Orange County Housing Report: Housing Demand is Back!

For the Orange County housing market, the Super Bowl typically marks the largest increases in housing demand.

A Normal Housing Cycle: Demand may not quite be at where it was in the mid-2000’s, but it is finally following a normal cyclical pattern.
Absent housing rebates, the real estate market is finally functioning on its own. It is easier to gauge where the market is heading. Demand is not being propped up like it was last year in the spring or 2009 in the winter with the first time home buyer tax credits. So, what does a “normal” housing cycle mean to Orange County? After taking down the holiday decorations, stuffing them into their corresponding boxes and then putting them away in the attic, everybody has been able to turn their attention to life as usual. That includes the return of buyer demand. Demand surges at the end of January, levels off in February and then swells to its highest point of the year from March through May, the spring market. At the same time, many sellers know it’s the best time of the year to sell, so a larger number of homeowners place their homes on the market. WARNING TO SELLERS: just because it is the best time of the year to sell, that does NOT mean that buyers are willing to pay a premium for a home in today’s market. Buyers today are “spreadsheet buyers,” meaning they are going to concentrate on the most recent comparable and pending sales to carefully arrive at price. They do not want to overpay for a home and will patiently wait for realistic sellers to negotiate with. My fear for the Orange County housing market is that a number of unrealistic sellers, and even unrealistically priced bank foreclosures, will hit the market like they did last year. I am holding out for a return of the discretionary seller. Sellers should only place their homes on the market if and only if they are ready to do what it takes to sell their home, starting with carefully arriving at price just like buyers. For the spring, expected market time will fall to its lowest point of the year. From June through August, the summer months, the second best time of the year to sell a home, demand will fall slightly, yet the steady stream of homes coming on the market will continue. Many sellers mistaken the summer as the best time of the year to sell a home. Expected market time will rise slightly during the summer market. With the kids starting school, purchasing a home is not as convenient, so demand begins to decelerate further and so does the stream of homes placed on the market. The expected market time during the autumn market remains about the same as the summer. With goblins and ghosts running from door to door chanting “TRICK OR TREAT,” the Orange County housing market transitions to the slowest time of the year, the holiday market. With all of the distractions of the holidays, demand decelerates until it reaches its lowest point of the housing cycle, New Year’s Day. The stream of homes that hit the market slows considerably. Buyers in the marketplace often complain of “nothing new” to look at. The expected market time during the holidays typically rises slightly. This is an outline of a normal housing cycle in Orange County. We have not witnessed a normal cycle in years. There is something refreshing about normal.

Housing Demand: In the last two weeks, housing demand surged.
Demand, the number of new pending sales over the prior month, increased by 26% in the past two weeks, adding an additional 564 homes, and now totals 2,718 pending sales. Thus far this year, demand is a mirror image of 2009, prior to any artificial government stimulus. Last year, there were 530 additional pending sales; but, remember that demand was being propped up by the $8,000 first time home buyer tax credit.

The Active Inventory: the inventory is rising at the same pace as last year.
Two years ago, sellers approached the market with extreme caution. Last year, everybody threw caution into the wind and replaced it with unwarranted optimism. They fell for news of year over year increases in the median sales price and multiple offers on many listed homes. The problem with the median sales price is that it is not an accurate gauge of appreciations or depreciation. It will give an overall feel for where house values are headed, but is not precise. Stack up all sales in a month and take the exact middle value and you get the median sales price. If all of a sudden there is an increase in the number of upper range homes sold, the median sales price is skewed upward. When values were falling like a rock at the end of 2007 and beginning of 2008, only the lower range was selling, the median sales price was skewed lower. Unwarranted optimism is my number one concern for the housing market in 2011. Only realistic homeowners will succeed in today’s marketplace.

In the past two weeks the active inventory added an additional 164 homes and now totals 10,389 homes. Last year at this time there were 2,532 fewer homes on the market.

Expected Market Time and Price Ranges: the expected market time increases as the price range increases.
For Orange County as a whole, the expected market time has dropped in the past month from 5.10 months to 3.82 months today, a slight seller’s market. For homes priced below $750,000, 76% of the active listing inventory, the expected market time is a robust 3.37 months. Even though it is technically a seller’s market, do not expect appreciation. There are just too many distressed homes in the marketplace, keeping a lid on appreciation. For homes priced between $750,000 and $1.5 million, the expected market time is 4.91 months, technically a market in equilibrium. From $1.5 million to $2.5 million, the expected market time is actually at its lowest level in several years. Still a buyer’s market, the expected market time is 9.43 months. For homes above $4 million, there are 277 homes on the market and only 2 pending sales within the last month. That’s an expected market time of just over 138 months. That is most likely an anomaly, but a strong indicator that the highest priced homes on the market should be prepared for a slow 2011.

The Distressed Market: there’s still not much change in the distressed market.
In the past two weeks the active distressed inventory, both foreclosure and short sales, dropped by 13 homes. Not much has changed since last September, growing by only 65 homes, now totaling 4,104. There are 726 foreclosures on the market, adding just two homes in the past two weeks. The expected market time for foreclosures is 1.64 months, a HOT seller’s market. There are currently 3,378 short sales on the active market with an expected market time of 2.85 months, also a seller’s market. Expect the distressed inventory to slightly increase as the year progresses. Do not expect a wave of new distressed activity.

Happy New Year – A 2011 Forecast

HAPPY NEW YEAR!!! Now what does that mean for Orange County Real Estate?
First, it is important to clarify that forecasting draws from historical data to predict the future. The fact that forecasts from experts and leading academic institutions have been all over the map is indicative of the uncertainty of the current housing and economic environment. At this point, those that predict the weather are doing a far superior job compared to economists. Forecasting at this point is more of art than an exact science, but I have a pretty strong inclination that the market is not going to change that much. It is going to be a lot more of the same with some minor tweaks. Here’s how I think 2011 will unfold:

• Demand: unlike 2010, demand is going to follow a normal cyclical pattern. Demand was HOT for the first half of 2010 due to the first time home buyer tax credit, and then it fell off a cliff for the second half without any government stimulus. In 2011, there is not a government stimulus program to monkey with demand. For the lower ranges, below $750,000, which accounts for 75% of the listing inventory, the market will become really hot quickly as we roll into the spring. On homes that are priced well, expect a lot of competition with multiple offers and purchase prices very close to their asking prices. This market will remain hot until the market cools in the autumn. For homes priced between $750,000 to $1.5 million, 15% of the active inventory, the market will heat up during the spring, just not as much as the lower ranges. Pricing will be key, as this range tends to be too optimistic right when they first hit the market. For homes priced above $1.5 million, 11% of the active inventory, the market will remain very cold with very little competition. Price is absolutely everything in this range. Unfortunately, this range is made up of the most unrealistic sellers. The problem is that there are just way too many homes on the market all vying for a small pool of potential buyers.

• Pricing: as pointed out above, there are three distinctly different markets in Orange County. As a result, the expectations of pricing should be based upon each price range and not the market as a whole. Regrettably, everybody hangs their hat on the reported median sales price as the best barometer of home values. With three different markets, the median sales price, the middle value, is flawed. In the lower ranges, we can expect very little change in pricing. Keep in mind, that’s 75% of the market. In some really hot areas, the market may even slightly increase. Distressed properties, 49% of the active inventory in the lower ranges, will keep a lid on any real appreciation. For the middle ranges, we can expect slight depreciation in prices. But, with only 17% of this range distressed, the pressure on pricing is not that great. In the upper ranges, distressed properties are not the problem, only 6%. The problem is that there are just too many sellers and not enough buyers. The higher the range, the slower the market. Only those willing to aggressively price their homes will be successful. The pressure on price is greatest in the upper ranges. In this downturn, values in the lower ranges dropped like a rock almost overnight. In the upper ranges, prices have been a lot stickier with fewer distressed homes and a lot more unrealistic homeowners. In 2011, prices will be most volatile in the upper ranges.

• The Active Listing Inventory: the housing market in 2010 was marred by unrealistic homeowners overpricing their homes and sitting on the market. Sellers with equity, sellers without equity and bank foreclosures all fell victim to overpricing. Reports of year over year increases in the median sales price along with reports of tremendous activity and multiple offers mislead everybody in thinking that the market had finally turned. There just are too many distressed homes, high unemployment and uncertainty of the future for values to rise. Instead, buyers have become spreadsheet buyers, pouring over comparable and pending sales, unwilling to pay a premium in order to purchase a home. In 2009, the active listing inventory dropped by 4,000 homes. In 2010, the inventory blossomed, erasing all of the improvements from the year before. In 2011, expect homeowners to have learned their lesson and only enter the market if they really have to sell. The return of the discretionary seller will keep a lid on a rise in the active inventory. This is fundamental to the overall health of the Orange County housing market.
• The Distressed Market: even though the shadow inventory is real, do not expect a wave of distressed properties to hit the market. It was two years ago that many were calling for a tsunami of foreclosures as the government was meeting with banks and the buzz of foreclosure moratoriums was in the air. Yet, it never materialized. There just were too many for the banks to liquidate all at once. A flood of foreclosures would have eroded values even more, more banks would fail and the problem could have snowballed into something much bigger. Ultimately, the banks and the government chose not to go that route. Yes, there are a tremendous number of homeowners who have not paid their mortgages. They just have not materialized as foreclosures. Instead, there is a definite process. Many attempt loan modification, which takes months for an answer. Others try the short sale route, which also takes months for an answer, and can be very complicated to put together. Still, there are others who choose to do nothing, and the banks have been slow to respond. The bottom line, it takes a very long time for distressed properties to move through the system. In the end, it will take years to work our way through the distressed backlog. For 2011, we can expect more of the same, a slight methodical increase in the number of short sales and foreclosures, but no dramatic shifts. Buyers should keep in mind that there is increased competition for distressed properties since all buyers are looking for a deal.

• Interest Rates: about a month ago, I thought the big surprise of 2011 was going to be a rise in interest rates. It turned out to be the big surprise to the end of 2010. Interest rates will still be the big surprise of 2011, with rates reaching the 6% mark. There’s a ton of pressure on rates to increase. An increasing deficit with the Fed printing money at warp speed, a government unwilling to cut spending, and no leader anywhere in the world willing to come up with a definitive game plan to get us out of this pickle, translates to mounting pressure on interest rates. If anybody is in the market to buy, they should pencil out the sizeable increase in monthly payments when rates jump 1%. It illustrates how taking advantage of low rates more than offsets any risk in falling values. Unfortunately, not enough buyers shop for homes based upon monthly payments; instead, they focus on price. It really should be the other way around with rates poised to increase.

• Closed Sales: in 2010, there were about 5% fewer residential resales compared to 2009. For the first half of the year the artificial government stimulus made it appear as if the number of sales was going to rebound for the first time since the downturn began in the autumn of 2005. After the stimulus ended, the market dramatically slowed and the market improvements and momentum faded. In 2011, there will be very close to the same number of sales, just not as lopsided as 2010. Instead, the market will follow a normal Orange County housing cycle: a strong spring market, a slightly cooler summer market, an even cooler autumn market and then the slowest time of the year, the holiday market.

Overall, it looks as if 2011 is going to be a lot like 2010. As a society, the American people are getting all caught up in forecasts and numbers. But, when it comes to housing, we are talking about a place to call “home.” There needs to be a return to finding the right place to call home for years, if not decades. In the past decade, we got caught up in taking out 30-year loans only to refinance every few years, or sell and purchase another, and another. It is time to return to carefully isolating the perfect “home” that best fits our needs, lock in the best interest rates in years, and enjoy life in one of the best places to live in the country. Historically, in the long run, a home is a great investment, especially in Orange County.

Happy New Year!