This Month in Real Estate – June 2017
Check out the National Numbers for June, 2017
Find out more in this Orange County Housing Report for February 28th, 2017.
Hot Housing Market: Everything on the market below $1 million is selling like hotcakes, and below $750,000 is nothing short of nuts.
The current Orange County housing market is scorching hot and has not been this good since July 2013. Once again, buyers are tripping over themselves to purchase. Homes that hit the market are fetching multiple offers within the first couple of days. Some buyers are writing offers on homes unseen. Others are waiving the appraisal contingency (still mandatory if they are getting a loan; so, if the appraisal comes in low, the buyer will have to bring in more money in order to close). When a home is priced at or close to its Fair Market Value, the purchase price is often higher than the asking price.
We are back to the bidding war days. When 10 offers to purchase are generated, there is only one victor. Nine buyers walk away and have to continue the pursuit of their dream home. This market can be extremely frustrating for a buyer. After a couple of failed attempts, many buyers sharpen their pencils and are willing to stretch in price even if it means paying more than the most recent comparable pending or closed sale. That is the nature of a housing market with very little inventory and very high demand.
The expected market time (the amount of time it would take for a newly listed home today to be placed into escrow) for all of Orange County is now at 50 days. When the expected market time drops below 60 days, the market is considered a solid seller’s market with steady price appreciation. Last year, Orange County was only below the 60-day threshold for about eight weeks, from mid-March through mid-May and never dropped below 55 days. It appears as if 2017 is going to be much hotter than the last few years.
When the expected market time dips below 30 days, the market shifts to a sizzling hot seller’s market with rapid price appreciation. In the past decade, the overall housing market has never reached this level, but many price ranges have. That is the case today as well. Not all of Orange County is considered “hot;” however, condominiums and detached homes priced below $500,000 are sizzling. This range represents 15% of the active listing inventory and 29% of demand.
Condominiums priced between $500,000 and $750,000, and detached homes priced between $500,000 and $1 million, are considered “solid” seller’s markets with expected market times between 30 and 60 days. They represent 24% of the current active inventory and 36% of demand. Both condominiums and detached homes priced between $500,000 and $750,000 are knocking on the door of a sizzling hot seller’s market with expected market times just above the 30-day threshold. That price range is starting to feel very hot and could easily drop below 30-days in the coming weeks.
Condominiums priced between $750,000 and $1 million and detached homes priced between $1 million and $1.5 million are currently experiencing a slight seller’s market, between 60 and 90 days. They represent 18% of the active listing inventory and 12% of demand. A slight seller’s market is characterized by slow, methodical price appreciation.
The market does not lean in the seller’s favor for detached homes priced above $1.5 million and condominiums priced above $1 million. The higher the price, the slower the market. They represent 30% of the inventory and only 9% of demand.
Buyers and sellers alike need to understand the market that they are working with in order to approach it with proper expectations. A buyer looking to purchase a $650,000 home is going to encounter a much different market than a buyer looking to purchase a $2 million home. Similarly, a condominium seller at $450,000 is going to experience a much different market than a condominium seller at $800,000.
A warning for buyers: do not expect the market dynamics to change much in the coming months. Even when more homes come on the market during the spring, there will be an increase in buyer activity as well.
A warning for sellers: do not stretch the asking price much at all. Overpriced, overzealous list prices result in wasted market time and do not generate offers. Pricing at or close to the Fair Market Value is the wisest formula for success.
Active Inventory: Within the past couple of weeks, the active inventory only increased by 12 homes.
Since January 1st, the active inventory has only grown by 389 homes. Within the past couple of weeks, it remained almost the same, growing by only 12 homes, a 0% increase, and now sits at 4,460. Once again, nearly everything that is coming on the market at or close to its Fair Market Value is being placed into escrow almost immediately.
Part of the issue is that, so far this year, 8% fewer homes have come on the market compared to last year at this time. The combination of a limited supply of homes coming on the market and ferocious demand has created the current sizzling hot Orange County housing market. More and more homeowners will come onto the market this spring through mid-August.
Last year at this time, there were 5,271 homes on the market, 15% more. Two years ago, there were 973 more homes on the market, or 18% more.
Demand: Demand is HOT, increasing by 10% in the past two weeks.
The only thing holding back current demand is the lack of supply of homes. There are simply not enough new sellers coming on the market. Even with very few choices right now, buyers are pouncing on everything new that hits the market that is reasonably priced and in decent condition.
Demand, the number of homes placed into escrow within the prior month, increased by 248 pending sales in the past couple of weeks, or 10%, and now totals 2,651. With an increase in demand and an inventory that remained the same, the expected market time dropped from 56 days to 50 days, a solid seller’s market.
Last year at this time, there were 2,584 total sales, 67 fewer than today, or 3% less.
Luxury End: The luxury market is starting to heat up a bit.
Demand is up for Orange County’s luxury home market with 73 additional pending sales compared to last year at this time, 19% higher. The luxury inventory is up by only 3 homes, nearly identical. The overall expected market time for all homes priced above $1 million is 122 days compared to 144 days last year.
In the past two weeks, demand for homes above $1 million increased from 412 to 465 pending sales, a 13% rise, its highest level since the end of August. The luxury home inventory increased from 1,834 homes to 1,891, its highest level since the start of December 2016. The expected market time decreased in the past couple of weeks from 134 to 122 days.
For homes priced between $1 million to $1.5 million, the expected market time in the past couple of weeks decreased from 80 days to 76 days. For homes priced between $1.5 million to $2 million, the expected market time decreased from 153 to 129 days. For homes priced above $2 million, the expected market time dropped from 252 days to 227 days. At 227 days, a seller would be looking at placing their home in escrow around mid-October.
Orange County Housing Market Summary:
Read more in this Orange County Housing Report February 14th, 2017.
The storyline in this Orange County Housing Report for February 14th, 2017, has remained the same for years now, there simply are not enough homeowners electing to sell their homes and make a move. It’s not just a local phenomenon, nor a Southern California phenomenon; it’s a national issue that has been juicing the 5-year seller’s market. Lack of supply, that’s the story. Ask any buyer or any REALTOR® what is the biggest challenge in today’s housing market and the instant response would unanimously be “there aren’t enough homes on the market.”
It makes perfect sense that homeowners were not in a rush to sell from 2008 through 2011. Those were the years where home values took a pounding and homeowners watched their equity vanish seemingly overnight. However, since 2012, those same homeowners watched their equity return nearly as fast as it disappeared. The relentless appreciation has continued and resulted in a record high median sales price. Orange County is back to where it was prior to the Great Recession, yet sellers have still not returned in the same numbers.
From 2000 to 2007, there were an average of 1,500 additional homeowners opting to sell every single month compared to the past five years. That’s an additional 18,000 homes per year. More homes on the market would be a welcome relief to today’s frustrated buyers.
Based upon 2016 closed sales, the turnover rate for the Orange County housing stock is once every 21 years. That’s an improvement over 2015’s once every 23 years and 2014’s once every 24 years, but not by much. The markets with the best rates can be found in areas with relatively newer homes (Laguna Woods being the only exception): Talega, Newport Coast, Coto de Caza, Foothill Ranch, and Rancho Santa Margarita. And, the top turnover rate can be found in Ladera Ranch and Rancho Mission Viejo, once every 10 years.
The lowest turnover rates can be found in more established cities: Fountain Valley, Los Alamitos, Seal Beach, Villa Park, and Westminster. The lowest rate in Orange County can be found in La Palma where homeowners are moving once every 41 years.
SO, what gives? Why aren’t homeowners moving like they did before? Some think it is because too many millennials are delaying the purchase of their first home and are shacking up with their parents. Others think it is because financing is too tight and that Dodd-Frank regulations are hurting housing. Both issues would have a negative effect on demand; however, housing does not have a problem with demand.
One of the key issues that has impacted the Orange County housing market has been the lack of affordable new housing. Today’s builders have been focusing on catering towards the higher end. The Orange County new home market used to create a lot more local real estate activity as many local homeowners bought new and had to sell their existing homes first. With the county running out of vacant land, this will be an ongoing issue.
Many homeowners are not moving because owning a home long term is now in vogue. The Great Recession rattled our collective psyche and people came out of it changed, looking at homeownership differently. Many are looking to hang onto their homes and dig in their roots, similar to the Midwest philosophy.
Still, the biggest factor preventing many would be sellers from placing their homes on the market is the fear that there will be nothing to buy after successfully selling their homes. This is one of the most prevalent, undermining market forces. Essentially, the low inventory is preventing homeowners from entering the fray. Collectively, they would significantly increase the inventory if they all gave it a shot and marketed their homes subject to finding a replacement property. A seller can accept an offer to purchase their home with the condition that they would be able to find a replacement property within a specific time period, 30-days being most common. If they are unable to find a replacement home within the given time period, then the contract is cancelled or additional time may be negotiated.
Another way around this dilemma is the dreaded “double move” where a homeowner sells their home, moves into a monthly rental, and then takes their time to isolate the most ideal home for their family. There are plenty of moving companies that actually cater to this scenario and can crate and store whatever will not be used at the short term rental.
A lack of inventory coupled with a low housing turnover is a persistent trend that is not going to change in the near future. Buyers, sellers, and homeowners with any desire to make a move need to realistically approach the market and plan accordingly.
Active Inventory: Within the past couple of weeks, the active inventory only increased by 3%.
Since January 1st, the active inventory has only grown by 377 homes. Within the past couple of weeks it added 128, or 3%, and now sits at 4,448. Part of the issue is that almost everything that has come on the market priced close to its Fair Market Value has flown off the market almost as quickly as the FOR SALE sign goes in the ground, especially homes priced below $1 million. Another issue is that, so far this year, 6% fewer homes have come on the market compared to last year at this time. There are more homeowners who are opting not to sell this year even though the conditions are perfect with a very low supply and ferocious demand.
More and more homeowners will come onto the market from now through the end of summer. The first wave starts now, around mid-February. Many of these sellers will move swiftly into escrow. The next wave is the official beginning of the Spring Market, mid-March. This wave will stretch all the way through mid-August.
Last year at this time there were 4,973 homes on the market, 12% more. Two years ago there were 1,001 more homes on the market, or 23% more.
Demand: Demand is HOT, increasing 25% in the past two weeks.
This is typically when demand starts to take off. As the housing market moves closer to the best time of the year in terms of real estate activity, the Spring Market, demand continues to climb. Even though there are few choices right now, buyers are pouncing on any fresh inventory that is reasonably priced.
Demand, the number of homes placed into escrow within the prior month, increased by 473 pending sales in the past couple of weeks, or 25%, and now totals 2,403. As a result of the giant rise in demand and only a slight rise in the inventory, the expected market time dropped from 67 days to 56 days, a seller’s market. This is the first time it has dipped below the 60-day mark at this point of the year since 2013 (34 days).
Last year at this time there were 2,342 total sales, 61 fewer than today, or 3% less.
Luxury End: Both the luxury inventory and luxury demand are on the rise.
Demand is up for Orange County’s luxury home market with 55 additional pending sales compared to last year at this time, 15% higher. The luxury inventory is up by 81 homes, 5% more. Most of the spike in demand is isolated to the $1 million to $1.5 million price range.
For homes priced between $1 million to $1.5 million, the inventory is down by 12 homes compared to last year, and demand is up by 42 pending sales. Yet, above $1.5 million, the inventory is up by 81 homes, and demand is up by only 13.
In the past two weeks, demand for homes above $1 million increased from 325 to 412 pending sales, a 27% rise, its highest level since the beginning of October. The luxury home inventory increased from 1,744 homes to 1,834, its highest level since mid-December. The expected market time decreased in the past couple of weeks from 165 to 134 days.
For homes priced between $1 million to $1.5 million, the expected market time in the past couple of weeks decreased from 98 days to 80 days. For homes priced between $1.5 million to $2 million, the expected market time decreased from 195 to 153 days. For homes priced above $2 million, the expected market time dropped from 277 days to 252 days. At 252 days, a seller would be looking at placing their home in escrow around the end of October.
Orange County Housing Market Summary:
Read more in this Orange County Housing Report for January 30th, 2017.
Living in Southern California, “surf’s up” is a phrase used to describe when the waves at the beach are worth surfing. In describing the Orange County housing market and whether or not right now is a good time to sell a home, yes, “surf’s up!” If you are a homeowner who wants to sell, but you are waiting for the “Spring Market” because that’s when the conditions are “the best” for selling a home, there’s actually no need to wait. So, grab your surfboard, contact a professional REALTOR®, jump in the water, and start paddling to the swells… Surf’s Up!
After a slow start to housing due to very few homeowners placing their homes on the market at the beginning of the month, everything that is coming on the market now is flying off the market almost as quick as the “FOR SALE” sign is placed in the front yard. The only complaint in the real estate trenches is that there are simply not enough homes on the market right now.
Everything priced below $1.5 million is experiencing a HOT market, and it’s scorching below $750,000. The market run has officially hit the five-year mark, and this is the second best start behind the blazing hot 2013 market. Why are the conditions so favorable compared to the last few years? Current demand is extremely strong and the active inventory is at exceptionally anemic levels. Compared to last year, there are 11% fewer homes on the market right now, and 19% fewer than 2015; yet, demand (new pending sales over the prior month) is almost identical to 2016. And, today’s demand has been muffled with fewer homes coming on the market so far this year.
The expected market time (the time it would take to list a home today and then place it into escrow) dropped from 84 days two weeks ago to 67 days today. This is because the supply of homes actually dropped slightly while demand, new pending sales, exploded.
The only thing keeping demand from being even higher today is the lack of inventory. Sellers who are opting to sell now, versus waiting until later in the spring, are totally taking advantage of a market ripe for the pickings. As long as a home is priced closed to its Fair Market Value and is in good condition, it will fly off the market with multiple offers. Carefully pricing will result in selling at, or even higher, than the asking price. Stretching the price too much will result in wasting the most valuable market time, the first few weeks after coming on the market.
For those opting to “wait until the spring,” there will undoubtedly be more buyers looking to purchase, but there will also be an enormous increase in the number of sellers. With increased demand comes increased supply. Who knows what the market will be like in 90-days. With the new presidential administration, it is hard to predict where housing will be a few months from now. One thing is 100% certain, right now the conditions are perfect for selling. Cowabunga dude, surf’s up!!!
Active Inventory: Due to a spike in demand and fewer homes coming on the market, the inventory actually dropped a bit in the past two weeks.
Since January 1st, there have been 6% fewer homes that were placed on the market compared to last year at this time. Remarkably, there were 7% fewer homes last year compared to 2015. So, this year there are even more homeowners who are opting not to sell even though the conditions are perfect.
In the past two weeks, the active listing inventory has shed 56 homes, or 1%, and now totals 4,320. This is typically the time of year when more homes are finally coming on the market. The holidays are officially way behind us; it is time to for homeowners to shake off the holiday buzz and not opt to wait until the Spring Market, taking advantage of current wave of pent up demand. The lack of new sellers hitting the market could be due to a “wait and see” attitude regarding the new Trump administration. Regardless, there will be a significant increase in supply in February. Stay tuned…
Last year at this time there were 4,841 homes on the market, 12% more. Two years ago there were 1,011 more homes on the market, or 23% more.
Demand: Demand skyrocketed in the past couple of weeks.
As is typical for this time of the year, buyers are chomping at the bit and are eager to move on from the doldrums of the Holiday Market that brings very few choices and not a lot of fresh inventory. Buyers know that is about to change, even though it has been slow going for January.
Demand, the number of homes placed into escrow within the prior month, increased by 368 pending sales in the past couple of weeks, or 24%, and now totals 1,930. Finally, the resilient Orange County housing engine is revving its supercharged engine and will continue to skyrocket as more inventory hits the market.
Last year at this time there were 6 more pending sales compared to today, totaling 1,936. The big difference this year, the near identical demand is being done with fewer homes on the market.
Luxury End: Demand is way up, while the luxury inventory is only up slightly.
Demand is up for Orange County’s luxury home market with 46 additional pending sales compared to last year at this time; however, there is more competition. The luxury inventory is up by 65 homes. That extra competition translates to more seller who are not successful on a monthly basis. Also, a lot of the luxury activity is taking place within the $1 million to $1.5 million price range.
For homes priced between $1 million to $1.5 million, the inventory is down by 26 homes compared to last year, and demand is up by 33 pending sales. Yet, above $1.5 million, the inventory is up by 91 homes, and demand is up by only 13.
In the past two weeks, demand for homes above $1 million increased from 245 to 325 pending sales, a 33% rise, its highest level since mid-December. The luxury home inventory increased from 1,705 homes to 1,744, its highest level since mid-December as well. The expected market time decreased in the past couple of weeks from 209 to 165 days.
For homes priced between $1 million to $1.5 million, the expected market time in the past couple of weeks decreased from 147 days to 98 days. For homes priced between $1.5 million to $2 million, the expected market time increased from 169 to 195 days. For homes priced above $2 million, the expected market time dropped from 370 days to 277 days. At 277 days, a seller would be looking at placing their home in escrow around the beginning of November.
Orange County Housing Market Summary:
Read more in this Orange County Housing Report for January 17th, 2017.
Fewer homeowners have opted to place FOR SALE signs in their front yards for years now. That has been the main theme of the Orange County housing market since it started the recovery five years ago; and, if the start to 2017 is an indicator of what is to come, this year is not going to be any different.
The annual average inventory dating back to 2005 is 9,237 homes on the market. Over the past five years straight, it has fallen considerably short. As a result, the annual inventory height has come up significantly short of the 10,820 home average as well. Take a look at last year, for example, where the inventory averaged only 5,965 homes on the market and reached a height of 7,329. There simply were not enough homes for sale to satiate demand. That’s the story dating back to 2012.
To keep it simple, the inventory needs to be above the 8,000 threshold for a sustainable amount of time for the market to tilt towards the buyer’s favor. Yet, the last time that occurred was in 2011. In the past five years, the active inventory has only eclipsed the 8,000 mark once for four weeks during the summer of 2014, not long enough to make a significant impact on housing.
This year, the Orange County housing market started the year with an inventory of 4,071, the second lowest start to a year behind 2013’s anemic 3,161 homes. The 2017 start is down 7% compared to last year.
One of the main reasons that there is not enough inventory is because of a changed mindset in Orange County since the Great Recession. Homeowners are simply not opting to sell their homes at the rate that they did prior to the recession. In vogue is not moving. With this mindset, homeowners are remodeling their homes instead of jumping from home to home.
Another reason the inventory is extremely low to start the year is that many “would be” sellers are waiting for the Spring Market, notoriously the best time of the year to sell in terms of activity. While that may seem like a logical choice, the facts don’t completely back it up in the lower ranges, below $750,000. The expected market time, from putting a sign in the ground to going into escrow, is at 60-days or less. That is a hot market and the year has only begun. There’s not a lot of competing sellers on the market today in the lower ranges. Later in the spring, there will be more buyers, but there will also be a lot more sellers. This is an advantageous time to place a home on the market with plenty of pent up demand.
A home that is in good condition, nicely appointed, and priced at or close to a home’s Fair Market Value, will fly off the market with multiple offers. This value can be obtained by diligently researching the most recent comparable pending and closed sales, comparing location, upgrades, lot size, etcetera. Listing at or close to the Fair Market Value does not mean tacking on an additional $10,000, $15,000, or $20,000. In this market, a seller does not need to leave extra room for negotiating. When a home is priced right, it tends to capture close to the asking prices. Intentionally overpricing just to test the market, or tack on extra dollars to leave room for negotiations, will only result in the need to adjust the asking price down the road, squandering away the most valuable market time, the first few weeks after initially coming on the market.
The current market is not as hot as it was in 2012 and 2013 when values were skyrocketing upwards and the expected market time for the lower ranges was at about 30 days. Today’s market is appreciation, but at a much slower rate, about 5% over the course of a year. That means that it takes 365 days to increase 5%. That does not mean pricing a home 5% above the most recent comparable sale will result in success. It will take a year to get there. In order to find success today and net the highest amount possible, the bottom line is this: it is ALL about PRICING right initially. If a home is overpriced, the market will speak loud and clear; it will sit with no success in spite of the sizzling temperature of housing.
Since the first of the year, the active listing inventory has increased by 305 homes and now totals 4,376. Last year at this time there were 200 more homes on the market, 5% more. The expected market time for all of Orange County is 84 days, a slight seller’s market, meaning that homes are appreciating very little right now. The expected market time last year was at 86 days, very similar to today.
Demand: Since January 1st, demand has actually dropped slightly.
Most likely due to an extreme shortage of inventory, demand, the number of homes placed into escrow within the prior month, dropped by 66 pending sales since January 1st, or 4%, and now totals 1,562. The robust Orange County housing engine is having trouble starting the year because of an extreme lack of new, fresh inventory. There are 7% fewer homes to come on the market for the first 12 days of the year compared to 2016.
As everybody collectively moves past the holidays and New Year’s resolutions drop by the wayside, more homes will ultimately come on the market and demand will rise. The first boost in both supply and demand will occur after the presidential inauguration; and, the second will occur after the Super Bowl. By then, housing will be revving its engine and accelerating into the Spring Market. In the middle of Spring, demand for housing will be nearly double where it is today and a lot more homes will be coming on the market daily as well.
Last year at this time there were 31 more pending sales totaling 1,593.
Luxury End: Demand is up, but so is the luxury inventory.
Demand is up for Orange County’s luxury home market, 22 additional pending sales compared to last year at this time; however, there is a lot more competition. The luxury inventory is up by 127 homes. That extra competition translates to more seller who are not successful on a monthly basis.
For homes priced between $1 million to $1.5 million, the inventory is up by 21 homes compared to last year, and demand is up by 8 pending sales. Yet, above $1.5 million, the inventory is up by 106 homes, and demand is up by only 14.
In the past two weeks, demand for homes above $1 million decreased from 261 to 245 pending sales, a 6% drop, and its lowest level since one year ago when it totaled 223. The luxury home inventory is nearly the same after dropping from 1,708 homes to 1,705, its lowest level since the end of January of last year. The expected market time increased in the past couple of weeks from 196 days to 209.
For homes priced between $1 million to $1.5 million, the expected market time in the past couple of weeks increased from 132 days to 147 days. For homes priced between $1.5 million to $2 million, the expected market time remained the same at 169 days. For homes priced above $2 million, the expected market time rose from 345 days to 370 days. At 370 days, a seller is looking at placing their home in escrow around the end of January of next year.
Orange County Housing Market Summary:
Read more in this Orange County Housing Report for January 5th, 2017
First, let’s take a look back at what happened in 2016 in terms of the inventory, demand, expected market time, luxury properties, and distressed properties.
The year started with an active inventory of 4,400 homes on the market and ended with a little over 4,200. A total of 44,000 homes came on the market in 2016, identical to 2015. That may seem like a lot; however, it’s 31% fewer than the number of homes that came on the market annually prior to the Great Recession. A major housing trend that started in 2008 in the midst of the recession was fewer homeowners opting to sell their homes. The 44,000 homes pales in comparison to 2005 when 64,000 homes were placed on the market. It’s no wonder buyers were tripping over themselves to find a home to purchase in 2016.
Cutting into the inventory a bit was closed sales. In 2016, there were 650 more closed sales, 2% more than 2015.
Other than starting the year off with fewer homes on the market, 2016 looked a lot like 2015 in terms of the inventory. The peak of 7,329 homes was reached in mid-July due to slightly stronger demand during the summer than what is typical. The Orange County yearly peaks tend to occur during August. The 2016 peak was still slightly higher than last year’s peak of 7,167.
Nonetheless, the active inventory has remained at anemically low levels since the start of 2012, and has been a seller’s market ever since. The long term active listing inventory average is 8,000 homes, and it has only reached that level for a few weeks in the summer of 2014.
In order for the market to start tilting in the buyer’s favor, the active inventory not only has to eclipse the 8,000 home mark; it needs to remain consistently above that threshold for a long period of time. Only when there is extra supply will appreciation slow. Until then, we can expect more of the same, slow methodical appreciation.
Homes are not appreciating as swiftly as they did in both 2012 and 2013. With low interest rates and very hot demand, the only reason the inventory grew at all this year was on the backs of overpriced sellers. Buyers were willing to stretch a tad in the hotter ranges, below $750,000 for detached homes and below $500,000 for condominiums. However, sellers who juiced their price to leave negotiating room, or were afraid to leave money on the table, or simply wanted to see if they could get more, learned a hard lesson in pricing and success. Success only comes by meticulously pricing a home according to its true Fair Market Value. Price above that value and homes sat on the market with no offers until the price was properly adjusted.
The inventory grew by 60% from January through July. And, as Orange County housing transitioned from the Summer Market to the Autumn and Holiday Markets, the inventory dropped by 42%. In the past two weeks alone, the inventory has shed 12%, 555 homes, and now totals 4,234, the lowest level since June 2013. Over the past twelve years, only 2013 had fewer homes to start a New Year with 3,161. Home price appreciation has everything to do with supply and demand. With such a low supply, 2017 is definitely starting on the right foot.
Demand: With record low interest rates in the mid 3’s, demand continued to sizzle in Orange County.
This year demand had a bit of a slower start due to a speed bump in the Chinese economy, a worldwide stock market correction, and a detrimental drop in the price of oil. This was accompanied by a flight to the safety of long term government bonds, especially United States treasuries. The rush to bonds helped fuel this year’s boom by ushering in mortgage rates in the mid 3’s. Despite higher prices in Orange County, the low interest rates helped improve home affordability and buyers took advantage.
For the first couple of months, demand was off by 5% compared to 2015, but by mid-March, the slower start was in the rearview mirror. Oil, China, and international stock markets were on stronger footing as well. The Orange County housing engine, along with the rest of the country, was vibrant and making up for lost time. The second half of the year experienced 10% stronger demand with interest rates remaining at historically low levels.
It was not until after the election that interest rates rose to the mid 4’s, too late to have any kind of an effect on the housing market. It came at a time where the inventory was already seasonally dropping. It won’t be until after the first couple of months of 2017 that the market will digest the higher rates.
With rates in the 3’s for most of 2016, it was no wonder buyers were lining up to purchase. For proper perspective, in 1990 the interest rate was at 10%. In 2000, it was 8%. And, just prior to the Great Recession, interest rates were at 6.4%. Higher rates cut into Orange County affordability dramatically due to its higher prices. For now, even at 4.5%, interest rates are facilitating affordability and propping up demand.
Within the past two weeks, demand dropped by 287 pending sales, or 14%, and now sits at 1,697. Last year at this time, demand was at 1,629, or 4% fewer than today.
Luxury End: More homes sold in the luxury end this year than ever before.
Orange County’s luxury home market has been pumping on all cylinders. Through December 29th, more homes have closed above $1.25 million (the threshold where the top 10% of all closed sales occur) than ever before in the county. There were 3,229 closed luxury sales compared to 2,941 last year, up 10%. The highest level prior to the recession occurred in 2005 at 2,857.
So, demand was up for luxury homes. Yet, for many sellers in this higher tier, the market felt sluggish. Higher priced homes notoriously behave differently compared to the lower end of the market. The upper end always tends to contradict the hot housing market. Homes don’t fly off the market with multiple offers and the expected market time ranges from 5 months to even over a year depending upon the price. There are fewer potential buyers in the highest stratospheres of the market.
Overall, the market felt a bit slower because there were more homes on the market competing for a small pool of buyers. The higher demand helped, but there were a lot more luxury homes for sale. At the end of June, there were 21% more higher end homes compared to the prior year. The disparity is not as great today, but there are still 12% more on the market today compared to the end of 2015.
Distressed Properties: Foreclosures and short sales are nothing more than an asterisk to the 2016 market.
In Orange County, homes have appreciated substantially since the beginning of 2012. With a five year run in housing, the number of underwater homes have declined to 1.6% of all homes with a mortgage. During the Great Recession, the number climbed to as high as 25%. In 2016, distressed sales were nothing more than an asterisk to an overall healthy, nearly recovered housing market, almost not worth mentioning in reviewing 2016.
Back in 2012, distressed homes accounted for 36% of closed sales. In 2016, with over 31,000 closed sales, there were only 390 foreclosures, or 1.2%. And, there were only 498 closed short sales, or 1.6%. That means that 97.2% of all closed sales were good ol’ fashioned homeowners with equity.
The distressed inventory started the year at 176 total foreclosures and short sales, and ended the year at 117, a difference of 59, or 33% fewer.
Expected Market Time: Based upon the low inventory and hot demand, it was a seller’s market the entire year.
The expected market time (the length of time it would take to place a home into escrow based upon current supply and demand) remained below the 90-day mark all year, continuously tipping in the seller’s favor. It only dipped below 60 days, a HOT seller’s market where homes appreciate at a faster clip, in March and April. For the most part, this year’s market remained between 60 and 90 days, a slight seller’s market where homes don’t appreciate that fast, but the seller’s still get to control more of the terms of a sale during the negotiating process.
The expected market time for all of Orange County grew to 75 days in the past two weeks, but is still a great start to a New Year. As a matter of fact, in the past 12 years, 2017 will have the second best start. The best start to a year occurred in 2013 with an expected market time of 47 days.
For homes priced below $1 million, the expected market time is at 53 days. For homes over $1 million, the expected market time rises to 196 days, or 6.5 months.
Orange County has not experienced equilibrium, a market that does not favor a buyer or seller, between 3 and 4 months, since the second half of 2014. It has not been a buyer’s market, above the 4-month mark, since the start of 2011.
The 2017 Forecast: With higher interest rates, change is in the air.
With interest rates increasing by nearly a full percent since the election, change is afoot. The new presidential administration is poised to spend money on the U.S. infrastructure and lower taxes, a recipe for increased inflation. As a result, many experts are anticipating more Federal Reserve hikes in the short term rate, which will be accompanied by a rise in long term rates as well. They made an initial hike in December and are poised to make a few more in 2017. Long term rates are not immediately impacted by changes in the short term rate, but multiple increases will definitely have an impact on the Orange County housing market. Here’s the forecast:
The bottom line, 2017 will feel a little slower than the past couple of years. At first buyers will be lining up to take advantage of the end to low rates, but as affordability erodes, so will the buyer’s appetite to pay much more than the Fair Market Value for a home. The inventory will rise on the backs of sellers pushing the limits on price. The market will move from a hot seller’s market for the first half of the year, to a market all about price. As the inventory rises, appreciation will come to a halt and Orange County will be poised to move from a seller’s market to an equilibrium market, one that does not favor a buyer or seller.