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!

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.

Orange County Housing Report: Hey Sellers, Get Realistic!!

The Orange County Housing Inventory has inflated by 48% since the beginning of the year on the backs of unrealistic sellers.

Unrealistic Sellers: Overpriced homes have flooded the market.
Reports of tremendous competition among buyers have fueled unrealistic seller expectations. Reports of multiple offers and homes selling quickly have fueled it as well. Reports of an increase in the median sales price did not help either. Yes, there has been a lot of demand and homes have sold quickly, procuring multiple offers. However, none of this would have happened had it not been for a major increase in home affordability. There has been a culture shift in the past few years where people have gone from spending frivolously (and often recklessly) to saving, paying off debt and making sure that every penny counts. Five years ago home buyers were racing to buy homes at whatever price. Today, buyers have become “spreadsheet” buyers, not wanting to pay much more than the last closed sale, regardless of the amount of competition. Sure, after writing offer after offer after offer a buyer is more willing to up the ante a bit and pay a couple thousand dollars above the most recent comparable sale, but they are NOT going to pay an extra $25,000. That is how we have experienced slight appreciation over the past year. In the hottest ranges, buyers have been willing to pay a little bit extra to procure a home. Over the course of the past year, the small incremental increases have amounted to a positive change in pricing. But think about it; a 5% change in pricing did not happen overnight. The reports in a change in pricing are YEAR OVER YEAR. Back in the heydays of the mid-2000’s homes were increasing a lot faster. That just is not the case this time around. Homeowners have been fooled, thinking the market has not just bottomed, it has recovered. There have been so many homeowners who have sat on the sidelines waiting for the market to recover so that they could finally sell. These pent up sellers have been placing their homes on the market at ridiculous values. They have taken an increase of 5% over a year to mean that they can price their home 5% above the most recent comparable sale. Spreadsheet buyers are just not going to bite. The economy is too fragile for this line of thinking. Yes, there is a premium to selling a home with equity versus the short sale down the street; HOWEVER, a buyer is not going to pay thousands of dollars more. The bottom line: sellers really need to take a hard look in the mirror and ask whether or not they really can drop to the realistic fair market value of their home. If not, they need to stop wasting everybody’s time and pull their home off of the market.

Active Listing Inventory: The proof that unrealistic sellers have flooded the market, an unabated increase in the inventory.
This year the Orange County housing inventory has grown by 3,524 homes, a 48% increase. In the past two weeks, the inventory has grown by 355 homes, a 3% increase, and now totals 10,817. Last year at this time the inventory was at 8,946 homes, 1,871 fewer than today. Every range has experienced growth, but the most substantial growth can be found between $250,000 and $1 million with a 71% increase.

Housing Demand: Independence Day typically marks a drop in demand, this year is not exception.
Since artificially peaking at the end of April due to the end of the First Time Home Buyer Tax Credit, an $8,000 incentive, demand has dropped 28%. Demand, the number of new pending sales over the prior month, decreased by 247 in the past two weeks and now totals 2,860, levels not seen since January of this year. From here, demand typically rises slightly and peaks at the end of August before slowly deteriorating for the remainder of the year.

Expected Market Time: After bottoming at the end of April, the expected market time for homes in the OC has increased to its highest level of the year.
With an increase in the active listing inventory and a decrease in demand, the expected market time increased from 3.37 months two weeks ago to 3.78 months today. The overall market is still a “seller’s market,” but it is moving in the wrong direction. Remember, this seller’s market is different. There may be a lot of buyers and a lot of competition, but spreadsheet buyers are unwilling to pay much of a premium over the last comparable sale. At the end of April, the expected market time was at 2.35 months. Last year at this time the expected market time was at 2.66 months. For homes priced above $1 million, the expected market time is 10.61 months. Contrast that with homes priced below $1 million where the expected market time is 3.22 months.

Foreclosures and Short Sales: So far this year, the distressed inventory has grown by 29%.
The active distressed inventory has increased from 2,555 homes at the beginning of the year to 3,307, levels not seen since May of 2009. The distressed inventory now represents 31% of the current active inventory. Last year at this time, there were 2,766 distressed homes on the market, 541 fewer than today. The number of foreclosures within the active listing inventory increased by 19 homes in the past two weeks from 559 to 578. The expected market time for foreclosures is 1.73 months, 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 71 homes over the past two weeks and now total 2,729. The expected market time for short sales is 2.52 months, still a HOT seller’s market.

Orange County Housing Report: Demand is Normal Again

After dropping nearly 22%, Orange County housing demand is now in a normal summer cyclical pattern.

Housing Demand: Over the last 5 years the average drop in demand was 3.2%, this year it was only 2%.
Whatever the reason, the end of school, graduation, the start of summer, demand cyclically drops at this time of year. The only difference this time around is that demand had already dropped 20% due to the end of the Federal first time home buyer tax credit. When demand reached 3,979 pending sales on April 29th, the height for 2010, and the highest threshold in almost five years, there was a rush to purchase by first time home buyers. That segment accounted for 25% of Orange County’s housing activity. With so many of them pushing to purchase by a deadline, it left a void in demand for the six weeks that followed the expiration. It wasn’t until the past two weeks when the normal housing pattern for Orange County reemerged. Earlier in the year, the market followed a normal pattern as well, until March and April. Demand grew by 30% in those two months, and then subsequently, dropped almost 22% in May and June. Demand, the number of new pending sales over the prior month, decreased by 60 in the past two weeks and now totals 3,107. For the second report in a row, demand is less than the prior year with 522 fewer pending sales compared to 2009. From here, demand typically falls in the next two weeks and then climbs at the end of July. With the distraction of the Fourth of July weekend coming up, that sounds fairly accurate.

Active Listing Inventory: The inventory has continued to grow unabated since the beginning of the year.
Last year the inventory dropped by 36%. This year, however, the Orange County housing inventory has grown by 3,034 homes, a 43% increase. In the past two weeks, the inventory has grown by 345 homes, a 3% increase, and now totals 10,469. This is also the second report in a row where the inventory is higher than last year. Last year the inventory was at 9,188 homes, 1,274 fewer than today. The drop in demand is partially to blame for the increase in the inventory, but keep in mind that it was still increasing unabated when demand was at its highest level in years. We have also heard that the market is really hot in lower price ranges, which is true, just ask any buyer. However, all ranges have experienced an increase in inventory, especially homes between $250,000 and $1 million. For homes priced between $500,000 and $750,000, the inventory has increased by 60%. The reason for the increase in inventory is because there are many homeowners who have held off on selling their home, pent up sellers, who have been waiting for the market to turn so that they could take advantage of the market and sell their home. Homeowners have heard about the hot market in the lower ranges with a lot of activity, multiple offers and homes selling for very close to their asking prices, and in many cases, above their asking prices. The problem is that many of these pent up homeowners are placing their homes on the market at unrealistic levels, thousands above the most recent comparable and pending sales. Buyers in today’s market have become “spreadsheet buyers,” pouring over the comparables and not wanting to pay much more than the last buyer. With demand hot, many are willing to pay a bit of a premium to purchase their dream home, but more along the lines of an extra $5,000, not $15,000 or more. As long as the overall economy’s health is in limbo and more distressed homes are hitting the market, buyers are unwilling to pay an extravagant premium to own a home. As a seller, it is imperative to carefully consider all recent comparable sales, taking into account location and amenities, and price accordingly. Then, listen carefully to how the market responds to your home and make any necessary adjustments.


Foreclosures and Short Sales: Since October 1, 2009, the distressed inventory has grown by 37%.
The active distressed inventory has increased from 2,346 homes on October 1st and now totals 3,217, levels not seen since May of 2009. The distressed inventory now represents 31% of the current active inventory. Last year at this time, there were 2,919 distressed homes on the market, representing 32% of the active inventory. The number of foreclosures within the active listing inventory increased by 29 homes in the past two weeks from 530 to 559. The expected market time for foreclosures is 1.52 months, 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 108 homes over the past two weeks and now total 2,658. The expected market time for short sales is 2.28 months, still a HOT seller’s market.

Interest Rates: Interest rates are at a 60 year low and will NOT last.
Everybody is so focused on price and the current historically low interest rates have become an expected part of our real estate market. However, with all of the money that the Federal government has poured into our economy, there is a real threat of major inflation on the horizon. One of the only ways to counter the threat is to raise rates. Due to the lackluster economy, the Federal Reserve is currently stuck and unable to raise rates in the short run, but sooner or later they will be forced to make a change. Rates are predicted to increase to 6% over the course of the next year. As interest rates rise, buyers can afford less of a home. This is best illustrated in an example. For a buyer with an income of $100,000 and putting 20% down, a rise in interest rates from 5% to 6% equates in a drop in home affordability from $590,000 to $540,000, a $50,000 drop. Buyers waiting for that “good buy” may find it next year, but at a price, with higher rates and a larger monthly payment.

Orange County Housing Report: End of Credit Won’t End Demand

At the stroke of midnight on April 30th the Federal first time home buyer tax credit will end, but there is just too much demand for it to spell the end to demand. Everybody within the real estate trenches, blogs and media have been looking to the end of the tax credit like the infamous Y2K predictions of a little more than decade ago. Remember those days? I had a neighbor who bought a trash can from the local hardware store and filled it with bottled water and canned goods claiming that the end of life as we knew it was upon us. Governments, banks, power companies, airports, traffic systems and more were all supposed to fail on the first day of the year 2000. Nothing really happened. For Orange County real estate, the end of the tax credit is not going to have much of an impact either. Don’t get me wrong; all of the government stimulus has definitely had a profound impact of the real estate market right in our very own backyard; however, it is time to move on. The program has to end sometime and it might as well be during the hottest time of the year, the Spring market. Yes, we have had buyers hurry to cash in on the credits, but there are enough first time home buyers that have been unsuccessful in purchasing thus far that will still be looking. The reports from the trenches are that these buyers are not about to do an about face and leave the market with their tales between their legs. More recently, many buyers saw the credit as a perk. The new California tax credit that starts this Monday is only going to last about a week due to the fact that only 17,500 first time home buyers in ALL of California will obtain the $10,000 credit (spread over three years) before the funds runs out. Yet, when California announced the credit about a month ago, demand was already hot. It did nothing to instigate more demand. The problem has been not enough supply in the lower ranges where first time home buyer activity is the greatest, not a lack of demand. Also, first time home buyer activity has been bumping along at about 25% of total activity. It is not going to drop significantly and there are plenty of non-first time home buyers in the marketplace as well.

Interest Rates: Rates are expected to rise which drops home affordability.
Buyers are motivated to purchase knowing that the expected rise in interest rates will ultimately make their payments go up. But, it is more than that. As interest rates rise, buyers can afford less of a home. This is best illustrated in an example. For a buyer with an income of $100,000 and putting 20% down, a rise in interest rates from 5% to 6% equates in in home affordability from $590,000 to $540,000, a $50,000 drop. With the government no longer committing to purchasing pools of loans, which ended on March 31st, interest rates are expected to rise a full percent over the coming year.

Housing Demand: Demand has not seen these levels since June of 2005
Demand, the number of new pending sales over the prior month, increased by 231 homes over the prior two weeks and now totals 3,979, a 3% increase and the height thus far in 2010. Demand is 347 pending sales stronger than last year at this time and 1,439 stronger than two years ago. Demand should hit a plateau through the remainder of the Spring market.

Active Listing Inventory: The active inventory has continued its gradual climb and just reached levels not seen since June of last year.
Over the past two weeks, the inventory has increased by 174 homes to 9,351, a 2% increase. We started the year at 7,165 listings and have added 2,186 homes to the active inventory to date. Last year, the inventory continued to drop from mid-March to the New Year. The increase seems gradual, but when looked at since the beginning of the year, a 31% increase is pretty profound. Agents in the trenches are stating that there are more overpriced, unrealistic sellers placing their homes on the market. Prior to the start of the year I forecasted that the discretionary seller would return; however, if more and more homes are placed on the market at unrealistic values, the inventory will continue to rise. This rise in inventory could dampen demand. This is a trend that we will have to continue to watch. If you are a homeowner contemplating placing your home on the market much higher than the most recent comparable sales and pending activity, the current market will not support your line of thinking. Buyers are not willing to pay a sizeable sum extra for a home simply because there is more demand and more competition. There is just too much distress that remains in the market and the distressed market is keeping a lid on appreciation.

Expected Market Time: Every price range experienced a drop in the expected market time. The expected market time for all of Orange County dropped slightly from 2.45 months two weeks ago to 2.35 months today. Yet, there still are two distinct markets: homes priced below $1 million, HOT, and homes priced above $1 million COLD. It is important to note that the lower the range, the HOTTER the market. For homes priced below $500,000, the hottest range, the expected market time is 1.6 months. Compare that to homes priced above $4 million where the expected market time is a frigid 29.5 months.

Distressed Inventory: The number of active foreclosures increased while the number of active short sales decreased.
The number of active distressed homes on the market, all short sales and foreclosures combined, increased by only 9 homes in the past two weeks and now total 2,790, or 29.8% of the current active inventory. Last year at this time, there were 3,724 distressed homes on the market, representing 35.9% of the active inventory. The number of foreclosures within the active listing inventory increased by 38 homes in the past two weeks from 416 to 454. The expected market time for foreclosures is 1.12 months, an extremely HOT seller’s market. Short sales, where a homeowner attempts to sell a home for less than the total outstanding loans against a home, which requires lender approval, decreased by 29 homes over the past two weeks and now total 2,336. The expected market time for short sales is 1.53 months, also a HOT seller’s market. Everybody’s looking for a deal, so there’s a lot of competition in purchasing foreclosures and short sales.

Orange County Housing Report: This Market is Taxing

Talk to an Orange County buyer, especially a first time home buyer, and you will quickly find that the real estate market is simply crazy. Let’s first establish that there are two different markets, below $1 million, HOT, and above $1 million, COLD. The below $1 million market accounts for 77% of the total active inventory and 94% of demand. The lower the range, the hotter the market. Most buyers new to the market have already formed an incorrect idea of the real estate market. They think that the market is plagued with desperate sellers waiting for a buyer to finally write an offer to purchase at a major discount and an incredible “deal” for the buyer. Instead, new, fresh inventory is scarce and buyers find that they are competing for anything half way decent that hits the market. Properties that are priced well and are in good condition garner tremendous attention and procure mulitple offers. Writing a purchase offer at the list price only to lose to three other buyers that brought in offers above the list price is common. Sales prices above list prices are common. First time home buyers losing out on properties to investors with larger down payments is common. The reality is that if a buyer is looking to bargain and negotiate, they are better off attending the local weekend swap meet. Remember, values of homes have already dropped significantly, 35% or more. Some economists have argued that values have dropped below where they should be today, which is often the case in real estate downturns. So, homes are already heavily discounted from where they were a few years ago. Home affordability has returned to the Orange County real estate market. Interest rates are still at historical lows. Throw in buyer income tax credits and we have all of the ingredients for a major seller’s market. Buyers entering the fray in today’s market get a real quick dose of reality and, if they really want to buy, sharpen their pencils real fast. In the lower ranges and in hotter areas, homes are starting to sell for more than the last comparable sale. The only thing that is keeping values from taking off like they did before is the distressed inventory.

Housing Demand: Demand has not seen these levels since the beginning of August 2005.
Demand, the number of new pending sales over the prior month, increased by 126 homes over the prior two weeks and now totals 3,748, a 3% increase and the height thus far in 2010. Last year’s height in demand was reached in June at 3,652 pending sales. Demand is 195 pending sales stronger than last year at this time and 1,374 stronger than two years ago. It seems as if demand is beginning to hit a plateau, so we will have to watch and see if that trend continues over the coming weeks.

Developing Trends: The active listing inventory has continued to gradually increase after bottoming at the beginning of the year.
Over the past two weeks, the inventory has increased by 266 homes to 9,177. We started the year at 7,165 listings and have added 2,012 homes to the active inventory thus far. Last year, the inventory continued to drop from mid-March to the New Year. Towards the end of last year, the drop was probably more in line with the cyclical drop in the inventory that starts in September until the end of the year. Naturally, during the beginning of the year and into the Spring market, more and more homeowners place their homes on the market in anticipation of the strongest time of the year to sell, the Spring market. In 2006 and 2007, homeowners often tested the market and attempted to obtain values above the current fair market value. There were a ton of overpriced listings that remained on the market and were not successful in ever selling. Instead, they just clogged the inventory and it methodically grew, reaching a height in August 2007 of just shy of 18,000 listings. In 2008 and 2009, homeowners no longer tested the market and the discretionary seller emerged. During the second half of 2009, the Orange County active listing inventory continued to shed homes and not as many new, fresh homes were placed on the market. REALTORS® in the trenches were complaining of a lack of inventory and nothing “fresh” to show their buyers. We still here that there is a lack of inventory, but behind the scenes, the active inventory is slowly but surely replenishing in every price range. It remains to be seen if the trend in an increase in the active inventory continues. Will the discretionary homeowner return or will more and more homeowners place their toe in the water, testing the market? We will have to wait and see. There are currently 1,384 fewer homes on the market today than just one year ago and 6,379 fewer than two years ago.
Expected Market Time: The lower the range, the lower the expected market time.
The expected market time for all of Orange County is currently at 2.45 months, a slight drop from 2.46 months two weeks ago. For homes priced below $500,000, the expected market time is 1.63 months, a deep seller’s market. For homes priced between $500,000 and $1 million, the expected market time is 2.84 months, still a seller’s market. For homes priced above $1 million, the expected market time is 9.44 months, the higher the range, the slower the market. For homes priced above $4 million, the expected market time is 38.44 months, or over 3 years.

Distressed Inventory: Again, not much has changed in the distressed inventory.
The number of active distressed homes on the market, all short sales and foreclosures combined, decreased by 33 homes to 2,781 and represent 30.3% of the active inventory. Last year at this time, there were 4,006 distressed homes on the market, representing 37.9% of the active inventory. The number of foreclosures within the active listing inventory decreased by two homes in the past two weeks from 418 to 416. Yes, that is correct. With all of the talk of foreclosures there are only 416 on the market in all of Orange County. The expected market time for foreclosures is 1.01 months. Short sales is a different story; there are plenty of short sales in Orange County. Short sales are where a homeowner attempts to sell a home for less than the total outstanding loans against the home, which requires the lender (or lenders in many cases) to approve the short sale, indicating their willingness to take less than the full payoff of a loan. Most short sales are not fast like their name would indicate and, on average, take months to close. The number of short sales within the active listing inventory decreased by 31 and now total 2,365. The expected market time for short sales is 1.61 months, also a HOT seller’s market. Everybody’s looking for a deal, so foreclosures and short sales tend to fly off of the market.

The Most Absurd Tax Credit EVER: The latest tax credit for first time homebuyers in California is going to run out in mid-May.
I am still scratching my head trying to understand why California approved $100 million towards a first time homebuyer tax credit. These are for transactions that close escrow on or after May 1, 2010. The $10,000 credit is spread out over three years. So, when will the $100 million run out? For every buyer, the state is counting $5,700 against the $100 million. That equates to 17,543 first time home buyers. Based upon the current wave of first time home buyer activity, the credit is forecasted to last less than two weeks. And, if there are buyers that are supposed to closed at the end of this month and are looking to delay closing until after May 1st, the credit may end even sooner.

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.

Orange County Housing Report: Short Sales Clog the System

Short sales, sales of homes for less than what is owed on the mortgage, are creating a backlog of pending sales that take FOREVER to close. 2010 is going to be the year of the short sale. With an enormous glut of foreclosures in 2008, the Federal government stepped in and in 2009 virtually strong armed big lenders to modify loans. The problem is that not everybody qualifies for a loan modification and many successful loan modifications default again on their loans down the road. Yet, there are still a tremendous number of homeowners in trouble. Both the government and banks are in agreement, that they don’t want to foreclose unless there is virtually no other alternative. And, there is a better alternative, short sales. There are many advantages to short sales for the homeowner; including, the ability to purchase again sooner. For the lender, they get to take advantage of pride in homeownership, the homes are not dilapidated and, unlike foreclosures, do not require thousands of dollars to fix nor do they have significant holding costs. So, at the end of November 2009, the US Treasury put together a short sale directive that outlines a new process that begins on April 5, 2010, for all Fannie Mae and Freddie Mac loans. In the interim, lenders have been scrambling to address the new program and modify their current processes that have been ineffective thus far. Currently, the short sale process is NOT working and has resulted in a deluge of pending sales that take forever to close. There are currently 6,706 outstanding pending sales in all of Orange County. Of those, 4,154, or 62%, are short sales. The problem is that almost 70% have been pending for over one month. Many have been pending for months. The reason these do not close within a short period of time is because they require lender approval. And, if there is a second loan, the process is even longer. Throw in the fact that many short sale homeowners have stopped paying their homeowner association dues, and they too have to sign off on the deal if they are obtaining less than what is owed. Often, the buyer of a pending short sale grows so frustrated that they cancel and look elsewhere. The short sale is then placed back on the market and is often placed right back into pending status in a short period of time, and the wait for lender approval continues. With short sales, the buyer, seller and offer must all qualify. The buyer must qualify for the new loan. The seller must qualify to obtain the short sale; there must truly be a hardship. Finally, the offer to purchase must be at or near fair market value. With demand so hot, lenders are taking a closer look at value and not willing to sell at a major discount. The current process for short sales is an absolute crapshoot. Real estate agents, buyers and sellers enter into a pending sale with no definitive timeline. Some lenders are better than others. Some second lenders are better than others. Some Realtors® are better than others. 2010 promises to be the year of the short sale. It is the year where a lot of the distressed backlog, often referred to as the “shadow inventory,” will finally be properly diminished in the form of short sales. Yes, there will still be foreclosures. Some short sales simply will not go together. Some homeowners will just walk away from their obligations. But, banks and the government have their sights set on going the short sale route. It is in everybody’s best interest. Buyers, sellers and agents have had their sights set on short sales for about a year and half now. If you are skeptical, just take a look at the following chart, the number of short sales versus foreclosures in Orange County:

As 2010 rolls along, the process is going to get better and better. It will not be perfect, but it will be better than it is right now. Short sales will finally result in more successful closed sales.

So, how do the rest of the numbers look? The active inventory increased over the past two weeks by 278 homes, or 4%, to 8,135. The active inventory last year was at 11,541, 3,406 additional homes compared to today. Two years ago it was at 15,392, 7,257 additional homes. Demand, the number of new pending sales over the prior 30-days, decreased by 4 to 3,244. There are 425 additional pending sales compared to last year and 1,424 compared to two years ago. Demand typically rises at a quicker pace in the middle of February, so we will have to see if this trend continues. Part of the problem is that there simply is not a lot of new inventory coming on the market. The biggest complaint from agents down in the trenches is that they need fresh inventory for the many buyers that they are working. The expected market time for all price ranges in Orange County increased slightly from 2.42 months two weeks ago to 2.51 months today. At the current pace, the overall market is a seller’s market without much appreciation at all. The number of distressed homes within the Orange County housing market is keeping a lid on appreciation. On the other hand, the higher end price ranges are experiencing a deep buyer’s market, the higher the price range, the deeper the buyer’s market. The hottest price range is homes priced between $250,000 and $500,000, with an expected market time of 1.75 months. Contrast that with homes priced above $4 million with an expected market time of 33.89 months. The active distressed home market, all short sales and foreclosures combined, increased by 54 homes to 2,705. The number of foreclosures within the active listing inventory increased in the past two weeks from 377 to 380, a gain of only three. The expected market time for foreclosures is a sizzling 0.95 months, a deep seller’s market. Foreclosures are HOT. The number of short sales within the active listing inventory increased by 54 and now totals 2,705. The expected market time for short sales is 1.68 months, also a deep seller’s market. There are a lot more short sales than foreclosures. In 2010, short sales will be KING.

Orange County Housing Report: Regardless of the Rain, the Market is Heating Up

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.

Orange County Housing Report: HAPPY NEW YEAR – A 2010 FORECAST

HAPPY NEW YEAR!!! Now, what does that mean for Orange County real estate? First, let me clarify that forecasting draws from historical data and circumstances to predict the future. Yet, we are currently in uncharted waters, making forecasting the housing market more of an art than an exact science. There have already been many forecasts released that are all over the map. It reminds me of picking NFL football games during the first week of the year when there are a lot of surprises. With that in mind, let’s take a look back at what happened in 2009 in terms of inventory, demand, expected market time and distressed properties.

The Active Inventory: We started the year with 11,326 homes on the market. The discretionary homeowner returned, knowing that the market was full of challenges and competition. Values had already dropped substantially, especially in the lower ranges. The active inventory reached its peak of 11,606 homes by the end of March, 280 additional homes compared to the beginning of the year, a 2.5% increase. From there, the inventory continued to drop steadily throughout the year. Currently, the active inventory has continued its downward trend, shedding another 207 homes and bringing the inventory to 7,381 homes, a 36% drop from the peak. The inventory has dropped to levels not seen since December of 2005. In comparison, the 2008 active inventory grew from 14,944 homes in January and peaked in March at 15,617 homes, a 4.5% increase. From there, the 2008 inventory dropped 26% through the end of the year to 11,842. In 2006 and 2007, the active inventory blossomed throughout the year and peaked in August. In both 2008 and 2009, the inventory had dropped to a much healthier level with the help from the discretionary homeowner. Had discretionary homeowners not been present, we could have been looking at inventory levels hovering around the 20,000 mark. The drop in the active listing inventory has also been aided by the number of short sales that have been placed into “Backup” position. Short sales, homeowners that owe more than their home is worth, are subject to lender approval of accepting less than the full loan amount. Many short sales continued to market their homes as active listings even though they had an acceptable agreement between a buyer and the seller. They remained on the market until they had “lender approval.” This resulted in an artificially high active inventory. This has since changed and the active inventory today is a much more accurate depiction of the real active inventory.

Demand: Just like in 2008, demand, the number of new pending sales within the prior month, continuously grew unabated. It was plodding along, ignoring cyclical ups and downs from week to week. Demand grew from 2,008 homes in the beginning of January to its peak of 3,652 homes in June, an 82% increase. After June, just like in 2008, demand followed the normal cyclical, seasonal pattern. Demand was boosted by the major drop in home values over the prior couple of years, increased affordability, historically low interest rates, the first time home buyer tax credit and the sheer number of distressed properties on the market. In 2008, a peak in demand of 3,060 homes was reached in June, and then slowed for the Autumn and Holiday markets. Currently, in keeping up with the normal Holiday market cycle, demand dropped by 523 homes in the past month to 2,515 homes. That is still much healthier than last year at this time when demand dropped to 1,997 homes, 21% slower than today. In 2007, demand was at 1,031 homes, 59% slower. Current demand is also at the strongest level for the finish to a year since I started tracking the Orange County housing market five years ago.

Expected Market Time: Orange County started off the year with an expected market time of 5.62 months. But, as demand continued to pick up steam and the inventory dropped, the expected market time methodically declined and reached a bottom in September of 2.33 months. Currently the expected market time is at 2.93 months. In 2008 the expected market time started the year at 14.97 months and dropped to 5.93 months at the end of the year. In 2007 the expected market time started the year at 7.78 months and increased to 15.05 at the end of the year. The current expected market time is also at a much healthier level going into 2010. At the current expected market time, it is technically a seller’s market. Distressed properties are keeping a lid on any real appreciation, but all of the other trimmings that go along with a seller’s market are very much a part of today’s housing landscape: multiple offers, sale prices above list prices, tremendous competition, and buyer frustration.

Distressed Properties: The big story of 2008 was how much the distressed inventory grew and became such a large part of the housing market. This year, the big story was how the number of distressed properties had dropped. With moratoriums on foreclosures at the beginning of the year and the government insisting upon loan modifications, the number of foreclosures dropped throughout the year. In the beginning of 2009 there were 5,118 distressed homes on the market, both short sales and foreclosures, representing 45% of the active inventory. The distressed inventory dropped 46% to a low of 2,346 in October, representing 31% of the active inventory. With a decrease in demand due to the holidays, the current active distressed inventory increased by 41 homes over the past month and is now at 2,537 homes, representing 34% of the total inventory. In 2008, the distressed inventory started the year at 3,858 homes, peaked in August at 5,950 homes and then dropped to 5,379 homes at the end of the year. Short sales make up 85% of the distressed inventory versus 15% for foreclosures. At the beginning of the year, distressed properties made up 69% of demand versus 55% today. There is tremendous demand for distressed properties. Even though it is the Holiday market, the expected market time for all foreclosures is at 1.07 months, a DEEP SELLER’s market. The sales to list price ratio for foreclosures in the month of November was 104%. That means that the average foreclosure sold for 4% ABOVE the list price. There are only 378 foreclosures actively listed today. One year ago there were 1,294. There is similar demand for short sales with an expected market time of 2.12 months. The sales to list price ratio for short sales in November was at 99%. Short sales have become a major part of the housing market and will be throughout 2010. There are 2,159 short sales on the active market, 4,037 short sales are pending and 856 have been placed on hold. All of these statuses combined total 7,093. Short sales represent 48% of all listings, pendings and properties on hold. As a buyer, it is very difficult to avoid short sales and their lengthy process. The bottom line, there is tremendous demand for distressed properties and buyers should not have the expectation of being able to offer much less than the purchase price.

2009, a look back: Perhaps the biggest surprise of the year has been the large drop in distressed sales. Throughout the year, everybody has heard of various foreclosure moratoriums and the pending wave of foreclosures to come, also known as the “shadow inventory.” The shadow inventory includes all homes that have been foreclosed on but the lender purposefully held off of the market, all homes scheduled for a trustees deed upon sale (the final foreclosure action) and, most important, all homes that are 90 days or more delinquent. There is a giant shadow inventory, but many economists and analysts have made the error of presuming that lenders are purposely holding already foreclosed homes off of the market. Instead, most of the shadow inventory is already on the market as short sales. There are over 7,000 in Orange County alone that are on the active market, pending or on hold. In Los Angeles, there are over 13,000, in Riverside there are over 8,000, in San Bernardino there are over 5,700, an in San Diego there are over 8,500. Minus Ventura County, there are over 42,000 short sales in Southern California alone. The short sales have piled up across the United States. There has been tremendous pressure from the federal government for lenders to modify loans. Thus far the program has not been that successful. Now they are turning their sites on short sales. The government wants lenders to modify first, short sale second, and, as a last resort, foreclose. On November 30th of this year, the Obama administration, through the U.S. Treasury, released the Home Affordable Foreclosure Alternative Program (HAFA), providing financial incentives to servicers and borrowers who utilize a short sale or a deed-in-lieu to avoid a foreclosure on an eligible loan. In response, lenders are already gearing up to handle the volume of short sales.

The first time home buyer tax credit also had a positive impact on the housing market along with the increased conventional loan limit to $729,750. The tax credit was supposed to end November 30th, but has since been extended through June of next year. So, we can expect a bump in activity due to the credit for the first half of 2010. The government was late to provide an extension to the increased conventional loan limit from 2008. So the first few months, the conventional loan limit dropped to $625,500 and then it was increased again to $729,750. The increase was set to expire at the end of 2009, but this time the government actually planned ahead and extended the increase through the end of 2010. This is very important to the Orange County housing market since loans above the conventional loan limit, jumbo loans, are much more difficult to obtain.

What can we expect in 2010? The federal government has been working overtime to help instigate an increase in demand and an eventual recovery within the real estate sector. The first time home buyer tax credit has been expanded to include move-up buyers who need to sell their homes first and extended through June of next year (homes need to be pending by April 30th and close by June 30th). As discussed prior, the conventional loan limit has been extended through all of 2010. But, the biggest wild card for 2010 is what will eventually happen to interest rates as the Federal Reserve halts the purchase of mortgage-backed securities. Here is my forecast:

• The lower end, below $1 million, and especially below $750,000, will continue to experience strong demand and values will remain flat or appreciate slightly. Homes priced below $1 million accounts for 76% of the active listing inventory and 94% of demand. Buyers and sellers can continue to expect multiple offers and sales prices at or above the list price. Bottom feeders need not waste their time.
• The upper end, above $1 million, and especially above $2 million, will continue to experience muted demand along with a drop in value. The upper end is catching up with the large drops in value within the lower end. The drop in value will be led by an increase in distressed sales in the upper ranges. Jumbo loans may be tougher to obtain in the upper ranges, but as values drop, demand will increase. The appetite for upper end distressed sales has grown and, with proper pricing, will attract higher demand and multiple offers.
• The number of units sold will increase year over year slightly. The difference will be much stronger in the first quarter of 2010 and the gap will tighten for the remainder of the year. For the most part, the demand curve will closely mirror 2009.
• The discretionary seller will return to the marketplace, keeping inventory levels at a healthy level. We can expect the active inventory to grow to no more than 9,000 homes.
• Short sales will be king in 2010. With the federal government turning their attention to short sales, the process is going to get a whole lot better. The government had been strong arming lenders to modify loans, but success has been very limited. There will be a lot more short sale approvals, which translates to successful closed short sales. The infamous “shadow inventory” will actually translate to more short sales. Short sales are already a major component of today’s real estate market. The only thing missing right now is a higher success rate and that is about to change. Expect the number of closed short sales to continue to exceed the number of closed foreclosures on a monthly basis.
• The number of foreclosures to hit the market will increase slightly year over year, but will NOT be a wave fueled by the “shadow inventory.”
• We can expect the distressed inventory to rise slowly with more short sales and foreclosures to hit the market; but, this will be offset by incredible demand for distressed properties. With demand so high, distressed properties will be placed at the last comparable sale, not below.
• As the Federal Reserve purchase of mortgage-backed securities comes to an end after the first quarter of 2010, interest rates will rise to about 6%. That may seem like a giant jump, but 6% is still low historically.
• It is going to by a long wait for homeowners waiting for the market to rebound. With unemployment high and more distressed homes to hit the market, the most likely scenario is going to be a flat market for the next couple of years, with no real appreciation or depreciation.

There have been a lot of lessons learned from the housing speculative bubble. The most important lesson has to be that people need to look for a place to call “home” for the long term, making sure that their family can afford the monthly payment. If a homeowner pays their 30-year fixed rate mortgage for 30-years, they own their home free and clear. Historically, in the long run, a home is a great investment. Your home is not an asset that is meant to be flipped every two years because the government has made it convenient to write off the gains. A home is place to call your own and a great place to raise a family or retire. And, in my humble opinion, you cannot beat Orange County as a place to call home.

Orange County Housing Report: A Holiday Pause

Christmas trees on cars, holiday office parties, full mall parking lots, as the season descends upon us, the Orange County real estate market follows a normal cyclycally slower path through the first couple of weeks of the New Year. Not much has changed over the last couple of weeks other than a drop in demand and the active inventory, typical for this time of year. It is cold outside, for Southern California, it has been raining, Orange County’s equivalent of snow, and there are plenty of holiday distractions. It is no wonder that fewer homes are coming on the market as buyer demand appreciably drops to lows last seen in February. It will take a couple of weeks into 2010 before buyers and sellers shake the cobwebs off and return their focus to real estate once again. Many are taking a break, as this real estate market is absolutely exhausting. Nothing is easy. Ask the buyers in the lower ranges that have written offer after offer with no success thus far. There is just way too much demand, especially below $750,000, and the buyer competition is fierce. Multiple offers are the norm. Losing to buyers with large down payments or all cash investors is the norm. It is frustrating to be a buyer in today’s market. Most buyers enter the Orange County market with totally different expectations, since all they hear about are homeowners in trouble, sellers upside down in their homes and falling property values. Yet, they get into the cars of Realtors®, and quickly come to the realization that the market is much different. It is actually a SELLER’s market, without massive appreciation. It is the short sales and foreclosures that are actually keeping values from appreciating. Demand is HOT, the inventories have fallen appreciably throughout this year, values have already dropped to affordable levels, interest rates are at historical lows, and the government has implemented tax credits for first time home buyers (and now moves up sellers). Today’s market reality is frustrating for buyers. It is no wonder that many buyers will take the holidays off, sit back and relax. It does not help that there simply is not enough new, fresh inventory hitting the market. This is primarily due to the notion that this is not the best time to sell a home. Many want to wait for what they think is the best time to sell a home, the Spring market, which starts after the Super Bowl. But, demand is still strong right now in the lower ranges. During the Spring market, there are more homeowners opting to place their homes on the market along with increased demand. It is actually a good time to market a home, especially if a seller is looking to move up and take advantage of the new tax credit.

So, how do the numbers look? Let’s start by taking a look at the biggest change in the past two weeks, demand. Demand, the number of new pending sales over the past month, dropped by 392 homes to 2,646, a 13% drop. Last year’s demand was 324 fewer and dropped 12% in two weeks. Two years ago there were 1,498 fewer and dropped by 8% in two weeks. The active listing inventory has not really changed much over the past couple of weeks, a 67 home drop to 7,588. We have not seen the active inventory at this low of a level since December 2005. That’s been the story of 2009. The Orange County real estate market has shed 4,254 homes since the beginning of the year, a 36% drop. The expected market time for all of Orange County increased in the past couple of weeks from 2.52 to 2.87 months. A rise in the expected market time is also cyclical through the end of the year. The expected market time last year was at 5.34 months and two years ago it was at 14.05 months. For homes priced below $1 million, the expected market time is 2.29 months. For homes priced between $1 million to $2 million, the expected market time is 7.64 months. That range represents 14% of the active listing inventory, but just 5% of demand. For homes priced above $2 million, the expected market time is 23.68 months. That range represents 12% of the active listing inventory and a meager 1% of demand. The data illustrates what buyers and sellers are experiencing within the housing market, the higher the range, the slower the market. The total pending count, which includes all pending sales beyond 30-days, dropped by 355 homes to 6,391, the largest drop of the year. Now that more short sales are actually obtaining lender approval and are closing, the total pending count has started to drop after rising throughout the year. For the fourth time this year, and now three reports in a row, the number of distressed properties on the market increased, but only by 13 homes, or 0.5%. There are now 2,509 distressed homes on the market, 33% of the total active inventory. Last year 45% of the active inventory was distressed and two years ago it was at 23%. There are currently only 337 foreclosures in all of Orange County, an increase of 16 in the past two weeks. Foreclosures only represent 4% of the active listing inventory and have an expected market time of 0.93 months. Last year the expected market time was at 1.42 months. Foreclosures are exceptionally HOT and continue to sell well above their asking prices. There are currently 2,172 short sales on the active market, a decrease of 3 in the past two weeks. Short sales currently represent 29% of the active listing inventory. The expected market time for short sales is currently at 2.14 month versus 7.32 months one year ago. Homeowners with equity in their home now account for 67% of the current active inventory and 48% of demand.

Orange County Housing Report: Thankful for Affordability

On this Thanksgiving Eve, the return of home affordabilty in Orange County is something to be thankful for, especially if you are a first time home buyer. With the run-up in prices earlier this decade, I recall many people were concerned for their children and the “next generation” of home buyers. Homes had risen to such astronomical heights that many wondered if they were going to be able to live close to home or stay in California. The silver lining to the current downturn has been that affordability and historically low interest rates have enabled buyers pushed out of the market in prior years to buy a home in Orange County. A few years ago nobody was working with first time homebuyers. Today, agents have pockets filled with buyers and many of them are purchasing a home for the first time. There is not a better feeling, as a Realtor® than handing a buyer keys to their first home. The return of affordability, historically low interest rate and a fear that rates will eventually rise has boosted demand as more and more buyers have entered the market, especially in the lower ranges. Throw in the first time home buyer tax credit (now extended through mid-2010) and an increased conventional loan limit all the way to $729,750 (now extended through all of 2010), buyers have even more reasons to purchase. As a result, the active inventory has dropped dramatically throughout the year. The lower ranges are experiencing a lot of activity and multiple offers. Homes below $750,000 are HOT and below $500,000 even HOTTER. Buyers and their agents are diligently watching the inventory for the next new listing to pop on the market. The active inventory is extremely tight, especially in the lower price ranges, with multiple offers and tremendous competition a new norm. As a result, prices have stabilized in many areas. These are the roots to an Orange County housing recovery. All downturns eventually turn around and it is the activity in the lower ranges that prop up the market. We have the activity, but unemployment and the sheer number of distressed properties, especially short sales, have to work their way through the system first.

So, how do the rest of the numbers look? The distractions of the holiday have finally seeped into the Orange County housing market. Demand, the number of new pending sales over the prior month, dropped by 6%, 203 homes, and now totals 3,038. That’s still better than 2,466 posted last year or 1,243 two years ago. Cyclically demand drops for the rest of the year and through the first few weeks of the New Year. We can expect more of the same this year, but maybe not as deep as prior years due to so many buyers waiting for the right home to hit the market. But, not as many homes will hit the market, waiting, instead, for the end of the holidays. As a homeowner, this is actually a good time to place a home on the market, especially in the lower ranges. The active listing inventory will continue its slow descent though the end of the year. The Spring market, which actually begins for Orange County after the Super Bowl, is typically the best time to sell. Demand will increase, but so will the number of homes hitting the market. There will still be plenty of competition from distressed properties, which will keep values in check throughout 2010. We can also expect a return of the discretionary homeowner for the fourth year in a row, only selling their home if they truly are motivated to sell. Currently the active listing inventory decreased by 64 homes over the past two weeks, totaling 7,655. That’s 5,292 fewer than last year and 9,114 fewer than two years ago. The inventory has dropped by 4,187 homes so far this year, a 35% drop. The expected market time for all of Orange County increased in the past couple of weeks from 2.38 to 2.52 months. A rise in the expected market time is also cyclical for the remainder of the year. The expected market time last year was at 5.29 months and two years ago it was at 13.49 months. For homes priced below $1 million, the expected market time is 1.99 months. For homes priced between $1 million to $2 million, the expected market time is 6.64 months. That range represents 15% of the active listing inventory, but just 6% of demand. For homes priced above $2 million, the expected market time is 25.65 months. That range represents 12% of the active listing inventory, but just 1% of demand. The data illustrates what buyers and sellers are experiencing within the housing market, the higher the range, the slower the market. The total pending count, includes all pending sales beyond 30-days, dropped by 109 homes to 6,746. Now that more short sales are actually successfully closing, the total pending count has reached a plateau after rising throughout the year. For the third time this year, and now two reports in a row, the number of distressed properties on the market increased by 34 homes, or 1%. 33% of the active inventory is distressed compared to 45% last year. There are currently only 321 foreclosures in all of Orange County, a decrease of 18 in the past two weeks. Foreclosures only represent 4% of the active listing inventory and have an expected market time of 0.78 months. Last year the expected market time was at 1.40 months. Foreclosures continue to be exceptionally HOT and are, on average, selling for 3% above their asking prices. There are currently 2,175 short sales on the active market, an increase of 52 in the past two weeks. Short sales currently represent 28% of the active listing inventory. The expected market time for short sales is currently at 1.82 month versus 7.21 months one year ago. Homeowners with equity in their home now account for 67% of the current active inventory.