and Republicans alike, everybody has their collective eye on the ball, putting a bottom underneath the housing market, thawing the financial markets and reversing the trend of unemployment. With all of that in mind, many buyers have already taken advantage of the Orange County housing market despite the slowest season of the year for real estate, the Holiday market. After President-Elect Obama is sworn into the office in about two weeks, we will have officially left the distractions of the holidays behind and entered into the beginning stages of the Spring market. The Spring market this year will be marked by increased demand and an inventory that will prove to be slow to grow. So, where are we right now? First, let’s take a look at the current active inventory. The inventory has shed just over 1,100 homes in the past month and now sits at 11,287 homes. Last year, we started 2008 with 14,944 homes on the market, 3,657 more than today. In 2007 there were 11,643 homes on the market, 356 additional compared to right now. Don’t be fooled by the similarities in these numbers because 2007 was much different than today. Today we have discretionary sellers who expect tremendous competition from distressed properties, both short sales and foreclosures. In 2007, many homeowners expected the Spring market to be hot and homes coming on the market outpaced demand considerably; thus, the inventory grew. In 2008, the discretionary seller knew what to expect and the number of homes that came on the market kept up with demand. In 2009, we can expect it to be quite similar to 2008. Due to the distractions of the heart of the holidays, demand, the number of new pending sales over the course of a month, took a cyclical drop of 314 homes over the past four weeks to 2008. But, this is typically the low point of the year for demand. At this time last year, demand was at 998 pending deals, 1,010 fewer than today. Demand is 101% stronger than last year… incredible! Two years ago demand was at 1,496 pending sales, 512 fewer than today. Three years ago demand was at 1,573 pending sales. The expected market time is currently at 5.62 months. Last year’s expected market time was at 14.97 months, and it was at 7.78 months two years ago. The distressed inventory, foreclosures and short sales, dropped by 401 homes over the past month, bringing the total to 5,118, its lowest point since March of last year. That’s a 7.2 % drop. Distressed properties now make up 45.3% of the inventory, a slight drop over the past couple of weeks. 69% of all pending sales are distressed sales right now. Obviously, the distressed inventory is helping fuel demand. 79% of all distressed homes are isolated below $500,000 and 92% are found below $750,000. It is no wonder that the lower end of the market has been a lot hotter than the rest of the market. All homes, distressed and the non-distressed traditional homeowner, below $500,000 make up 53% of the active inventory and 73% of demand. The lower ranges are also hotter than the rest of the market due to the fact that the government is backing all conventional financing and FHA financing up to $625,500. That does not mean that there are not great deals in the upper ranges; it means that it there are a few more hoops to leap through in financing above the $625,500 loan limits.

So, if you are a buyer, how should you approach this market? It is a great time to be a buyer. It has been more than worth the wait for the patient buyers that have been sitting on the fence. Now, I am hearing again of so many buyers trying to predict the bottom of the housing market. It absolutely astounds me at the number of buyers that flocked to purchase back in 2005 after tremendous appreciation year in and year out. Real estate booms and busts are cyclical and it could not last forever. After tremendous depreciation in housing, this is the time to purchase. This is the time to flock to real estate, when prices are down. Why buy near a peak in appreciation? The time to buy is somewhere near the bottom of the trough of a downturn. Would it be so bad if the market continued to drop for another year? Not really. Prices have already dropped considerably to this point, and most of that drop took place when we bottomed in demand from August of 2007 through February of 2008. The bottom line, if you find the home that best meets your family’s desires and budget, and you are not planning to move in a couple of year, than BUY. This is Orange County, a very desirable place to live with a shortage of buildable land, plenty of great weather and beaches and historically an excellent long term housing investment. Buyers in this market need to be aware that there is plenty of competition for distressed properties and homes in the lower ranges. The sales to list price ratio for foreclosures is currently 101%, meaning that, on average, they are selling for slightly above the list price. The sales to list price ratio for short sales is currently 97%, meaning that offers written for 10% less than the asking price have a much less chance of success. Know the market that you are considering and utilize the expertise of an experienced real estate agent to guide you through the myths and hurdles of Orange County housing in 2009.

So, if you are a seller, how should you approach the market? If you are a homeowner and you absolutely, unequivocally have to sell, than do not hesitate to place your home on the market immediately at the best price and in the best condition. Homes that are priced well and in great condition have a much better chance in successfully selling in a shorter amount of time. So, carefully arrive at price by placing the most emphasis on current pending sales and recent comparable sales, sales within the prior 90-days. Major discounts from the prior sales are not necessary, but do not “pad” the asking price because there is a dollar amount that you are looking for. Unfortunately, the market does not care what you need to net from your home. Be prepared to make any changes or modifications to the asking price or condition based upon new pending and closed sales and buyer showing feedback. Sellers too need to know their market and utilize the expertise of an experienced real estate agent to achieve success. The area expert may not be the best choice. Instead, look to the real estate agent that knows and understands the current market with a track record of success, a market expert.