Demand is Up and Supply is Down

As is typical for this time of year, demand increased a bit at the beginning of August; however, the continuous drop in the active listing inventory is far from ordinary. Inventories have been dropping across the nation and Orange County is no exception. Since March of this year, the active inventory has been steadily dropping. The inventory has shed 2,925 homes since then, a 25% drop. Currently at 8,681 homes, that is far fewer than the 14,348 last year or 17,611 two years ago. So, what’s going on? Prices are down, interest rates are down, affordability is up and demand is up. All of these forces together have been pulling the inventory down. Throw in the fact that discretionary homeowners are only placing their homes on the market if they have to and are motivated to do what it takes to compete in this market. Demand, the number o f new pending sales within the past month, is currently at 3,481, an increase of 165 pending sales within the last two weeks. Last year demand was at 2,940. So, with an increase in demand and a lower inventory, the market has heated up. The expected market time for all of Orange County is currently at 2.5 months, technically a seller’s market. The lower the range, the hotter the market. All ranges below $1 million are pretty hot, but homes priced below $500,000 are sizzling. The expected market time for homes priced between $250,000 and $500,000 is currently at 1.30 months. For detached homes within that range, the expected market time is only 1.02 months. When the expected market time drops to such low levels, sellers are busy sorting through multiple offers and buyers are writing offer after offer with no luck. I have been asked many times why the market is not appreciating given all of the activity. The devil is in the details. Even though the distressed inventory has been dropping and now represents 29.5% of the current active inventory, 50% of current demand is distressed properties. With so many short sales and foreclosures driving demand, these distressed sellers are keeping a lid on any price appreciation. But, don’t misinterpret me. There may be a lid on appreciation, but in the hotter areas and price ranges there is also a lid on price depreciation. Values have fallen significantly since the start of this downturn, fueled by a consistent supply of distressed properties. So, current values have reached affordable levels where it makes sense again to own versus rent. First time home buyer activity has returned with a vengeance as well. Throw in the return of investor activity and it is no wonder that demand has increased this year.

How do the distressed numbers look? First off, the “next wave” of foreclosures that we have been hearing about since the beginning of the year still has not materialized. I have been hearing from industry experts and agents alike that the next wave is still coming. I am certain that they are right to a degree, that the distressed numbers will increase, just not at the great numbers that they are anticipating. The agents on the streets are telling me that they all have pockets full of buyers waiting for the right property to come onto the market and they all would love a “foreclosure deal.” This is where pent up demand really does exist. Any surge in foreclosures would be met with buyers in waiting. We can expect a lot of competition and continued multiple offers for some time to come. There are currently only 2,559 distressed homes on the market, a drop of 57 in the past two weeks. This is the lowest drop in the distressed inventory since February of this year. Could we be reaching a plateau before the overly predicted wave to come? Only time will tell. There are only 299 foreclosures currently on the active market with demand at 590, representing an expected market time of .51 months. That’s correct, two weeks. Foreclosures are so incredibly hot that they can generate 20 plus offers. Yet, only one gets the property. Demand is plentiful, there just is not enough supply. There are 2,260 short sales on the active market with demand at 1,145 and an expected market time of 1.97 months.

If you are a buyer, how should you respond to this market? First, please throw out the notion that there is no competition and that you can write an offer for thousands less than the asking price. The sales to list price ratio for homes priced below $500,000 is 100%. That means that, on average, homes are selling for their full asking price. For all homes in Orange County, the sales to list price ratio is 98%. Remember, homes have already dropped 30% or more in value. As a buyer, do NOT write an offer for 10% or more off of the asking price with a letter detailing that the housing market is currently in a declining market. These buyers feel that the ultimate sales price should reflect a future drop in values. That notion of purchasing is ludicrous. Industry experts and economists cannot accurately determine future prices and are constantly revising their estimates. The values are already highly discounted over the past few years. Arriving at the fair market value includes taking into consideration pending activity, recent sales (within the prior 90 days), property condition, seller motivation and circumstances, location, upgrades, lot size and amenities. To rely on Zillow.com or other online valuation tools is also absurd. These tools only take into consideration property size and sales price, ignoring all of the other factors that are used to arrive at price. There has been a lot of pressure on interest rates to move higher. Gone are the days of interest rates below 5%. As interest rates rise, affordability drops. In purchasing today, the monthly payment is approximately the same as a home purchased later with a drop of 10% in value and a 1% rise in interest rates. These historically low interest rates are not here to stay. How long they remain low is anybody’s guess. Last, buyers should only purchase in today’s market if and only if they plan on living in their home for years to come. In the long run, Orange County housing has proven to be an excellent long term investment. It is also a great place to call “home.”