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: 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: 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: 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: 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: Short Sales are a Nightmare

Have you ever pedalled up a steep hill on your bicycle as a kid only to wonder if you were going to ever make it? That’s the same feeling that buyers, sellers and agents get in trying to arrive at a successful close date. Short sales are homes where the asking price is less than the outstanding loan amounts. These are subject to the lender’s approval. This takes anywhere from weeks to months. There is nothing short about a short sale. About a year ago, it was just about impossible for agents to show a short sale to a prospective buyer. Nine times out of ten, the short sale already had at least one offer on the home and submitted to the lender for approval. However, the home remained on the market as an active listing until the approval was received. So, agents would show their buyers home after home only to find out that most short sales already had an offer submitted, which amounted to a giant waste of everybody’s time. Agents then would contact every short sale to see if it was “really” available. This stemmed from the fact that an escrow is not opened until after lender approval. Escrow is not opened so that expenses are not incurred for any work completed. Inspections, homeowner association documentation, appraisals, etcetera, are all fee based and time sensitive and nobody is going to want to pick up the tab if a lender does not approve a file or if there are significant delays. The short sale data has been cleaned up over the course of the last year. It is mandatory for all offers that are submitted to a lender to be placed in “Backup Offer” status or “Pending Sale” status within the Multiple Listing Service. I used to reference the overstated active listing inventory and the understated pending sale statistics last year at this time. The data is still not perfect, but is much improved and easier for agents and buyers to look at homes. In response to so many short sales no longer counted as a part of the active listing inventory, the total pending sale inventory has blossomed. There are currently 6,838 total pending sales. 58% are short sales, only 8% are foreclosures and 33% are homeowners with equity. There are 3,703 pending sales that have been pending for more than one month. 76% are short sales, 5% are foreclosures and 19% are homeowners with equity. There are 2,132 pending sales that are have been pending for more than two months. A stunning 91% are short sales, 1% are foreclosures and 8% are homeowners with equity. Almost a third of the total pending sales count has been pending for more than two months and most are short sales. Even though more and more homeowners have defaulted on loans, lenders have not been foreclosing. As a result, the market has grown much hotter with an increase in successful short sales and a shift to more equity sellers. Here’s a breakdown:

The huge increase in pending short sales has not materialized as a huge increase in closed short sales. All of these numbers illustrate that dealing with short sales is like bicycling up a steep hill as a kid. Just because a buyer’s offers is accepted, if it is a short sale, it is going to take a long time to close escrow. Since short sales are distressed, their pricing attracts a lot of attention from buyers. Buyers can expect multiple offers in dealing with short sales. In the end, buyers have to move quickly and compete with other offers only to wait for a long period of time for the seller to obtain lender approval. Sometimes the process takes such a long time that the buyer walks away and looks for something else. Many move onto equity sellers. The Orange County real estate market and the entire state of California are at the mercy of lenders. The bottom line, the market is full of challenges and the short sale process makes the current real estate landscape even more challenging.

So, how do the rest of the numbers look? The market has continued to not change much over the past few months. Once again, the past two weeks are no exception. The active listing inventory decreased slightly by 30 homes over the past two weeks, totaling 7,719. That’s 5,539 fewer than last year and 9,514 fewer than two years ago. The inventory has dropped by 4,123 homes so far this year, a 35% drop. We can expect the active listing inventory to drop slightly for the remainder of the year. Demand, the number of new pending sales within the past month, increased by 75 in the past couple of weeks to 3,241, a 2% increase. Last year’s demand was 684 fewer and two years ago was 1,946 fewer. The expected market time for all of Orange County decreased in the past couple of weeks from 2.48 to 2.38 months. The expected market time last year was at 5.18 months and two years ago it was at 13.31 months. For homes priced below $1 million, the expected market time is 1.87 months. For homes priced above $1 million, the expected market time is 8.79 months. That range represents 27% of the active listing inventory, but just 7% of demand. For only the second time this year, the number of distressed properties on the market increased. The distressed inventory increased by 73 homes, or 3%. 32% of the active inventory is distressed compared to 44% last year. There are currently only 339 foreclosures in all of Orange County, an increase of 25 in the past two weeks. Foreclosures only represent 4% of the active listing market and have an expected market time of 0.82 months. Last year the expected market time was at 1.22 months. Foreclosures continue to be exceptionally HOT and are, on average, selling for 3% above their asking prices. There are currently 2,123 short sales on the active market, an increase of 48 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 1.72 month versus 7.08 months one year ago (this number was grossly overstated as illustrated earlier). Homeowners with equity in their home now account for 68% of the current active inventory. If a buyer wants to avoid the many pitfalls of dealing with short sales and foreclosures, they should turn their attention to equity sellers.

Orange County Housing Report: Lack of Inventory is SPOOKY

Keeping with the cries for “trick or treat,” the Orange County housing market has its own eerie trick, an incredible lack of inventory for homes priced below $1 million. The other day I was asked what one thing spooks me the most about the real estate market right now and the crazy inventory was my answer. There is very little fresh, new inventory. The lower the range, the “spookier” it gets. Properties that are priced right and in great condition are flying off of the market with multiple offers and tremendous activity. Buyers new to the market are dumbfounded by all of the competition. Their expectations are of doom and gloom and the ability to “cherry pick” whatever home they are interested in AND at a discount. Yet, just about every agent has pockets filled with buyers who want to buy but have been unable to purchase after losing out on property after property. For most, it is not the first time home buyer credit that is motivating them, as it is set to expire at the end of November anyhow (there is an extension that is in the works though). Many buyers don’t even qualify for the credit due to income requirements. Affordability, low rates and a fear that rates will increase from their historically low levels has motivated people to jump into the market. On average, agents are writing several offers for every buyer. To top it off, investors are back in the real estate game and pushing out buyers with smaller down payments. FHA (Federal Housing Administration) financing allows for a small down payment, but buyers electing to utilize this program simply are finding it impossible to purchase. We have seen prices increasing in the lower ranges slightly, but distressed properties are keeping a lid on stronger appreciation. The "shadow inventory" of foreclosed properties sitting on the sidelines and not yet on the market due to foreclosure moratoriums, government intervention, or banks careful not to flood the market, has only compounded the problem of a lack of inventory. Even if the strategy were to change and more of the “shadow inventory” hit the market, demand is currently strong enough to quickly sop it up. However, buyers should not expect foreclosures to flood the market all at once, lenders and the government are not interested in eroding values further. Instead, when the market heats up in the spring we can probably expect an increase in foreclosure activity to parallel an increase in demand. This housing downturn has been full of surprises and this year's "spooky" twist has been an unexpected drop in the inventory.

So, how do the numbers look? The market really has not changed much over the past few months. The past two weeks are definitely no exception. There have been no surprises other than the continued descent in the housing inventory. The active listing inventory decreased by 174 homes over the past two weeks, totaling 7,749. We have not seen the inventory this low since the beginning of January 2006. That’s 5,041 fewer than last year and 9,705 fewer than two years ago. The inventory has dropped by 4,093 homes so far this year, a 35% drop. We can expect the active listing inventory to drop slightly for the remainder of the year. Demand, the number of new pending sales within the past month, dropped by 31 in the past couple of weeks to 3,166, a 1% drop. Last year’s demand was 703 fewer and two years ago was 1,925 fewer. For the remainder of the year, as we enter the Holiday market, we can expect demand to continue to slowly drop as the distractions of Thanksgiving, unwrapping presents and ringing in a New Year sets in. The expected market time for all of Orange County decreased ever so slightly in the past couple of weeks from 2.48 to 2.45 months. The expected market time last year was at 5.19 months and two years ago it was at 14.06 months. That’s correct. The current expected market time for the entire market, including the sluggish upper end, is two-and-a-half months. For homes priced below $1 million, the expected market time is 1.89 months. For homes priced above $1 million, the expected market time is 9.27 months. That’s because that range represents 29% of the active listing inventory, BUT just 8% of demand. There is actually okay activity up to $2 million, nothing to write home about, but some movement. For the 1,039 homes priced above $2 million, the expected market time is in the double digits, a crawl. After increasing for the first time this year two weeks ago, the number of distressed properties on the market decreased by 9 homes. 31% of the active inventory is distressed compared to 43% last year. There are currently only 314 foreclosures in all of Orange County, a decrease of eight in the past two weeks. The numbers have not really changed much since July. Foreclosures only represent 4% of the active listing market and have an expected market time of 0.69 months. Last year the expected market time was at 1.22 months. Foreclosures continue to be exceptionally HOT and are, on average, selling for 3% above their asking prices. Buyers should be aware that it is a feeding frenzy out there for foreclosures. Realistic expectations are that the more qualified borrower able to bring in a strong offering price is going to ultimately prevail. Buyers with smaller down are going to find it difficult to compete. There are currently 2,075 short sales on the active market, a decrease of just one home in the past two weeks. Short sales currently represent 27% of the active listing inventory, a major player in today’s marketplace. The expected market time for short sales is currently at 1.85 month versus 6.92 months one year ago. Remember, there is nothing “short” about a short sale. Short sales, where the homeowner owes more than the home is worth, are subject to loan approval and can take anywhere from weeks to months to secure that approval.

Orange County Housing Report: Two Polar Opposite Markets

With Halloween fast approaching, the differences between the lower end and higher end Orange County housing market are SPOOKY. It is extremely ironic that the general public expects a really soft real estate market with a lot of inventory and that buyers get to call all of the shots. That is entirely not true for homes priced below $1 million with an expected market time of only 1.88 months. That translates to an incredibly HOT seller’s market. That range represents 71% of the current active listing inventory. The upper range, homes priced above $1 million, represents 29% of the active listing inventory, but has an expected market time of 10.37 months. Anything over 10 months is basically an almost frozen market, a deep buyer’s market. So, today’s Orange County buyers need to know that the lower the range, the hotter the market. From $750,000 to $1 million, the expected market time is 3.76 months, not incredibly hot, but not incredibly slow either. The word on the street is that there is not that much new, fresh inventory hitting the market, so if a great property comes on the market that is priced right, don’t expect it to last very long. Below $750,000 is crazy, and below $500,000 is just NUTS. That’s right, N-U-T-S!!! Tremendous competition, multiple offers, and selling prices close to or above the asking prices are the norm. This is where many who have not experienced the Orange County housing market by sitting in a car and touring the few homes on the market within their areas of interest simply will not believe me. So, if you are in doubt, take a look around for homes in the lower ranges. The hot market is a reality. The homes that do not sell are overpriced, in poor condition or are in a poor location. It is not just distressed homes that are selling. 50% of demand, the number of new pending sales during the past month, is sellers with equity in their homes. Homes that are priced right are selling and selling fast. The sales to list price ratio for homes priced below $1 million is 99%. That means that on average, homes are discounted by only 1% off of their asking prices. For homes priced below $500,000, the sales to list price ratio is 100%, meaning that, on average, they are selling for their full asking price. That should be the headline in local newspapers and the topic for the nightly news: “Most homes in Orange County are selling for their asking prices and they are selling fast!” Let me clarify one important point though, the lower ranges are experiencing a seller’s market, but are not experiencing appreciation. Prices have stabilized because there is just too much demand. But, with so many distressed properties still in the mix and many appraisal issues, prices are not going up. With the government’s changes to the appraisal process, known as “The Home Valuation Code of Conduct,” more and more homes are not appraising for the agreed upon purchase prices. The government had the right intention, but I can write a book as to how the code of conduct has made the housing recovery process much more challenging. When an appraisal comes in too low, the buyer, the seller, or a combination of the two, makes up the difference, OR the pending sale falls apart and the home is placed back on the market.

Now, let’s take a closer look at the upper ranges. Homes above $1 million may represent 29% of the active listing inventory, but they only represent 7% of demand. As is customary, the higher the range, the slower the market. In this downturn it is even more pronounced. The sales to list price ratio in the upper range is 92%. That takes into account the LAST list price after many price reductions. The sales to ORIGINAL list price ratio is 85%. This vast discrepancy is due to unrealistic expectations on the part of sellers within the higher ranges and illustrates the need to carefully price a home based upon recent sales activity, 90 days or sooner is preferable, and all pending activity. Sellers in the upper ranges should not fall into the trap of giving too much weight to active listings. In this market, a buyer is not going to take into consideration another active listing that has sat on the market for months in coming up with an offering price. Appraisers are not going to give active listings much credence either. The market is so slow in the upper ranges that a great price, super condition and a great location still may equate to a long market time. Demand is just too low, so sellers need to pack their patience and enjoy the ride; this may take a while.

So, how do the rest of the numbers look? So, how do the rest of the numbers look? The active listing inventory increased by just six homes within the past couple of weeks, remaining under the 8,000 mark and totaling 7,923. That’s 4,799 fewer than last year and 9,836 fewer than two years ago. Ask any agent and their number one complaint is a lack of inventory in the lower ranges. Demand, the number of new pending sales within the past month, dropped by 73 in the past couple of weeks to 3,197. Last year’s demand was 524 fewer and two years ago was 2,022 fewer. The expected market time for all of Orange County increased slightly in the past couple of weeks from 2.42 to 2.48 months. The expected market time last year was at 4.77 months and two years ago it was at 14.73 months.

The number of distress properties on the market increased for the first time since November of 2008. Within the past couple of weeks the number of foreclosures and short sales increased by 79, now totaling 2,398, returning to early September 2009 numbers. 30.3% of the active inventory is distressed compared to 42.9% last year. There are currently only 322 foreclosures in all of Orange County, an increase of two in the past two weeks. Foreclosures only represent 4% of the active listing market and have an expected market time of 0.67 months. Foreclosures are HOT and are, on average, selling for 4% above their asking prices. There are currently 2,076 short sales on the active market, an increase of 77 over the past two weeks. Short sales currently represent 26% of the active listing inventory, a major player in today’s marketplace. The expected market time for short sales is currently at 1.82 month versus 6.08 months one year ago. Short sales are also a hot segment within the marketplace; however, buyers should not expect instantaneous results and quick closings. Short sales must wait for “lender approval,” which can take anywhere from weeks to months.

Orange County Housing Report: End of Summer Cycle

As the end of summer fast approaches, the Orange County real estate market continues to follow its normal, cyclical path. The active listing inventory continues to drop, demand drops slightly and the expected market time has very little movement. This is typical for this time of year.

Here’s a breakdown of how the numbers look this week:

• Active listing inventory dropped by 169 homes in the past two weeks to 8,362, its lowest level since the beginning of 2006.
• The active inventory last year was at 13,582, 5,220 additional homes.
• The active inventory two years ago was at 17,760, 9,398 additional homes.
• Demand, the number of new pending deals over the prior month, dropped by 103 in the past two weeks to 3,403.
• Last year’s demand was at 2,847, 556 fewer than today.
• Two years ago, demand was at 1,206, 2,197 fewer than today.
• The expected market time is currently at 2.46 months, a slight change from the 2.43 month mark posted two weeks ago.
• The current expected market time is within the definition of a seller’s market, below five months. There is tremendous demand for homes priced below $750,000. Below $500,000, the market is extremely hot. Homes are receiving tremendous activity with multiple offers and an average list to sales price ratio of 100%. Even though we are currently experiencing a seller’s market, property values are not appreciating. This is primarily due to the number of distressed properties on the market that continue to suppress values.
• The expected market time for properties priced between $250,000 and $500,000 is currently at 1.33 months, levels not seen since the incredible days of 2005. Ask any buyer looking for a home priced below $500,000 just how crazy the market has been and you will quickly find that they are writing offer after offer. Last week, one of our agents stated that his buyer was finally in escrow after writing their fifth offer.
• Buyers today do not know how crazy the market is until they lose out on a property or two, learning from the good ol’ school of hard knocks. This is contrary to their perception of the housing market out of the gates due to the constant stream of press on the recession, unemployment and distressed homeowners.
• The current Orange County housing market is controlled by lenders, where just about half of all pending deals are either a short sale or foreclosure.
• The number of distress properties on the market dropped by 43 homes in the past two weeks, now totaling 2,516. The total had stopped its drop two weeks ago. I thought that the number would increase today. The pace in the drop has slowed over the past month, so it will be interesting to see where we go from here.
• 30.1% of the active inventory is distressed. That’s far different compared to last year when 42.3% of the inventory was distressed.
• There are currently only 332 foreclosures on the active market, an increase of 13 over the past two weeks.
• The expected market time for foreclosures is currently at 0.71 months, a deep seller’s market.
• There are 2,184 short sales on the active market, a drop of 56 over the past two weeks.
  The expected market time for short sales is currently at 1.80 months.

What can buyers expect going into the Autumn Market? Interest rates dropped and remain extremely low. Demand is still extremely hot for homes priced below $750,000. There has been a lot of news regarding the end of the $8,000 first time tax credit, which currently ends with sales on November 30th. However, we can expect an extension to that program coming soon. We can also expect a second extension to the increased conventional loan limit, for Orange County it is $729,750. The government does not want to see a decrease in the current real estate market momentum, and these two programs have helped immensely. So, even though we are entering a cyclically slower time of year, do not expect that much of a change in the current market. There are still droves of buyers still looking for homes. The word out on the street is that agents have pockets filled with buyers and not enough new inventory coming on the market. Any increase in fresh inventory would be welcomed by buyers and their agents alike. However, there just won’t be a lot of new inventory to hit the market until after the New Year. The upper price ranges are experiencing less demand. Lack of financing and the recession are not helping. But, the distressed inventory within the upper ranges is definitely fueling some demand.

Orange County Housing Report: A Seasonal Summer Drop in Demand

While celebrating the 4th of July and enjoying the warm weather and California surf, demand for Orange County homes dropped by 7%, a typical drop for this time of year. The average drop in demand over the past five years has been 8%. This year is no exception. Demand, the number of new pending sales over the past month, dropped from 3,629 pending sales two weeks ago to 3,359 today, a drop of 270 homes. Last year the drop was 324 homes and demand totaled 2,682 pending sales, 677 fewer than today. Two years ago there were 1,578 fewer pending sales compared to today, totaling only 1,781 for all of Orange County. Over the past five years, demand cyclically increases over the next two weeks, averaging an increase of 4%. The active listing inventory dropped to below the 9,000 mark for the first time since February 2006. The inventory dropped by 242 homes in the past two weeks from 9,188 to 8,946, a 3% drop. From the first of the year, when the active inventory totaled 11,842, the inventory has shed a total of 2,896 homes. Last year the active inventory totaled 14,701 homes, 5,755 additional homes on the market compared to today. Two years ago the active inventory reached 17,334 homes, 8,388 additional homes compared to today. Even though demand dropped, the expected market time did not increase that much because of the drop in inventory. The expected market time increased from 2.53 two weeks ago to 2.66 months today. Most buyers have the expectation of a deep buyer’s market where they can take their time and write an offer to purchase a home well below the asking price. With so much negative news swirling around the economy, the recession, employment and the housing market, it is ironic to find that homes priced below $1 million are experiencing tremendous competition and often sell for at or above the asking price. The lower ranges are incredibly hot too. From $250,000 to $500,000, the hottest price range, the expected market time is 1.44 months. That range represents 24% of the current active inventory and 45% of demand. 55% of the active inventory within that range is either a foreclosure or short sale. Buyers are looking for a deal and are looking for foreclosures. 72% of all distressed sales are found below $500,000. It is reasonable to conclude that distressed sales are fueling the market, especially in the lower ranges. Total pending count, different than demand in that demand tracks new pending sales over the past month only, dropped for the first time this year by 54 homes, now totaling 6,403. Last year at this time the total pending count was at 4,192, 2,211 fewer than today. Two years ago there were 3,797 fewer than today.

The active distressed inventory, both foreclosures and short sales, continued its decent, dropping from 2,919 homes to 2,766, a 153 home drop. Foreclosures make up 13.5% of the distressed inventory. There are only 374 in all of Orange County. The other 86.5% are short sales, totaling 2,392. Foreclosures make up only 4.2% of the TOTAL active inventory and 26.7% are short sales. Foreclosures make up 17.7% of demand and short sales make up 35.4%. With so many buyers looking for a deal, many are turning to foreclosures only to find that there is just way too much demand and competition. They fly off the market as quickly as they come on. The expected market time for foreclosures is only .63 months, between two and three weeks. The expected market time would probably be even less, but it takes a bit of time to sort through multiple offers and communicate with the out of area banks. The number of short sales on the active market has dropped to 2,392, 115 fewer than two weeks ago and 50% off of the peak of 4,810 established in May of 2008. With so few foreclosures on the market, many buyers have turned to short sales where the competition has grown substantially and the expected market time has dropped to 2.01 months. Short sales have become an acceptable alternative to both buyers and lenders alike. Not only have buyers jumped on the short sale bandwagon, but lenders have approved more and more short sales in lieu of the lengthy foreclosure process. One year ago 94% of all distressed listings were at or below $750,000. Today, 88% is found below $750,000, dropping from 89% two weeks ago. The trend is more and more distressed homes are found above the $750,000 mark as the market moves from the subprime fallout to prime loans. The upper ranges are just beginning to catch up to the lower ranges. We have all read or heard about the foreclosure wave to come. It will not manifest itself in an increase in short sales. When more foreclosures do hit the market, there is so much pent up demand for the foreclosure “deal” that many will become pending sales just as fast as they are placed on the market. The reports from agents on the streets are that they are all working with buyers and they all would love to jump on the next foreclosure to hit the market.

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: Demand Suddenly Surges

Coinciding with a drop in interest rates and a Wall Street rebound, demand for Orange County housing increased by 22% in just two weeks. Demand, the number of new pending sales over the past month, increased from 2,670 pending sales two weeks ago to 3,247 today, a 577 home increase. Last year’s high of 3,060 pending sales was reached on June 12. Orange County demand has not reached this level since September 2005, the beginning of the current downturn. Last year there were 962 fewer pending sales, totaling 2,285, and two years ago there were 1,114 fewer,

totaling 2,133. The active listing inventory shed 580 homes in the past two week, a 5% decrease, totaling 11,026. The active listing inventory has not seen these lower levels since the beginning of April 2006. Last year there were 15,474 homes on the market, 4,448 additional homes compared to today. Two years ago there were 14,010 homes on the market, 2,894 additional homes. The expected market time dropped from 4.35 months two weeks ago to 3.4 months today. The expected market time last year was at 6.77 months, and two years ago it was at 6.57 months. This is the lowest expected market time since March 2006. The distressed homes inventory, foreclosures and short sales, dramatically changed over the past two weeks, dropping by 581 homes to 4,092. The height of the distressed inventory, 5,950, was achieved on August 7, 2008. There are 1,858 fewer distressed homes on the market compared to the height, a 31% drop. The distressed inventory now represents 37% of the current active inventory, dropping from 40% two weeks ago. Foreclosures now have an expected market time of 0.77 months, or three weeks. There are 170 fewer foreclosures on the market, totaling 731. Demand for foreclosures is at 953 pending sales. The foreclosure market is extremely hot. Buyers can expect to compete with multiple offers and sales prices above their list prices. The short sale inventory shed 391 homes in the past two weeks to 3,379 homes. The short sale inventory height, 4,701, was reached on August 7, 2008, coinciding with the total distressed inventory height. There are 1,322 fewer short sales on the market today. Demand for short sales increased by 205 pending sales, totaling 967. Since short sales are subject to lenders approval and are often not changed to pending status until lender approval is received, this may be a sign that lenders are gearing up to curb foreclosures through the accommodation of short sales. Total Orange County pending sales continues to reach record heights week after week. I started tracking the statistic back in September of 2006. After increasing by 355 homes over the past two weeks, the total pending count has reached 4,905 pending sales. Last year at this time, total pending sales totaled 2,852, 1,698 fewer than today. Two years ago it was at 3,047, 1,858 fewer.

Word within the trenches is that there is tremendous activity out there in the lower ranges and with distressed properties. Many buyers first enter the market with anticipation that they are going to somehow be able to obtain a property for tens of thousands less than the asking price. They are quickly learning that there is a lot of competition in the lower ranges and all distressed homes. There just is not enough news highlighting this aspect of the real estate market. The activity in the lower ranges has reached such a high level, that it is starting to reflect in the median sales price for Orange County, which posted its first month over month increase, from January to February 2009, in eight months. Lower interest rates, a lot of stimulus, the massive return of the first time home buyer, the return of investors, have all equated to a sharp uptick in the current Orange County real estate market.

There is a major difference between the lower and upper ranges. For all home below $750,000, the expected market time has been dropped considerably. The best range in Orange County is homes between $250,000 and $500,000, with an expected market time of 2.09 months. 60% of the inventory within that range is either a short sale or foreclosure. The expected market time for homes below $250,000 is 2.46 months. For homes between $500,000 and $750,000, the expected market time is 3.46 months. It shoots up to a 6.4 month expected market time for homes between $750,000 and $1 million. From there, the expected market time blossoms to a stagnant market. The expected market time ranges from 13.11 month, homes between $1 million and $1.5 million, and 43.44 months, homes above $4 million. What this helps illustrate is that the government’s focus on freeing up conventional financing, loans up to $729,750, is working within the real estate market. For jumbo financing, where loans are much more difficult to obtain and are at a higher rate, especially above $1 million, demand has just come to a crawl. With no focus from the government on higher ranges, it will not be until a bottom is reached in the lower ranges, which some are predicting during the second half of 2009, and confidence is restored in the financial markets, that decent demand will return to the upper ranges.

Orange County Housing Report: A Stimulating Pause

As all of the details of the various stimulus plans are slowly making their way to Main Street, the Orange County housing market has slowed as well. The tax credit for first time home buyers (individuals who have not owned within the prior 3 years), the increased conventional loan limit to $729,750, the unveiling of the details to help instigate lenders to refinance loans for homeowners who are as much as 5% upside down in their homes, and the unveiling of the finer points to help promote loan modifications, are only just beginning to make their way to the experts and professionals that work within the real estate and lending industries. It is no wonder that there has been a pause in recent Orange County demand as buyers are just not yet aware of how all of the recent fanfare applies to them. Also, there has benn recent news of even more stimulus to come to help resurrect the dormant financial engine that keeps our economy in gear. The frozen financial markets are only moving because the U.S. Treasury is purchasing pools of loans to keep lending flowing. The government is working on incentives to motivate investors to enter the game as well. They are looking to help purchase “toxic assets,” a term that simply means “bad loans,” to help instigate lenders to lend again. The problem thus far has been that lenders have received billions of dollars from the government only to clamp down further on lending. Part of the problem is that for every loan that is bad, they have to have a certain threshold of capital set aside. With so many bad loans on the books, lenders have had to maintain hordes of capital in the form of reserves and they cannot use that money for new loans. So, this is what the government is sifting through in the background to repair out financial markets and restore confidence in the U.S. financial system once again. As more and more of these programs are unveiled there will be a slight delay until it trickles down to the Orange County marketplace. Similarly, the new higher conventional loan limits that were unveiled in February of 2007 took over a month until it finally hit Main Street in the form of new loans. The latest round of stimulus was only unveiled in the third week of February of this year, but the real estate and financial industries are still ironing out all of the details. With all of the stimulus and record low interest rates, each program is going to slowly trickle down in the form of increased demand in real estate in weeks and months to come.

So how do the numbers look? In the past two weeks, demand, the number of new pending sales within the prior month, decreased by 195 homes to 2,624. Last year at this time there were 731 fewer pending sales, totaling 1,893. Two years ago there were 2,388 pending sales, 236 fewer than today. The affects on demand from the stimulus plan should probably start to play out within the Orange County real estate marketplace over the next month. The active listing inventory has remained relatively unchanged so far this year, increasing by only 43 homes over the past month, bringing the current total to 11,562. Last year the active inventory was at 15,412 homes, 33% higher. Two years ago there were 996 additional homes on the market, totaling 12,558, 10% higher. The current expected market time increased from 4.09 months two weeks ago to 4.41 months today. Last year the expected market time was 8.14 months. Two year ago the expected market time was 5.26 months. Total Orange County pending sales is at a much healthier level compared to the last two years. Currently, total pending sales is at 4,408, an increase of 67 pending sales in the past two weeks. This is the highest level for total pending sales since I began tracking this figure back in September of 2006. Last year at this time, total pending sales totaled 2,524, 1,884 fewer than today. Two years ago it was at 3,419, 989 fewer compared to today. Today marks the first time that the distressed inventory is lower compared to the prior year, after falling by another 99 foreclosures and short sales over the prior two weeks to 4,408. One year ago today, the distressed inventory was at 5,057, 649 more than today. Since peaking on August 7th at 5,950, the distressed active inventory has dropped by 20%; that is 1,166 fewer distressed homes on the active market. The distressed inventory represents 41% of the total active inventory, dropping from 42% two weeks ago. The number of pending sales that are either a short sale or a foreclosure remained at 62%. The expected market time for foreclosures increased slightly from its record low of .99 months two weeks ago to 1.08 months today. Foreclosures remain the hottest category of homes within the Orange County marketplace today. The expected market time for short sales dropped ever so slightly from 5.16 months to 5.14 months today, a record low for the current housing downturn.

The condition of the Orange County real estate market really depends upon the price range. Of course, 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 1.95 months. However, there are only 321 detached homes within the detached active home inventory out of 6,966 total, less than 5%. The second hottest range is detached homes between $250,000 and $500,000 with an expected market time of 2.46 months. There are 1,905 detached homes within that range, 27% of the detached inventory.

It will be interesting to witness the ramifications of increased demand in the lower ranges. The lower ranges are already hot and there have been reports from the trenches that a bottom in pricing has been achieved in many areas where prices have not changed over the course of the past few months. As a stronger bottom is established in the lower ranges throughout Orange County, and the flow of financial system is restored, the strength in the market will eventually start to trickle up to the higher ranges.

Orange County Housing Report: Demand Takes Off

Even though the United States is waiting on the stimulus package, demand for Orange County real estate is beginning to take off. In the past two weeks, demand, the number of new pending sales within the prior month, increased by 24% to 2,671 pending sales, an increase of 674 homes. Last year at this time there were 1,103 fewer pending sales, totaling 1,568. Two years ago there were 2,463 pending sales, 208 fewer than today. After slowly increasing in demand during the first few weeks of the New Year, demand has surged and is following a course similar to 2007. It will be interesting to see what happens to demand as the Obama stimulus package is passed in the coming weeks. In the past two weeks, the total active inventory decreased by 41 homes to 11,519. Last year there were 3,740 additional homes on the market, totaling 15,259. Two years ago there were 464 additional homes on the market. The current expected market time dropped from 5.39 months two weeks ago to 4.31 months today. Last year the expected market time was 9.73 months and two year ago it was 4.87 months. Total Orange County pending sales is at a much healthier level compared to the last couple of years. Currently, total pending sales just eclipsed the 4,000 pending sale mark and now stands at 4,019. Last year, total pending sales did not surpass the 4,000 mark until June. Last year at this time, total pending sales climbed to 1,969, 2,050 less than today. Two years ago it was at 3,026, 993 fewer compared to today. There has not been much of a change along the distressed property front. The total number of distressed homes on the market, both foreclosures and short sales, dropped by 31 homes in the past couple of weeks and now stands at 5,073, 44% of the total active inventory. 63% of all pending sales are either a short sale or a foreclosure. The expected market time for foreclosures dropped to the lowest level of the current downturn, 1.08 months. Foreclosures are HOT and are selling almost as fast as they are placed on the market. Many buyers looking for a deal are fooled into thinking that they can purchase a foreclosure at a massive discount, only to find that multiple offers are generated on foreclosures and the average sales to list price ratio is 101%. That’s right, on average foreclosures are selling for above their list price. The expected market time for short sales also dropped to their lowest level of this downturn, 5.78 months. Foreclosures and short sales have driven prices down to levels where affordability has improved tremendously fueling an increase in first time home buying and overall demand. Lastly, the upper end market is still extremely stagnant and will remain so until the economy improves and something is done about jumbo financing. Currently, jumbo financing begins at $625,500, has a much higher interest rate, and qualifying is a lot more difficult than conventional financing.

So, where is the real estate market going from here? The real estate market is going to dramatically improve with the right stimulus package. The Obama administration and Congress is feverishly working on a major stimulus package and should be passed within the coming week. Let’s examine some of what they are strongly considering:

· Reduce interest rates to at least 4.5%
· Increase the conventional loan limit for high cost areas from $625,500 back to $729,900
· Eliminate repayment of the $7,500 first time home buyer tax credit and make it available to all buyers

The Federal Reserve and the FDIC are working on programs to prevent foreclosure and increase loan mitigation. Out in the real estate trenches, the topic of the day is “loan modifications.” The industry is acutely aware that all eyes are on decreasing the flow of foreclosures and finally putting a bottom under the housing market. In terms of units, Orange County housing bottomed out between the fourth quarter of 2007 and the first quarter of 2008; just take a look at current demand compared to demand last year, 70% higher. Pricing is a different story, and only with a bump in demand are we going to experience a true bottom in pricing. With historically low interest rates, an increased conventional loan limit, a buyer tax credit, foreclosure abatement and other forms of stimulus, the end result will be an increase in housing demand and a high probability of reaching a bottom in pricing around mid-year.

The final whistle of the Super Bowl marked the beginning of the Spring real estate market. Sure enough, there already was a considerable increase in demand. From here, demand will continue to rise and will most likely receive an “Obama bounce” with the passing of the stimulus package. With demand increasing and a return of the discretionary homeowner opting to keep their homes off of the market unless they really have to sell, we can expect the active listing inventory to remain flat or even slightly fall. The expected market time will fall as well to levels not seen in quite some time. The undercurrent of foreclosures and short sales will continue to fuel supply; but, depending upon the reach of the stimulus package, this flow may begin to ebb. Up to this point, the Orange County real estate market has been controlled by lenders (foreclosures and short sales). However, it has come to the point that not only the Orange County real estate market, but the entire national real estate market, is in the hands of our government. They know that the first step to turning around our economy is to stop the fall of real estate values and the flow of foreclosures and short sales. Stay tuned… round one is going to be signed by President Obama within a week.

Orange County Housing Report: Waiting on Stimulus

With only a small change in the past two weeks, the official beginning of the Spring market will most likely be delayed until the MAJOR stimulus package that the Obama administration and Congress are currently working on is revealed. The stimulus package is targeted for a mid-February launch. Currently everybody seems to be cautiously waiting for change. The stimulus package promises to be nuclear in its reach, and it needs to be to begin to turn around the current economic situation. In 2009, the United States government is poised to be vigilante and relentless in their pursuit to turn things around. We will see foreclosure aid, more financing aid, job creation, tax breaks, small business incentives and more. Legislation and Federal Reserve involvement will be aimed at reducing interest rates and narrow the spread from the low rate that banks borrow money to the much higher interest rates that are passed onto consumers. The good old fashioned pendulum has been out of control. For years, lenders were carelessly lending with no restrictions and now they have battened down the hatches to the point that only the best of the best can qualify for anything outside of a government backed conventional or FHA loan, loans up to $625,500. So, the lending pendulum has swung from out of control lending to too many restrictions and hurdles to adequately meet real lending demand. That is the crux of the issue that our government is painstakingly trying to change. In sticking with the pendulum analogy, the financial market would be much healthier somewhere in between. The real question is just how long it is going to take for the financial markets to thaw and restore the backbone of our economy. One thing is for certain, the government is about to apply a relentless full court press until they have applied enough stimulus to turn the tide. Stay tuned, the government is working on giving the ailing economy a major Valentine’s Day gift.

So, what do the current numbers look like? In the past couple of weeks, the active inventory has increased by 273 homes to 11,560. Last year at this time there were 15,245 homes, a difference of 3,685. Two years ago there were 11,895, 335 additional homes compared to today. Demand, the number of new pending sales within the prior month, increased by 138 in the past two weeks, sitting today at 2,146 pending sales, an increase of 7%. Last year, demand was at 1,219, 927 fewer than today. Two years ago, there were 216 fewer pending sales, totaling 1,930. The expected market time dropped slightly in the past couple of weeks from 5.62 months to 5.39. Last year, the expected market time was at 12.51 months, and two years ago it was at 6.16 months. One thing is for certain, all of the numbers today illustrate a much better start to a New Year compared to both 2007 and 2008. Here’s how Orange County compares to the rest of Southern California:

The number of distressed homes, foreclosures and short sales, dropped by 14 homes in the past two weeks, totaling 5,104, 44.2% of the active listing inventory. Here’s a county comparison of distressed sales:

In Orange County, distressed homes are fueling a majority of the current activity. 77% of all distressed sales are below $500,000 and 90% are below $750,000.

The government is basically underwriting most of the current demand since they are propping up conventional and FHA financing, loan limits up to $625,500. All homes below $750,000 account for 71% of the current active inventory and 91% of demand. So even though 29% of the active inventory is above $750,000, it accounts for only 9% of demand. This is primarily due to the current financial crunch where financing outside of conventional and FHA loans has become very difficult to obtain. Since the government is currently doing nothing to help jumbo financing, these loans are sitting on a lender’s balance sheet. With conventional and FHA financing, the government is currently purchasing these loans to revitalize the flow of financing below the $625,500 limit. Investors are virtually sitting on the sidelines; only the government is currently propping up demand. Homes that fall within jumbo financing parameters, above $750,000, are suffering from no government intervention. This phenomenon will continue until either investors’ confidence is restored or the government steps in. The higher the price range, the slower the market. For homes between $750,000 and $1 million, the expected market time is 8.87 months. For homes between $1 million and $1.5 million, the expected market time is 17.88 months. For homes above $4 million, the expected market time is 116.67 months. There are 350 homes on the market above $4 million and demand is only at 3. In 2008, this range posted its best expected market time in March at 17.67 months. Until jumbo financing improves through government intervention or investor confidence is restored, the upper ranges can expect only slight improvements.

What can we expect in the Orange County real estate market from here? The Spring market will most likely take off after the major stimulus package is passed in mid-February. Demand will continue to improve, the inventory will rise slightly, and the expected market time will drop. Good news for the health of the real estate market is the fact that discretionary homeowners are not being fooled by aspirations of a strong Spring market; instead, most are choosing to not compete. Historically low interest rates will fuel demand as well, and we can expect rates to eventually remain in the mid-4’s, which is unprecedented. Distressed sales will also continue to fuel demand as more and more new distressed properties hit the market. We can expect strong numbers of distressed sales throughout 2009 with the distressed inventory falling slowly but surely. With so much stimulus, low interest rates and increased affordability, the current down cycle, now going on its third year, has a strong chance of bottoming as early as the middle of the year.