Orange County Housing Report: On Your Mark, Get Set, Go!!!
January 28, 2018
With the holidays behind us, the 2018 Orange County housing
market is beginning to rev its engine.
Heating Up Fast: With a low housing supply and fierce demand, the housing market is accelerating fast.
In the blink of an eye, Starbucks holiday cups are gone, all of the ornaments are tucked away, and most of those good intentioned New Year’s resolutions have fallen victim to the hustle and bustle of everyday life. Emerging from the fog of all of the holiday distractions are buyers eager and ready to purchase their next home.
In just two weeks, demand has increased 22% while supply has only increased 2%. To understand why the market is changing so rapidly, let’s dust off that old Econ 101 book that details supply and demand. When there is a lot of supply and very little demand, prices fall, which favors buyers. When there is very little supply and tremendous demand, prices rise, which favors sellers. Since 2012, the supply of homes on the market has been severely constrained and demand, propped up by historically low interest rates, has been through the roof.
In just two weeks, the expected market time for all price ranges combined dropped from 77 days to 64, knocking on the door of an extremely hot seller’s market. For homes priced below $1 million, the market is already hot and will only grow hotter. The higher price ranges will also heat up, but will not sizzle like the lower ranges. Above $1.5 million, the market will improve, but will be a lot more sluggish.
When the supply of homes is low and demand to buy a piece of the “American Dream” is high, the expected market time falls. That is precisely what is occurring right now. During the Holiday Market, the supply of homes was low and so was demand. Buyers were distracted by the holidays and diverted their attention away from housing. Now that the holidays are in the rearview mirror, the supply of homes has remained at chronically low levels, while demand is rapidly rising. As a result, the expected market time, the amount of time it would take from placing a home on the market to opening escrow, is falling like a rock.
The housing market is forging its way to the absolute best time to sell, from about mid-February though mid-May. That is when the expected market time drops to its lowest levels of the year. Homes will fly off the market at the fastest annual rate. From mid-May through June, a deluge of sellers enter the fray, exceeding the number of pending sales, and the expected market time actually rises. Going back to “supply and demand,” demand remains steady and strong while the supply of homes on the market increases. As a result, the expected market time rises. It is still a great time to sell, just not as hot as earlier in the year. From July through the remainder of 2018, the expected market time will remain elevated.
It is extremely important to note that placing a home on the market during the hottest time of the year does not guarantee success. It is still all about price. When sellers price their homes too aggressively, they sit on the market and do not entertain offers to purchase. A stunning 25% of all homes that have been placed into escrow so far this year had to reduce their asking price at least once. When the market is hot, carefully pricing a home close to its Fair Market Value is the absolute best way to approach the market. This can be accomplished by diligently analyzing recent comparable pending and closed sales and not giving too much weight to active listings. A realistic price will attract multiple offers to purchase and, often times, will allow a seller to fetch a sales price at or higher than the active listing price.
The market is not titling in favor of buyers and will not anytime soon. Buyers should approach the market with a ton of patience and the mindset that they will eventually persevere. It may take writing offers on 10 different homes, but in the end will be worth it. Interest rates are still at historically low rates, but this gift will not last forever. Waiting is not the answer.
Active Inventory: The active inventory increased by only 67 homes in the past couple of weeks.
The active listing inventory added an additional 67 homes in the past two-weeks, a 2% increase, and now sits at 3,774. The biggest issue for Orange County housing this year has been a real lack of inventory. Thus far in 2018, there have been 6% fewer homes placed on the market. This issue has prevented additional closed sales and has been undermining the true potential for housing. If there were more homes for sale, there would be more pending and closed sales.
We can expect the inventory to continue to rise from now through mid-summer until it reaches a peak somewhere between mid-July and mid-August. The velocity of homes coming on the market will pick up steam in mid-March as the active inventory climbs at is highest rate of the year.
Last year at this time, there were 4,320 homes on the market, 14% more than today.
Demand: Demand increased by 22% in the past couple of weeks.
Buyers are extremely eager to purchase, yet are faced with a very anemic inventory. Buyers are gobbling up inventory nearly as fast as homes are placed onto the market. As a result, in the past two weeks, demand, the number of new escrows over the prior month, increased by 317 pending sales, or 22%, and now totals 1,764. That’s the largest gain since the start of February of last year. The housing market is only revving the engine at this point. Expect demand to continue to accelerate from here until it peaks sometime in May.
Last year at this time, demand was at 1,930 pending sales, 166 more than today, or 9%. This is primarily due to fewer homes coming on the market. There simply are not enough choices.
The expected market time, the amount of time it would take for a home that comes onto the market today to be placed into escrow, decreased from 77 to 64 days in the past two weeks, a seller’s market with mild appreciation.
Luxury End: Luxury demand has thawed and dramatically improved in just two weeks.
In the past two weeks, demand for homes above $1.25 million increased from 170 to 241 pending sales, up a staggering 42%. The luxury home inventory increased from 1,376 homes to 1,429, a 4% rise in the past two-weeks. Expect both demand and the inventory to rise from now through the Spring Market. The current expected market time for all homes priced above $1.25 million plunged from 243 days to 178.
For homes priced between $1.25 million and $1.5 million, the expected market time dropped from 157 to 112 days. For homes priced between $1.5 million and $2 million, the expected market time decreased from 188 to 145 days. For homes priced between $2 million and $4 million, the expected market time decreased from 285 days to 221 days. In addition, for homes priced above $4 million, the expected market time dipped from 695 to 355 days. At 355 days, a seller would be looking at placing their home into escrow around January 2019.
Orange County Housing Market Summary:
- The active listing inventory increased by 67 homes in the past two weeks and now totals 3,774. Expect the inventory to increase from now through mid-Summer. Last year, there were 4,320 homes on the market, 546 more than today.
- There are 25% fewer homes on the market below $500,000 today compared to last year at this time and demand is down by 28%. Fewer and fewer homes and condominiums are now priced below $500,000. This price range is slowly disappearing.
- Demand, the number of pending sales over the prior month, skyrocketed in the past two weeks by adding an additional 317 pending sells, up 22%. The average pending price is $902,385.
- The average list price for all of Orange County remained at $1.8 million over the past two weeks. This number is high due to the mix of homes in the luxury ranges that sit on the market and do not move as quickly as the lower end.
- For homes priced below $750,000, the market is HOT with an expected market time of just 40 days. This range represents 37% of the active inventory and 59% of demand.
- For homes priced between $750,000 and $1 million, the expected market time is 55 days, a hot seller’s market (fewer than 60 days). This range represents 17% of the active inventory and 20% of demand.
- For homes priced between $1 million to $1.25 million, the expected market time is 68 days, a slight seller’s market (between 60 and 90 days).
- For luxury homes priced between $1.25 million and $1.5 million, the expected market time dropped from 157 days to 112. For homes priced between $1.5 million and $2 million, the expected market time decreased from 188 to 145 days. For luxury homes priced between $2 million and $4 million, the expected market time decreased from 285 days to 221 days. For luxury homes priced above $4 million, the expected market time fell from 695 to 355 days.
- The luxury end, all homes above $1.25 million, accounts for 37% of the inventory and only 13% of demand.
- The expected market time for all homes in Orange County dropped from 77 days to 64 in the past two weeks, a slight seller’s market (60 to 90 days). From here, we can expect the market time to drop dramatically through mid-February.
- Distressed homes, both short sales and foreclosures combined, make up only 1.2% of all listings and 2.2% of demand. There are only 15 foreclosures and 32 short sales available to purchase today in all of Orange County, that’s 47 total distressed homes on the active market, dropping by 3 in the past two weeks and reaching its lowest level since the very beginning of the Great Recession. Last year there were 91 total distressed sales, 74% more than today.
- There were 2,269 closed residential resales in December, down by 9% from December 2016’s 2,484 closed sales. December marked a 6.5% drop from November 2017. The sales to list price ratio was 97.3% for all of Orange County. Foreclosures accounted for just 0.8% of all closed sales and short sales accounted for 0.9%. That means that 98.3% of all sales were good ol’ fashioned sellers with equity.
Have a great week.
Quantitative Economics and Decision Sciences