Orange County Housing Report: Too Much Noise
Everybody seems to have an opinion about the direction of the housing market.
Ignore the Noise: From talk of a housing bubble to speculation that the market will slow because of higher rates, the best advice is to ignore all of the noise and turn to the facts.
Wow! There is a lot of talk and speculation about the housing market these days. Some people are convinced that housing is a bubble and it will implode, dropping more than it did during the Great Recession. Yikes, interest rates have reached 4.5%, it must mean the end of the housing run is near. On a live video, one real estate professional warned that the market will turn this autumn stating that a downturn occurs every 10-years. Some speculated that the new tax law would affect the luxury market negatively.
From recent volatility in the stock market to the looming trade wars, there is a lot of uncertainty out there and it has been spilling over to housing. Is a housing downturn around the corner? Will the market finally favor buyers? The answer is simple, not anytime soon. Ignore all of the noise.
There is no major, upcoming downturn larger than the Great Recession. Interest rates would have to rise beyond 5.5% to negatively impact housing. No, real estate recessions do not occur every 10 years like clockwork. The new tax law is not impacting the luxury market. Stock market volatility and the trade war are not influencing housing. It is all just noise.
Some of the buzz may originate from wishful thinking. For others, it may be fear generated from the uncertainty that swirls around the modern economy. Yet, all of the clamor is not based on the facts. Quite simply, nobody can ignore the data. It is a seller’s market with ZERO indicators, or trends, that the market is going to turn in the buyer’s favor anytime soon.
FACT – It is a HOT seller’s market with an expected market time of 55 days. Any time the expected market time, the amount of time it would take for a home on the market today to be placed into escrow, falls below 90-days, it is a seller’s market. When it falls below 60 days, it is considered a HOT seller’s market, one that is pumping on all cylinders and leaning heavily in favor of sellers. Crowded open houses, multiple offers, buyers seemingly tripping over each other to purchase, that has become a springtime norm for Orange County housing and it is no different today.
FACT – In the past 15 years, today’s active inventory is at the second lowest level behind 2013. For the market to start tipping in the buyer’s direction, the inventory needs to rise above the long-term average of 8,000 homes for a sustained period of time. Not just exceeding 8,000 homes for a month or two; instead, it must remain elevated for years. During the Great Recession, the inventory exceeded 8,000 homes for six years. The active listing inventory is currently at 4,420 homes and does not look like it will come close to even touching 8,000.
FACT – More luxury homes have sold so far this year than ever before. Through the first two months of the year, there have been 444 closed sales above $1.25 million, a new record. Last year, the prior record, there were 430 closed sales, 3% fewer. So far, the new tax law has had zero impact on the trend in a record level of closed luxury sales.
FACT – The supply is low and demand is high. One cannot ignore basic supply and demand from Econ 101. When very little supply, a nine-year trend, is matched with very hot demand, a six-year trend, prices rise. Even though interest rates have risen to 4.5%, current rates are still low in historical contexts, making homes more affordable. This is precisely why the rise in interest rates has not adversely affected the market. Instead, it has pushed more buyers to buy before rates continue to rise.
FACT – A lack of homeowners coming on the market, especially below $750,000, is starting to eat into the number of closed sales. When there are fewer homes to purchase, sales go down. The headlines this year are going to report that sales are down and prices are up. That does not mean that the market is slowing. Instead, it means that the lack of entry-level homes coming on the market will make purchasing within this range even more challenging than prior years.
The bottom line is this: facts and data do not lie. Buyer, seller, and all consumer expectations should really be anchored in fact, not the noise of rumors, opinions, or uneducated guesses. The housing market is hot and it will remain a seller’s market for the long run.
Active Inventory: The active inventory increased by 6% in the past two weeks.
Across the board, in every price range, the active inventory increased. In the past two weeks, the inventory added 242 homes, a 6% increase, and now totals 4,420. Even though demand is hot and there are very few homes on the market, they are not instantly being placed into escrow. This is partly due to the fact that it takes a bit of time to market and negotiate a sale, even in a fast pace, seller’s market; HOWEVER, there are still plenty of homeowners aggressively pricing their homes, stretching the value too much. These homes are starting to accumulate on the market without success. Today, buyers are willing to stretch in price a bit, but they are not going to get carried away, as values are already high. Alternatively, sellers should price their homes carefully, adhering to their Fair Market Value. When a home is priced right, it will procure multiple offers, allowing a seller to pit the offers again each other. This often results in a sales price at, or even above, the asking price.
Last year at this time, there were 4,571 homes on the market, 3% more than today. The year over year difference has slowly been diminishing.
Demand: Demand dropped by 1% in the past two weeks.
Demand, the number of new pending sales over the prior month, decreased by 24 pending sales over the past couple of weeks and now totals 2,417, a 1% drop. Year in and year out, demand typically pauses for a brief moment at the beginning of March, a strange annual phenomena. After “springing forward” this weekend, there will be more daylight to work with and the Spring Market will accelerate. Demand will increase dramatically from now through April and will peak sometime between April and May.
Last year at this time, demand was at 2,576 pending sales, 159 more than today, or 7%. The number of pending sales has dropped this year because of a serious lack of inventory of homes priced below $750,000. As a matter of fact, there have been 12% fewer homes that have come on the market below $750,000 so far this year. This lack of affordable housing has seriously undermined potential demand.
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, increased from 51 to 55 days in the past two weeks, still a hot, seller’s market. Last year at this time, the expected market time was at 53 days, very similar to today.
In the past two weeks, demand for homes above $1.25 million decreased from 354 to 343 pending sales, down 3%. The luxury home inventory increased from 1,629 homes to 1,704, up 5%. From here, expect both demand and the inventory to rise throughout the Spring Market. The current expected market time for all homes priced above $1.25 million increased from 138 to 149 days over the past two-weeks. Luxury End: The luxury inventory increased while luxury demand slightly decreased.
For homes priced between $1.25 million and $1.5 million, the expected market time decreased from 79 to 78 days. For homes priced between $1.5 million and $2 million, the expected market time increased from 115 to 149 days. For homes priced between $2 million and $4 million, the expected market time increased from 167 days to 193. In addition, for homes priced above $4 million, the expected market time decreased from 515 to 338 days. At 338 days, a seller would be looking at placing their home into escrow around the February 2019.
Orange County Housing Market Summary:
- The active listing inventory increased by 242 homes in the past two weeks, up 5%, and now totals 4,420. Expect the inventory to increase from now through mid-Summer. Last year, there were 4,571 homes on the market, 151 more than today.
- There are 24% fewer homes on the market below $500,000 today compared to last year at this time and demand is the same as last year. 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, decreased in the past two-weeks by 24 pending sells, down 1%. The average pending price is $900,305.
- 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 33 days. This range represents 35% of the active inventory and 58% of demand.
- For homes priced between $750,000 and $1 million, the expected market time is 43 days, a hot seller’s market (fewer than 60 days). This range represents 17% of the active inventory and 22% of demand.
- For homes priced between $1 million to $1.25 million, the expected market time is 82 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 79 days to 78. For homes priced between $1.5 million and $2 million, the expected market time increased from 115 to 149 days. For luxury homes priced between $2 million and $4 million, the expected market time increased from 167 days to 193 days. For luxury homes priced above $4 million, the expected market time decreased from 515 to 338 days.
- The luxury end, all homes above $1.25 million, accounts for 38% of the inventory and only 14% of demand.
- The expected market time for all homes in Orange County increased from 51 days to 55 in the past two weeks, a hot seller’s market (fewer than 60 days). From here, we can expect the market time to remain below 60-days through May.
- Distressed homes, both short sales and foreclosures combined, make up only 1% of all listings and 1.4% of demand. There are only 14 foreclosures and 30 short sales available to purchase today in all of Orange County, that’s 44 total distressed homes on the active market, rising by four in the past two weeks. Last year there were 77 total distressed sales, 77% more than today.
- There were 1,820 closed residential resales in February, down by 4% from February 2017’s 1,888 closed sales. February marked a 1% increase from January 2018. The sales to list price ratio was 97.6% for all of Orange County. Foreclosures accounted for just 0.9% of all closed sales and short sales accounted for 0.7%. That means that 98.4% of all sales were good ol’ fashioned sellers with equity.
Have a great week.
Quantitative Economics and Decision Sciences