Buyers have jumped right back into the real estate market, not missing a beat since shaking off the holiday cobwebs. What in the world is going on with Orange County’s hot real estate market? First, it is not just Orange County, it is a Southern California phenomena. There are many skeptics and naysayers who believe that the hot market is temporary and totally propped up by the government. Many point to the tax credit, or the low interest rates to explain away the current hot demand. Others point to the pending “shadow inventory” of foreclosures that lurks around the corner and will destroy demand (I dealt with the shadows in detail two weeks ago). With the government potentially ending their purchase of Freddie Mac and Fannie Mae loans, interest rates are going to go through the roof and slaughter demand, according to the skeptics. They talk about a double dip and they are not referring to a soft serve ice cream cone dipped twice in chocolate. I heard recently that the real estate market is starting to inflate into a new bubble. The moral to the story: you don’t have to look very far to find somebody beating down the real estate market. There’s almost a perverse group of people out there that want to see the demise of real estate and values drop to 1995 levels. Bearish blogs and emails with web links to pessimistic articles abound. Those that labeled real estate a bubble back in 2005 were right. Values have dropped substantially. Foreclosures and short sales have flourished. But, what the current naysayers are missing is that values have dropped to levels that have improved affordability substantially. First time home buyers have come out of the woodwork. Interest rates have dropped to ridiculously low levels. Investors have reemerged. Interest rates will increase this year, but that will help reel in current rampant demand. Even though the government is stating that the end of their mortgage purchases is coming, they will not let rates increase much past 6%. They will purchase if they need to, but they do want to see that financial investors reemerge to some degree. And, let’s keep the current interest rates in perspective. They were at 17% in 1980, 10% in 1990, and 8% in 2000. 5% rates have helped resurrect the market, but they can float up and we will still have demand. It’s the incredible drop in prices that has fueled demand. In looking at long term data, values have dropped too much from where they should be today. They were way too high back in 2005, but they are too low in 2010. Does that mean that Orange County real estate is going to appreciate this year? Not with so many distressed properties on the market. Distressed properties are keeping a lid on appreciation for now. Don’t get me wrong; the tax credit has helped fuel demand. So have lower interest rates and government programs. But, basic economics always prevail. As prices fall, demand increases. They eventually fall to a point where demand begins to surge. This surge places a bottom on the drop in values. In the lower ranges, prices have bottomed (and in some really hot areas are actually increasing). Currently, there is almost too much demand. Showing a buyer a home in the lower ranges today is just like the heydays of 2004 and 2005. The problem is that there just is not enough inventory.
So, how do the rest of the numbers look: The active inventory increased over the past two weeks by 387 homes, or 5%, to 7,680. The active inventory last year was at 11,560, 3,880 additional homes compared to today. Two years ago it was at 15,245, 7,565 additional homes.
The current increase is typical for this time of year now that the holidays are behind us. We are at the beginning stages of developing the Spring market. Over the past two weeks demand, the number of new pending sales over the prior month, increased by 12% to 2,547. The Orange County housing market has not seen demand this strong at this point of the New Year since 2004. Last year’s demand was at 2,146, 401 fewer than today. Two years ago it was at 1,219,
1,328 fewer than today. The expected market time is currently at 3.02 months, a slight change from the 3.22 month mark posted two weeks ago. The current OC real estate is essentially made up of three very different real estate markets: - MARKET 1: the below $1 million market. A vast majority of the market is below $1 million. This market represents 77% of the active listing inventory and 93% of current demand. The expected market time for homes priced below $1 million is 2.5 months, a seller’s market with multiple offers that fetch sales above their asking prices. This is especially true below $750,000. This market is sizzling.
- MARKET 2: between $1 million and $1.5 million. This market represents 8% of the current active inventory and 4% of current demand. The expected market time is 5.73 months, which is just about at equilibrium. This market is all about price. Sellers that overprice their homes will sit. Buyers can afford to be more patient, but distressed properties that are priced well are snapped up quickly. This market is tepid.
- MARKET 3: homes priced above $1.5 million. This market represents 15% of the current active inventory, yet only 3% of demand. The expected market time is 18 months. Anything above 10 months is virtually at a standstill, a deep buyer’s market. This market is frozen.
Over the past two weeks the distressed inventory increased by 118 homes to 2,673, levels last seen in July of last year. The number of foreclosures actually dropped from 375 to 355. The expected market time for foreclosures is an unbelievable 0.94 months, a deep seller’s market. If you are a buyer interested in a foreclosure, sharpen your pencil. The number of short sales on the active inventory increased by 138 and now totals 2,318. As I forecasted last month, short sales are going to by KING in 2010. The expected market time for short sales is 2.17 months, also a seller’s market. These too require buyers to sharpen their pencils prior to bringing in an offer to purchase. 34.8% of the active inventory is distressed. Last year at this time 44.2% of the inventory was distressed. Distressed properties are fueling demand as well.
