Market Time Report: Mounting Pressure on Pricing

May 3, 2007

The Orange County real estate market is having a tough time bouncing back from the distractions of last month’s subprime “shakeup.” With lenders tightening their requirements and virtually abandoning the subprime practice, first time homebuyers and the entry level market seem to be the most affected. But, with all of the attention focused on lenders who made poor choices and the rising default and foreclosure rate, many buyers who are fully qualified to buy are now sitting on the sidelines waiting to see where the market goes from here. In the meantime, the Orange County inventory has been growing at a very rapid pace as demand has dropped considerably. The current active inventory has climbed to 15,519 homes. In two weeks, the active inventory has increased by 708 homes. In just one month, it has climbed by 1,509 homes. The market time has climbed from 6.57 one month ago to 8.33 months today. Yet, demand, the number of new escrows within the prior 30 days, has dropped by 270 homes in the past month to 1,863. The pullback in demand can be linked to both a tightening of lender requirements and buyer fence sitting. With demand at such low levels, the active inventory and market time have both climbed significantly.

Last year at this time, demand was at 2,701 homes, 838 additional homes. Today’s demand is 30% less than last year. Two years ago demand was at 4,272 homes, or 56% less than today. Last year the active inventory was at 11,956 homes, 3,563 fewer than today. Two years ago the active inventory was at 5,188 homes, 10,331 fewer than today. The market time was at 4.43 months last year compared to 8.33 months today. Two years ago the market time was at 1.21 months.

Typically during the first six months the condominium market is slightly stronger than the detached home market. However, with the tightening of lender requirements, the entry level market and first time home buyer market has slowed dramatically, affecting the condominium market substantially. The market time for condominiums has grown from a 6.28 month market a month ago to 8.87 months today, a 41% increase. The market time for detached homes has increased from a 6.77 month market a month ago to 8.01 months today, an 18% increase. There are still more vacant condominiums actively on the market, 30.8%, compared to detached homes, 21.5%.

What can we expect in the coming months? Believe it or not, the Spring market is almost over. This month we can anticipate more of the same, buyers sitting on the sidelines digesting and slowly moving past the fading spotlight of the subprime debacle. However, with the growing inventory, dropping sales, increased foreclosures (nothing compared to the Inland Empire and Central Valley), we can anticipate additional media attention which could continue to dampen demand. The active inventory should hit 16,000 homes this month, matching the height of the inventory for 2006 achieved in August. In the Summer market, June through August, the inventory should continue to rise along with the market time. As market time pushes towards ten months, the pressure on pricing will increase. Demand will probably rise to around 2,000 homes placed into escrow in a 30 day period. Bernanke and the Federal Reserve may drop the short term rate by the end of Summer, which could provide a bit of a needed boost to demand during the Autumn and Holiday markets. The Autumn market will be marked by a slight decrease in demand and many sellers throwing in the towel and pulling their homes off of the market. The active inventory will begin its descent. During the Holiday Market, Halloween through the first couple weeks of the New Year, even more sellers will throw in the towel, the active inventory will continue to drop, and demand will soften to its lowest levels of the year.

The following areas have inventories less than seven months: Anaheim Hills, Brea, Corona Del Mar, Cypress, Dove Canyon, Huntington Beach, Irvine, Laguna Beach, Laguna Hills, Mission Viejo and Talega.

The following areas have inventories greater than ten months: Anaheim, Buena Park, Coto de Caza, Dana Point, Foothill Ranch, Lake Forest, Newport Beach, Newport Coast, San Juan, Santa Ana and all ranges above $2.0 million.

Steven ThomasRE/MAX Real Estate Services
President"Outstanding Agents! Outstanding Results!"

Are you thinking of buying or selling in Orange County? For more information visit our website at www.pierbowl.com. Or call us at 949-370-2652.