Monday, February 9, 2009

Orange County Housing Report: Demand Takes Off

Even though the United States is waiting on the stimulus package, demand for Orange County real estate is beginning to take off. In the past two weeks, demand, the number of new pending sales within the prior month, increased by 24% to 2,671 pending sales, an increase of 674 homes. Last year at this time there were 1,103 fewer pending sales, totaling 1,568. Two years ago there were 2,463 pending sales, 208 fewer than today. After slowly increasing in demand during the first few weeks of the New Year, demand has surged and is following a course similar to 2007. It will be interesting to see what happens to demand as the Obama stimulus package is passed in the coming weeks. In the past two weeks, the total active inventory decreased by 41 homes to 11,519. Last year there were 3,740 additional homes on the market, totaling 15,259. Two years ago there were 464 additional homes on the market. The current expected market time dropped from 5.39 months two weeks ago to 4.31 months today. Last year the expected market time was 9.73 months and two year ago it was 4.87 months. Total Orange County pending sales is at a much healthier level compared to the last couple of years. Currently, total pending sales just eclipsed the 4,000 pending sale mark and now stands at 4,019. Last year, total pending sales did not surpass the 4,000 mark until June. Last year at this time, total pending sales climbed to 1,969, 2,050 less than today. Two years ago it was at 3,026, 993 fewer compared to today. There has not been much of a change along the distressed property front. The total number of distressed homes on the market, both foreclosures and short sales, dropped by 31 homes in the past couple of weeks and now stands at 5,073, 44% of the total active inventory. 63% of all pending sales are either a short sale or a foreclosure. The expected market time for foreclosures dropped to the lowest level of the current downturn, 1.08 months. Foreclosures are HOT and are selling almost as fast as they are placed on the market. Many buyers looking for a deal are fooled into thinking that they can purchase a foreclosure at a massive discount, only to find that multiple offers are generated on foreclosures and the average sales to list price ratio is 101%. That’s right, on average foreclosures are selling for above their list price. The expected market time for short sales also dropped to their lowest level of this downturn, 5.78 months. Foreclosures and short sales have driven prices down to levels where affordability has improved tremendously fueling an increase in first time home buying and overall demand. Lastly, the upper end market is still extremely stagnant and will remain so until the economy improves and something is done about jumbo financing. Currently, jumbo financing begins at $625,500, has a much higher interest rate, and qualifying is a lot more difficult than conventional financing.

So, where is the real estate market going from here? The real estate market is going to dramatically improve with the right stimulus package. The Obama administration and Congress is feverishly working on a major stimulus package and should be passed within the coming week. Let’s examine some of what they are strongly considering:

· Reduce interest rates to at least 4.5%
· Increase the conventional loan limit for high cost areas from $625,500 back to $729,900
· Eliminate repayment of the $7,500 first time home buyer tax credit and make it available to all buyers

The Federal Reserve and the FDIC are working on programs to prevent foreclosure and increase loan mitigation. Out in the real estate trenches, the topic of the day is “loan modifications.” The industry is acutely aware that all eyes are on decreasing the flow of foreclosures and finally putting a bottom under the housing market. In terms of units, Orange County housing bottomed out between the fourth quarter of 2007 and the first quarter of 2008; just take a look at current demand compared to demand last year, 70% higher. Pricing is a different story, and only with a bump in demand are we going to experience a true bottom in pricing. With historically low interest rates, an increased conventional loan limit, a buyer tax credit, foreclosure abatement and other forms of stimulus, the end result will be an increase in housing demand and a high probability of reaching a bottom in pricing around mid-year.

The final whistle of the Super Bowl marked the beginning of the Spring real estate market. Sure enough, there already was a considerable increase in demand. From here, demand will continue to rise and will most likely receive an “Obama bounce” with the passing of the stimulus package. With demand increasing and a return of the discretionary homeowner opting to keep their homes off of the market unless they really have to sell, we can expect the active listing inventory to remain flat or even slightly fall. The expected market time will fall as well to levels not seen in quite some time. The undercurrent of foreclosures and short sales will continue to fuel supply; but, depending upon the reach of the stimulus package, this flow may begin to ebb. Up to this point, the Orange County real estate market has been controlled by lenders (foreclosures and short sales). However, it has come to the point that not only the Orange County real estate market, but the entire national real estate market, is in the hands of our government. They know that the first step to turning around our economy is to stop the fall of real estate values and the flow of foreclosures and short sales. Stay tuned… round one is going to be signed by President Obama within a week.