Market Time Report: Revitalizing the Financial and Housing Market

September 20, 2007

As the national economy began to feel the affects of both the financial and housing market crunch, the Fed surprised everybody with a half point cut and congress, in conjunction with the Treasury and the White House, is embarking on other solutions. The end result is that rather than sit on the sideline and watch the housing market unravel, to avoid the potential of a recession, all hands are on deck doing everything in their means to stimulate lending and housing. Of course, this does not mean that demand will change overnight. Instead, as the economy absorbs the rate cuts and future congressional legislation, demand will begin to rise. A couple of months ago, rate cuts were not forecasted to change until the beginning of 2008, if at all. Now, we not only received a rare half point cut, there will most likely be additional cuts through the end of the year. Congress is exploring an increase in FHA limits, a temporary increase in conforming limits from $417,000 to the mid-$600k level, not to mention legislation to help insure the financial market does not repeat the subprime mess and liquidity crunch. The bottom line is that everybody is involved and no longer watching from the sidelines. This should definitely have an impact on the housing market. Yes, there will still be foreclosures and defaults, but the peak may be coming in the beginning of 2008 as more and more buyers enter the marketplace with favorable interest rates and broader available financing. Stay tuned!!

It is still too soon to start seeing the effects of the rate cut. Remember, this is just the beginning of the housing and financial market stimulus. Demand, the number of new escrows within the prior 30 days, dropped from 1,206 homes two weeks ago to 1,180, a 26 home drop. The current active inventory increased by 138 homes in two weeks to 17,898 homes, the highest mark of the year, 1,892 additional homes compared to last year’s peak, reached in August of 2006. Orange County’s market time increased from 14.73 months two weeks ago to 15.17 months. Last year at this time, there was an additional 1,028 escrows within the prior month (almost double), the active inventory was at 15,672, or 2,226 fewer homes, and market time was at 7.1 months. Two years ago, there were 10,150 fewer homes on the market, 1,878 more escrows within the prior month, and the market time was at 2.53 months.

Currently, short sales and foreclosures in Orange County account for 8% of the active inventory and 10% of all escrows opened within the prior 30 days. Two weeks ago they accounted for 7% of the active inventory and 8% of the escrow activity. Of all the short sales and foreclosures currently on the market, 57% are below $500,000 and 92% are below $750,000, virtually unchanged from two weeks ago.

The financial crunch over the past several weeks has translated to a much slower detached home market, since a majority of that market requires a jumbo loan to purchase. For condominiums, market time has increased from 14.39 months two weeks ago to 14.79 months today. The market time for detached homes has increased from 14.94 months to 15.4 months today. Four weeks ago, the market time for detached homes was at 11.79 months. 32.8% of the current active condominium inventory is vacant, versus 25.4% of the current active detached home inventory. Overall 27.5% of the active inventory is vacant. Because of the long market times, many homeowners will opt to lease out their homes for the time being, in anticipation of a stronger future market.

What can we expect for the remainder of the year? Currently we are experiencing inherent demand. Regardless of the market, there always is somebody willing to purchase. But, with Bernanke and the Federal Reserve cutting rates, congress and the white house poised to pass quick-fix legislation, demand should begin to build in the coming months. For the rest of the Autumn market, now through Halloween, we can expect the inventory to begin to drop as more and more sellers pull their homes off the market. With a dropping inventory and increased demand, the market time should stabilize and then begin to drop. The Holiday market, Halloween through the first couple weeks of the New Year should be marked by more homeowners pulling their homes off the market. But, with the Federal Reserve, congress and the White House tinkering with the financial market, demand for housing could steadily rise. This could ultimately translate into a decent start to 2008, reminiscent of the decent start that the housing market achieved at the beginning of this year. Earlier this year, the Orange County real estate market was heating up until the subprime mess derailed demand in March and then the liquidity crisis in the financial sector further derailed demand to its current anemic levels.

How should a seller approach the market? If you don’t have to sell, don’t. If you would like to sell, don’t. Homeowners should only look to sell their homes IF AND ONLY IF they absolutely MUST sell. There are 17,898 homes on the market and 1,180 new escrows within the prior month. Given current demand, 16,718 homeowners will NOT be successful over the course of the next month. That translates to a 6.6% chance of success. Sellers should sit on the sidelines and wait for the overall market to improve and demand to increase from its current weak levels. There is so much competition that sellers must be the best priced, best condition, best location to be successful. Poor condition or a poor location necessitates a further reduction in the asking price. Sellers willing to address cosmetic fixes and have their homes in tip top shape from top to bottom, inside and out, will fare better in this market. Box up clutter and stage the home similar to a builder model, with all lights on and music playing in the background. This needs to be done every single time the home is shown without exception. Every buyer that walks through could be the one that brings in an offer. With so much pressure on pricing, it is best to price a home aggressively immediately, rather than play the wait and see what happens game. This will ultimately result in chasing the market down in price, where a seller starts high, then reduces the asking price, only to find that the fair market value has dropped from the original fair market value. Also, buyers don’t care about a seller’s desire to net a certain dollar amount from their home.

How should a buyer approach the market? The perfect storm is brewing: rates are falling, prices are coming down, there is little to no competition and we are fast approaching the Holiday or Winter market. This IS the buying season. Many will tell you to wait. Others will accuse me of bias because I am in the real estate industry. Nobody knew that 1995 was the bottom of the last downturn either until years later. In hindsight, every living adult should have bought that year, but most everybody was fearful that the market would continue to decline. Sound familiar? Prices have already come off of their highs and for the rest of the year and the start of 2008 promises to be a very similar situation. Throw into the equation that rates will extremely favorable and it is an excellent scenario. It is important to note that Bernanke and the Federal Reserve will only drop rates for as long as they have to. As soon as the market shows any signs of life, they are going to hedge inflation and increase rates immediately. Even if prices drop slightly, you can still expect payments to increase as rates increase. Having the luxury to isolate an ideal home in a soft market with low rates is not a luxury to pass up. It is extremely important to keep in mind that Southern California, and more specifically, Orange County, is historically a super long term investment and an excellent place to live with a real lack of buildable land. Last, in arriving at a fair offering price, the average current closed sales to list price ratio for Orange County is 97% and NOT 80% or even 90%. Lowball offers rarely result in a sale. Seeking motivated seller and offering a fair price will.



Steven Thomas

President RE/MAX Real Estate Services

If you are considering buying or selling a home in South Orange County, call on the experts! Dianna and Brian McGarvin 949-370-2652 or visit our website at http://www.pierbowl.com/.