Orange County Housing Report: Interest Rates Trump Tax Credit

It is time for buyers to start focusing on historically low interest rates; they won’t last forever.

Interest Rates: Rates are at ridiculously low levels and seem to be taken for granted.
I have always been fascinated how almost nobody focuses on how rates affect purchasing power. These low rates actually pencil out to be so much better than the $8,000 First Time Home Buyer Tax Credit; yet, the lower rates just have not stimulated demand like the credit. Consider a $500,000, 30 year mortgage at 4.375%. The monthly payment would be $2,496 per month. The same monthly payment at 5.375%, where rates were just one year ago, would be for a mortgage of $446,000. That is a $54,000 difference, almost seven times the tax credit. That’s one way to look at the incredible savings today’s low interest rates offer buyers. Now, let’s take a look at the difference in payment for the same mortgage amount. The payment on a $500,000, 30 year mortgage at 5.375% is $2,800 per month, or $304 per month more compared to the 4.375% rate. In just five years, the savings would be a very impressive $18,240. Over the life of the loan, 30 years, the savings would be $109,440. These numbers are mind boggling. Yet, first time home buyers tripped over each other clamoring to purchase a home prior to the end of the tax credit on April 30th. But, now, in the face of the lowest interest rates in our lifetime, buyers just aren’t rushing to purchase. As soon as the economy starts to improve, interest rates will increase by at least one percent. As a buyer, today’s rates should be very motivating. The best time to purchase is during a buyer’s market with rock bottom rates, not when the market is appreciating again. Unfortunately, low rates don’t seem to sell like an $8,000 credit. So, let’s put phrase it in a way that will sell: “Give yourself an $18,240 tax credit by purchasing now before rates rise just one percent.” For further perspective, rates were at 8% at the beginning of 2000. For a $500,000 mortgage, the monthly payment would be $3,669, an additional $1,173 per month. In 1990, rates were at 10%, which would be $4,388, an additional $1,892 per month. Buyers cannot afford to ignore today’s rates. They should not be taken for granted. As soon as the economy improves, rates will increase and buyer’s purchasing power will begin to erode.

Demand: With the begging of the Autumn market, demand drops 7%.
In looking at demand, the First Time Home Buyer Tax Credit pulled demand forward. To take advantage of the credit, a buyer had to be under contract on or before April 30th. Since reaching the height in demand at the end of April, demand has dropped 32%. Demand, the number of new pending sales over the prior month, dropped by 203 over the past two weeks and now totals 2,690 pending sales, a 7% drop. The incredible rates should spur demand. It will be interesting to see where demand goes over the coming weeks now that the kids have settled in at school.

Active Listing Inventory: It appears as if the listing inventory is climbing towards a peak of 12,000 homes.
The active listing inventory gained 175 homes in the past two weeks and now totals 11,892. The inventory has actually grown unabated since the beginning of the year. If demand was just slightly hotter, the inventory would actually drop. It started the year at 7,165 homes and has increased since by 4,727, a 66% increase. This year marked the exit of the discretionary seller. Instead, the market has been plagued by homeowners who have been sitting on the sidelines anticipating a turnaround in the housing market. With demand artificially stimulated at the beginning of the year by the tax credit, sellers were fooled into thinking that the market had indeed turned around. They took reports of year over year increases in the median sales prices and stories of heated demand and multiple offers as the perfect time to dive into the market. Unfortunately, seller after seller entered the market and anticipated appreciation like just a few years ago and priced their homes at unrealistic levels, thousands of dollars above the last comparable or pending sale. The end result is a ton of homes have been sitting on the market overpriced and the active inventory has increased unabated. A SPECIAL NOTE FOR SELLERS: reduce your home to market value or pull your home off the market immediately and wait for the overall economy to dramatically improve.

Expected Market Time: The lower ranges have slowed but not nearly like the stalled upper end.
For homes priced below $1 million, the expected market time is 3.87 months. This range represents 82% of the active inventory and 93% of demand. For homes priced above $1 million, the expected market time is 12.02 months, the higher the range, the slower the expected market time. This range represents 18% of the active inventory, but only 7% of demand. The slowest range, homes priced above $4 million, has an expected market time of 70 months. The hottest market in Orange County is Foothill Ranch with an expected market time of only 2.38 months and an average list price of $467,000. The slowest market in Orange County is Newport Coast with an expected market time of 12.08 months and an average list price of $4.4 million. The expected market time for all of Orange County is 4.42 months. Last year at this time the expected market time was 2.33 months.

Foreclosures and Short Sales: With demand slowing, the distressed inventory continues to grow.
The active distressed inventory grew by 110 homes over the past two weeks and now totals 4,026 total foreclosures and short sales, levels not seen since April of 2009. The active distressed inventory started the year with 2,555 homes and has since grown by 58%. The distressed inventory now represents 34% of the current active inventory. Last year at this time, there were 2,384 distressed homes on the market, 1,642 fewer than today. The number of foreclosures within the active listing inventory increased by 24 homes in the past two weeks from 684 to 708. The expected market time for foreclosures is 1.84 months, still an exceptionally HOT seller’s market. Short sales, where a homeowner attempts to sell a home for less than the total outstanding loans against a home, requiring lender approval, increased by 86 homes over the past two weeks and now total 3,318. The expected market time for short sales is 3.61 months, much slower than 1.53 months posted last April.