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: The Distressed Inventory is Dropping

The total number of distressed properties, foreclosures and short sales, dropped to its lowest level since December 27, 2007. There are currently 3,724 distressed homes on the active market, 37% off of the peak of 5,950 established in August 2008. The number of active foreclosures has dropped from its November 2008 peak of 1,404 to 529, a 62% drop. It is not just the number of foreclosures that has been dropping; the number of short sales on the active market has dropped by 20% since February, from 4,009 to 3,195. This drop can be directly attributed to much stronger demand for homes priced below $1 million, which accounts for 74% of the active inventory and 95% of demand. Homes above $1 million account for 5% of demand, but 26% of the active inventory. Demand has been incredibly strong in the lower ranges because of two factors: 96% of all distressed properties are found below $1 million; and, jumbo loans, loans above $729,750, are much harder to obtain than conventional loans, loans below that level.

For Orange County, demand, the number of new pending sales over the prior month, increased by an additional 79, now totaling 3,632 and the current height of demand for 2009. Orange County demand has not been at this level since August of 2005, just prior to the beginning of the current cycle. Last year there were 1,092 fewer pending sales, totaling 2,540, 30% less. Two years ago demand was 1,769 fewer, totaling 1,863, 49% less. Three years ago demand was 26% less and totaled 2,701. The recent surge in demand seems to be abating, but this can be attributed to less inventory in the lower ranges. With an expected market time of 1.73 months, the $250,000 to $500,000 range has been incredibly hot and many buyers have written offer after offer with no success. The sales to list price ratio for homes within this range is 100%. So, those buyers looking to scoop up a deal by writing for less than the asking price are, on average, out of luck. The sales to list price ratio for foreclosures within that range is 101%.

The active listing inventory dropped 198 homes in the past two weeks to 10,363. The inventory has not been at these levels since April 2006. At the start of the year the active inventory was at 11,842, 1,479 additional homes compared to today. Last year there were 15,437 homes on the market, 5,074 additional homes compared. Two years ago there were 15,519 homes on the market, 5,156 additional homes. Three years ago there were 11,956 homes on the market, 593 additional homes compared to today. The expected market time dropped from 2.97 months two weeks ago to 2.85 months today. The expected market time last year was at 6.08 months, two years ago it was at 8.33 months, and three years ago it was at 4.43 months. This is the lowest expected market time since October 2005. Total Orange County pending sales continues its surge, reaching record heights for this three and one-half year downturn, totaling 5,733, an 828 home increase over the past month. Last year at this time, total pending sales reached 3,514, 2,219 fewer than today. Two years ago it was at 2,824, 2,909 fewer. Total pending count is different than demand because demand tracks new pending sales over the past month. Total pending count takes into account all pending sales, including those that have been pending for longer than 30-days. The 5,733 tabulation indicates that there will be a surge in sales over the next couple of months.

How should a buyer approach this market? Most buyers have the wrong expectations in approaching the Orange County real estate market. Everybody is acutely aware of the current global recession caused by the financial crunch, so it is understandable that today’s buyers want a deal when buying a home. However, buyers fail to consider two important aspects of the current real estate market: there is tremendous demand for lower priced homes and distressed properties; and, today’s asking prices already reflect a major drop in value. Prices have reached much more affordable levels just as interest rates have dropped to historical lows, the end result, demand not seen prior to the current downturn. So, buyers need to take a litmus test of the market that they are interested in. Buyers can expect multiple offers and even above asking price sales prices for homes priced below $500,000 and distressed homes. The market has heated up considerably for homes priced between $500,000 and $750,000 as well, with an expected market time of 2.49 months. The market is much stronger between $750,000 and $1 million too, with an expected market time of 4.95 months, considered a market in equilibrium. The incredibly hot demand has been underreported and most buyer have to learn the hard way before getting realistic, writing offers below the asking price and losing out on a property or two. Another reality of the current marketplace is the number of hoops lenders will put you through in funding a loan. Buyers will not only put together the initial loan package; more often than not, the lender is going to request additional paperwork during the pending sale process. As of May 1st, the government imposed an additional hurdle which will change the appraisal process. This new process has a very high potential in delaying the close of a pending sale. It is my humble opinion that these additional hurdles are necessary, but should be postponed until the market has healed. It is easy for politicians to make headlines and change the way lending and appraising is processed in the midst of a downturn, but the real fixes need to come when the market is moving on all cylinders.

Orange County Housing Report: 21% Fewer Distressed Homes on the Market

As the market marches forward, the distressed active inventory, both foreclosures and short sales, has dropped by 21% since its peak in August of 2008. There have been various explanations for a dip in the number of distressed sales, like legislation that lengthens the amount of time to file a notice of default (when somebody is behind on their mortgage) and ultimately delay foreclosure. The problem with that theory is that the distressed inventory has been steadily dropping for seven months. The distressed inventory has dropped by 1,277 homes, or 21%. On August 7, 2008, the distressed inventory was at 5,950 homes and represented 41% of the 14,348 total active inventory (both distressed and non-distressed listings). Today, the distressed inventory has fallen to 4,673, 40% of the 11,606 total active inventory. One year ago today, the distressed inventory was at 5,221, 548 more that today, the second report in a row with a year over year improvement. However, the distressed inventory is still extremely high. This inventory needs to drop significantly for the real estate market to start to appreciate once again. The rate that it drops is slow because of the number of bad loans in the system combined with a high unemployment. However, in the lower ranges, the rate of depreciation has slowed remarkably, and even bottomed in some areas. This is due primarily to the extremely high demand in the lower ranges, homes priced below $500,000. This range accounts for 49% of the total active inventory, but 73% of demand. There are some cities with expected market times close to two months, technically a seller’s market. A lot of this demand has been fueled by the drop in prices and the desire to acquire a bank owned, foreclosed home. Buyers looking for a home below $500,000 need to be prepared for a lot of competition. The average sales to list price ratio for foreclosed homes is 101%, meaning that, on average, the home is selling for above the list price. Short sales DOMINATE the distressed sales market within Orange County and account for 80.7% of all distressed homes. The other 19.4% are foreclosures, the hottest properties in the county. There are currently 905 foreclosures on the market and demand, the number of homes placed into escrow within the last month, is at 882 pending sales. The expected market time for foreclosure is 1.03 months. Foreclosures are so hot, that multiple offers are the norm. The demand is similar to 2005 demand for all homes, CRAZY seller’s market. Buyers in today’s market expect a discount and expect to be able to take their time in making a decision to write a purchase offer. Most buyers must learn the hard way, after losing a property or two, that these homes generate tremendous buyer competition. The expected market time for short sales has dropped significantly, now at 4.95 months, but this figure is grossly overinflated due to the nature of short sales. Short sales are where a homeowner attempts to sell their home, owing more than their home is worth. Even though most short sales have an agreed upon purchase offer between a buyer and the seller, most are continually marketed as an active listing rather than as a pending sale because of the belief by many that they do not have an official acceptance until the lender approves the sale at a discount in what is owed. In the trenches, agents are reporting that vast majority of short sales that are a part of the active inventory have offers that are already submitted to the lender(s). Another giant drawback to short sales is that the “lender approval” process can take weeks to months to obtain. Often, by the time a lender does approve of a short sale offer, the buyer has already moved onto another home. The bottom line, there may be a lot of distressed homes on the market, but as a buyer, expect a lot of competition.

So how do the numbers look? In the past two weeks, demand, the number of new pending sales within the prior month, increased by 46 pending sales to 2,670. Last year at this time there were 587 fewer pending sales, totaling 2,083. Two years ago there were 2,195 pending sales, 475 fewer than today. All of the recent stimulus aimed specifically at real estate should begin to trickle down into the Orange County real estate scene in the form of increased demand within the next couple of weeks. In the trenches, agents are already reporting increased buyer interest, increased open house activity and more buyers on the verge of writing after fence sitting for quite some time. All of the ingredients for an increase are there: historically low interest rates, government incentives to purchase now, and a lot of government intervention aimed at placing a sound bottom underneath the housing market. Prices, especially in the upper ranges, may continue to fall; however, what most buyers fail to consider is that these historically low interest rates will not be around forever. Instead, with all of the money that the federal government is pumping into our economy, the U.S. economy will most certainly endure a major increase in inflation down the road. The Federal Reserve responds to an increase in inflation with an increase in interest rates. In 1990, interest rates were thought to be at a great level when they broke just below 10%. At 5%, today’s approximate interest rate, the payment for a $500,000 loan is $2,684. At 7%, the payment is $3,327, an increase of $643 per month. At 10%, the payment would be $4,388, a difference of $1,704. Even if homes were to fall an additional 10%, a 7% loan at $450,000 would be $2,994, still $310 a month more than a 5% loan at $500,000. At 10% it would be $1,265 more per month. The beauty of homeownership in Orange County is it is an incredible long term investment. So, if you are a buyer and can live in your home for more than just a few years, ultimately it makes sense to buy as soon as you isolate the home that best fits your family’s criteria and budget. It may not pay to wait because after the economy turns around, inflation will increase interest rates. Almost all buyers fail to factor the negative effects of increasing interest rates, which can be profound.

The active listing inventory continues to remain relatively unchanged so far this year, increasing by only 65 homes over the past month, bringing the current total to 11,606. Last year the active inventory was at 15,617 homes, 35% higher. Two years ago there were 1,767 additional homes on the market, totaling 13,373, 15% higher. The current expected market time decreased slightly from 4.41 months two weeks ago to 4.35 months today. Last year the expected market time was 7.5 months. Two year ago the expected market time was 6.09 months. Total Orange County pending sales continues to reach record heights over the past two reports. I started tracking the statistic back in September of 2006. After increasing by 142 homes over the past two weeks, the total pending count has reached 4,550 pending sales. Last year at this time, total pending sales totaled 2,852, 1,698 fewer than today. Two years ago it was at 3,321, 1,229 fewer.

The condition of the Orange County real estate market really depends upon the price range. The story of 2009 remains the same, the lower the price range, the hotter the market. The hottest range is detached homes below $250,000 with an expected market time of only 1.94 months. However, there are only 303 detached homes in that range. The second hottest range is detached homes between $250,000 and $500,000, with an expected market time of 2.27 months.

It will be interesting to see the impact of all of the recent stimulus within the various ranges. We can expect the lower ranges to improve and eventually bottom first. It won’t be until confidence is restored in the financial marketplace, the current focus of the Federal Reserve, the Obama administration and Congress, that we will see a bottom in the upper ranges.

Orange County Housing Report: A Much Better Start

The Orange County housing market is in a much better place in starting 2009 compared to the last couple of New Years. Prices are down, affordability is up and interest rates are at historically low levels. The housing market and the financial markets have the attention of every corner of the government. The Federal Reserve, Congress, the Bush Administration, the incoming Obama Administration, Democrats and Republicans alike, everybody has their collective eye on the ball, putting a bottom underneath the housing market, thawing the financial markets and reversing the trend of unemployment. With all of that in mind, many buyers have already taken advantage of the Orange County housing market despite the slowest season of the year for real estate, the Holiday market. After President-Elect Obama is sworn into the office in about two weeks, we will have officially left the distractions of the holidays behind and entered into the beginning stages of the Spring market. The Spring market this year will be marked by increased demand and an inventory that will prove to be slow to grow. So, where are we right now? First, let’s take a look at the current active inventory. The inventory has shed just over 1,100 homes in the past month and now sits at 11,287 homes. Last year, we started 2008 with 14,944 homes on the market, 3,657 more than today. In 2007 there were 11,643 homes on the market, 356 additional compared to right now. Don’t be fooled by the similarities in these numbers because 2007 was much different than today. Today we have discretionary sellers who expect tremendous competition from distressed properties, both short sales and foreclosures. In 2007, many homeowners expected the Spring market to be hot and homes coming on the market outpaced demand considerably; thus, the inventory grew. In 2008, the discretionary seller knew what to expect and the number of homes that came on the market kept up with demand. In 2009, we can expect it to be quite similar to 2008. Due to the distractions of the heart of the holidays, demand, the number of new pending sales over the course of a month, took a cyclical drop of 314 homes over the past four weeks to 2008. But, this is typically the low point of the year for demand. At this time last year, demand was at 998 pending deals, 1,010 fewer than today. Demand is 101% stronger than last year… incredible! Two years ago demand was at 1,496 pending sales, 512 fewer than today. Three years ago demand was at 1,573 pending sales. The expected market time is currently at 5.62 months. Last year’s expected market time was at 14.97 months, and it was at 7.78 months two years ago. The distressed inventory, foreclosures and short sales, dropped by 401 homes over the past month, bringing the total to 5,118, its lowest point since March of last year. That’s a 7.2 % drop. Distressed properties now make up 45.3% of the inventory, a slight drop over the past couple of weeks. 69% of all pending sales are distressed sales right now. Obviously, the distressed inventory is helping fuel demand. 79% of all distressed homes are isolated below $500,000 and 92% are found below $750,000. It is no wonder that the lower end of the market has been a lot hotter than the rest of the market. All homes, distressed and the non-distressed traditional homeowner, below $500,000 make up 53% of the active inventory and 73% of demand. The lower ranges are also hotter than the rest of the market due to the fact that the government is backing all conventional financing and FHA financing up to $625,500. That does not mean that there are not great deals in the upper ranges; it means that it there are a few more hoops to leap through in financing above the $625,500 loan limits.

So, if you are a buyer, how should you approach this market? It is a great time to be a buyer. It has been more than worth the wait for the patient buyers that have been sitting on the fence. Now, I am hearing again of so many buyers trying to predict the bottom of the housing market. It absolutely astounds me at the number of buyers that flocked to purchase back in 2005 after tremendous appreciation year in and year out. Real estate booms and busts are cyclical and it could not last forever. After tremendous depreciation in housing, this is the time to purchase. This is the time to flock to real estate, when prices are down. Why buy near a peak in appreciation? The time to buy is somewhere near the bottom of the trough of a downturn. Would it be so bad if the market continued to drop for another year? Not really. Prices have already dropped considerably to this point, and most of that drop took place when we bottomed in demand from August of 2007 through February of 2008. The bottom line, if you find the home that best meets your family’s desires and budget, and you are not planning to move in a couple of year, than BUY. This is Orange County, a very desirable place to live with a shortage of buildable land, plenty of great weather and beaches and historically an excellent long term housing investment. Buyers in this market need to be aware that there is plenty of competition for distressed properties and homes in the lower ranges. The sales to list price ratio for foreclosures is currently 101%, meaning that, on average, they are selling for slightly above the list price. The sales to list price ratio for short sales is currently 97%, meaning that offers written for 10% less than the asking price have a much less chance of success. Know the market that you are considering and utilize the expertise of an experienced real estate agent to guide you through the myths and hurdles of Orange County housing in 2009.

So, if you are a seller, how should you approach the market? If you are a homeowner and you absolutely, unequivocally have to sell, than do not hesitate to place your home on the market immediately at the best price and in the best condition. Homes that are priced well and in great condition have a much better chance in successfully selling in a shorter amount of time. So, carefully arrive at price by placing the most emphasis on current pending sales and recent comparable sales, sales within the prior 90-days. Major discounts from the prior sales are not necessary, but do not “pad” the asking price because there is a dollar amount that you are looking for. Unfortunately, the market does not care what you need to net from your home. Be prepared to make any changes or modifications to the asking price or condition based upon new pending and closed sales and buyer showing feedback. Sellers too need to know their market and utilize the expertise of an experienced real estate agent to achieve success. The area expert may not be the best choice. Instead, look to the real estate agent that knows and understands the current market with a track record of success, a market expert.