Orange County Housing Report: Lack of Inventory is SPOOKY

Keeping with the cries for “trick or treat,” the Orange County housing market has its own eerie trick, an incredible lack of inventory for homes priced below $1 million. The other day I was asked what one thing spooks me the most about the real estate market right now and the crazy inventory was my answer. There is very little fresh, new inventory. The lower the range, the “spookier” it gets. Properties that are priced right and in great condition are flying off of the market with multiple offers and tremendous activity. Buyers new to the market are dumbfounded by all of the competition. Their expectations are of doom and gloom and the ability to “cherry pick” whatever home they are interested in AND at a discount. Yet, just about every agent has pockets filled with buyers who want to buy but have been unable to purchase after losing out on property after property. For most, it is not the first time home buyer credit that is motivating them, as it is set to expire at the end of November anyhow (there is an extension that is in the works though). Many buyers don’t even qualify for the credit due to income requirements. Affordability, low rates and a fear that rates will increase from their historically low levels has motivated people to jump into the market. On average, agents are writing several offers for every buyer. To top it off, investors are back in the real estate game and pushing out buyers with smaller down payments. FHA (Federal Housing Administration) financing allows for a small down payment, but buyers electing to utilize this program simply are finding it impossible to purchase. We have seen prices increasing in the lower ranges slightly, but distressed properties are keeping a lid on stronger appreciation. The "shadow inventory" of foreclosed properties sitting on the sidelines and not yet on the market due to foreclosure moratoriums, government intervention, or banks careful not to flood the market, has only compounded the problem of a lack of inventory. Even if the strategy were to change and more of the “shadow inventory” hit the market, demand is currently strong enough to quickly sop it up. However, buyers should not expect foreclosures to flood the market all at once, lenders and the government are not interested in eroding values further. Instead, when the market heats up in the spring we can probably expect an increase in foreclosure activity to parallel an increase in demand. This housing downturn has been full of surprises and this year's "spooky" twist has been an unexpected drop in the inventory.

So, how do the numbers look? The market really has not changed much over the past few months. The past two weeks are definitely no exception. There have been no surprises other than the continued descent in the housing inventory. The active listing inventory decreased by 174 homes over the past two weeks, totaling 7,749. We have not seen the inventory this low since the beginning of January 2006. That’s 5,041 fewer than last year and 9,705 fewer than two years ago. The inventory has dropped by 4,093 homes so far this year, a 35% drop. We can expect the active listing inventory to drop slightly for the remainder of the year. Demand, the number of new pending sales within the past month, dropped by 31 in the past couple of weeks to 3,166, a 1% drop. Last year’s demand was 703 fewer and two years ago was 1,925 fewer. For the remainder of the year, as we enter the Holiday market, we can expect demand to continue to slowly drop as the distractions of Thanksgiving, unwrapping presents and ringing in a New Year sets in. The expected market time for all of Orange County decreased ever so slightly in the past couple of weeks from 2.48 to 2.45 months. The expected market time last year was at 5.19 months and two years ago it was at 14.06 months. That’s correct. The current expected market time for the entire market, including the sluggish upper end, is two-and-a-half months. For homes priced below $1 million, the expected market time is 1.89 months. For homes priced above $1 million, the expected market time is 9.27 months. That’s because that range represents 29% of the active listing inventory, BUT just 8% of demand. There is actually okay activity up to $2 million, nothing to write home about, but some movement. For the 1,039 homes priced above $2 million, the expected market time is in the double digits, a crawl. After increasing for the first time this year two weeks ago, the number of distressed properties on the market decreased by 9 homes. 31% of the active inventory is distressed compared to 43% last year. There are currently only 314 foreclosures in all of Orange County, a decrease of eight in the past two weeks. The numbers have not really changed much since July. Foreclosures only represent 4% of the active listing market and have an expected market time of 0.69 months. Last year the expected market time was at 1.22 months. Foreclosures continue to be exceptionally HOT and are, on average, selling for 3% above their asking prices. Buyers should be aware that it is a feeding frenzy out there for foreclosures. Realistic expectations are that the more qualified borrower able to bring in a strong offering price is going to ultimately prevail. Buyers with smaller down are going to find it difficult to compete. There are currently 2,075 short sales on the active market, a decrease of just one home in the past two weeks. Short sales currently represent 27% of the active listing inventory, a major player in today’s marketplace. The expected market time for short sales is currently at 1.85 month versus 6.92 months one year ago. Remember, there is nothing “short” about a short sale. Short sales, where the homeowner owes more than the home is worth, are subject to loan approval and can take anywhere from weeks to months to secure that approval.