Orange County Housing Report: Demand Springs Forward

With the return of Southern California sunshine and temperatures in the 70’s, Orange County demand is finally on the rise. Orange County is taking “Spring Forward” to a whole new level with an increase in demand for the first time in six weeks. Demand, the number of new pending sales over the prior month, increased by 216 homes over the prior two weeks and now totals 3,270, the highest level thus far in 2010. Demand is 600 pending sales stronger than last year at this time and 1,187 stronger than two years ago. After looking at developing trends, I had been wondering whether or not demand was going to surge or if it would ignore cyclical market fundamentals. It would not have been the first time that this downturn ignored the conventional Southern California housing cycle. Call it a coincidence, but now that the cool temperatures, clouds and rain have subsided, the Orange County housing market is revving its engine. There are a ton of buyers in the marketplace right now according to REALTORS® in the trenches. The current problem is surprisingly a LACK OF INVENTORY. The expected market time for all homes priced below $1 million is 2.23 months, a deep seller’s market with a very low inventory. These homes represent 78% of the active inventory and 94% of demand. But, for homes priced above $1 million, there is NOT a lack of inventory. Collectively, this range represents 22% of the active inventory but only 6% of demand. The expected market time is 8.99 months, a buyer’s market. To understand how the market has evolved since last year, let’s take a closer look and compare year over year changes in both the active inventory and demand:
The inventory has dropped significanlty in every range. With the exception of homes priced below $250,000, demand is much stronger in every range. There just are not enough homes on the market in the lower ranges where demand is so incredibly hot. For the lowest range, less than $250,000, the inventory is down 43%, but demand is only off by 10%. It is no wonder that there are multiple offers and homes selling for above their asking prices in the lower ranges. More inventory would actually be welcomed with open arms by both buyers and their REALTORS®. These charts also illustrate how the “jumbo” market between $750,000 and $4 million has actually improved tremendously. Their expected market time has dropped significantly as well. For example, homes priced between $1 million and $1.5 million dropped from an expected market time last year of 16.21 months to 6.55 months today. 6.55 months may be a buyer’s market, but it is not frozen. Anytime the expected market time is above 10 months, double digits, there is just too much inventory and very little demand. Currently, only homes above $2 million have expected market times that are double digits. They represent 10% of the current active inventory, but only 2% of demand. The current market is much different than just one year ago. Just ask all of the buyers who are having trouble purchasing because of a lack in inventory.

How do the rest of the numbers look? The active inventory increased over the past two weeks by 330 homes, or 4%, to 8,776. The active inventory last year was at 11,606, 2,830 additional homes compared to today. Two years ago it was at 15,617, 6,841 additional homes. The overall expected market time for all of Orange County dropped from 2.77 two weeks ago to 2.68 months today. The total pending count, which includes homes that have been pending for months, increased from 6,869 two weeks ago to 7,049 today. That is the highest level since I started tracking total pendings back in September of 2006. This is primarily due to the mind-boggling number of short sales that are waiting for lender approval (short sales are homes where the outstanding loans exceed the market value of the home and are subject to the lender[s] agreeing to take less in order to close the sale). 4,250 of the 7,049 total pending sales are short sales, 60%. Yet, only 40% of current demand is made up of short sales. On average, short sales just do not close as fast. Instead, they clog the system and buyers are left on the edge of their seats wondering when they will ever be able to move into their new home.

The number of active distressed homes on the market, all short sales and foreclosures combined, increased by 26 homes to 2,795 and now represent 31.8% of the inventory. Last year at this time, there were 4,673 distressed homes on the market, representing 40.3% of the active inventory. The number of foreclosures within the active listing inventory dropped by two homes in the past two weeks from 396 to 394. The expected market time for foreclosures is an astonishing 1.05 months, a deep seller’s market. Foreclosures are flying off of the market. The number of short sales within the active listing inventory increased by 28 and now total 2,401. The expected market time for short sales is 1.86 months, also a deep seller’s market.

Orange County Housing Report: An Olympic Pause

National anthems, a record medal haul for the U.S., a spectacular gold medal hockey game, all great distractions of Olympic proportions, but we typically see a pause in Orange County housing demand at this time of year. Demand, the number of new pending sales over the prior month, dropped by 190 homes over the prior two weeks, now totaling 3,054. However, this is a cyclical anomaly in the data because February is such a short month. Had February been a normal month in length, demand would have remained unchanged from a couple of weeks ago. Demand is 430 pending sales stronger than last year at this time and 1,161 stronger compared to two years ago. There really has not been much change in the past month, in terms of activity. The storyline remains the same: there are not enough homes coming on the market in the lower ranges to satiate the ravenous appetite of current demand. If a home is priced well and is below $750,000, it will fly off the market and generate more than one offer. I am asked over and over why there is so much demand. It is worth repeating over and over again until the general public is acutely aware of the current marketplace. Yes, there are a ton of distressed homes on the market. But, in the lower ranges, they are not eroding pricing any further. Values have already dropped at least 35%. Interest rates are low. There still is the first time home buyer’s tax credit, but its reach is not very far due to the lack of inventory and the fact that cash buyers, or buyers with larger down payments, are snatching up many of the homes that are hitting the market.

How do the rest of the numbers look? The active inventory increased over the past two weeks by 311 homes, or 4%, to 8,446. The active inventory last year was at 11,562, 3,116 additional homes compared to today. Two years ago it was at 15,412, 6,966 additional homes. With a drop in demand and an increase in the inventory, the expected market time increased from 2.51 months two weeks ago to 2.77 months today. At the current pace, the overall market continues to be a seller’s market without much appreciation at all. But, for those sellers in the higher ranges, DO NOT GET EXCITED about the overall numbers. In drilling down to specific ranges, the higher the price range, the slower the market. It is slow for all markets above $1 million. Above $2 million, the market is ice cold. The number of active distressed homes on the market, all short sales and foreclosures combined, increased by 64 homes to 2,769. The number of foreclosures within the active listing inventory increased in the past two weeks from 380 to 396, a gain of 16. The expected market time for foreclosures is a mind numbing 1.14 months, a deep seller’s market. Foreclosures remain the hot ticket. The number of short sales within the active listing inventory increased by 48 and now totals 2,373. The expected market time for short sales is 1.91 months, also a hot ticket. There are 6,867 total pending sales in all of Orange County. Of those, 4,254 are short sales, 62%. Yet, only 27% of all closed residential resales in February were short sales. Most short sales are simply not closing. They are waiting on lender, or in many cases lenders, approval of the sale. Of the 4,254 pending short sales, only 757 have been pending for less than a month. 1,488 have been pending for over three months. The data does not even capture the short sales where a frustrated buyer walks away after waiting too long. Those are placed back on the market and, often, after generating several offers, quickly become pending sales again.

So, where do we go from here? There are a lot of unknowns regarding the future of the economy, unemployment, a double dip, etc. All of the experts seem to enjoy the healthy debate, but opinions are all over the map. But, the Orange County housing market is trudging forward, regardless. First time homebuyers represent about 25% of all purchases and so do investors. I have also been asked where all of these first time homebuyers are coming from. Many of them are in their late twenties or early thirties and responsibly saved for a down payment, but simply could not afford to buy when prices reached their astronomical heights several years back. They were priced out of the market for years and did not jump into the market until prices dropped to a very attractive level along with interest rates. Current demand is strong. The market would appear even stronger in if all of the short sales that are pending would close. That will change as more short sales are approved as 2010 rolls along. The federal government now wants the big banks to modify loans first. If that does not work out, then they want the big banks to go the short sale route. Foreclosing is only a last resort. As March rolls along and the spring officially begins, we can expect more homes to hit the market and demand to increase. The listing inventory will increase slightly due to more and more higher priced properties hitting the market where demand is not strong enough to keep up with the increased flow. The lower ranges will remain feverish.