The Squeeze on Demand

September 6, 2007

Good Afternoon!
Demand for Orange County has taken a hard hit because of the current financial market crisis, dropping to its lowest level in years. Demand, the number of new escrows within the prior 30 days, dropped to 1,206 from 1,475 just two weeks ago and 1,804 four weeks ago, the beginning of the current financial market troubles. This is the second bump in the road for demand this year, the first coming at the beginning of March when subprime lenders began closing their doors. About four weeks ago, Wall Street realized that their investments in the financial markets were compromised by an insufficient portfolio rating system where “pools” of loans contained subpime loans, despite AAA ratings, the best rating possible. Today, Wall Street, and the rest of the world, will not touch any portfolio of loans because they simply do not trust the system; they don’t know what they are buying. Conventional loans, loans less than $410,000, are fine and the interest rates have been dropping. There are government sponsored agencies, Federal National Mortgage Association (FNMA) and Freddie Mac (FHLMC), that are still buying conventional loans. However, jumbo loans, loans above $410,000, a majority of the Orange County marketplace, are at higher rates and most can only be accomplished by direct lenders such as Wells Fargo or Bank of America who have the ability to fund loans and hold them until the financial markets right themselves or the government steps in. And, for the most part, only borrowers with great credit can obtain jumbo loans or any other “unconventional” loans. In today’s market, buyers should go with direct lenders that are able to fund and hold their loans. The rates on unconventional loans have not dropped recently either. This has had a major impact on demand in housing. With the subprime crunch beginning in March, lenders had already tightened lending requirements. This latest chapter in our market has led to even further tightening, pushing many would be buyers out of the housing market. Experts are now calling for a new rating system to strengthen the financial markets, but that may take a few months. Also, it looks like Bernanke and the Federal Reserve will drop rates by at least a quarter percent and they may be looking at as much as a half percent cut. This should help spark demand as the Fed looks to jump start not only the housing market, but the overall economy. The economy is beginning to feel the effects of the housing market. Many loan programs have all but evaporated. So, in the interim, demand in Orange County is taking a hit. After reaching a record height two weeks ago, the active inventory dropped by 121 homes to 17,760. Because of the drop in demand, the current market time jumped to 14.73 months from 12.12 months two weeks ago and 9.76 months four weeks ago.

Currently short sales and foreclosures in Orange County account for 7% of the active inventory, which has grown from 5% four weeks ago. Of all the short sales and foreclosures currently on the market, 54% are below $500,000 and 92% are below $750,000. Short sales and foreclosures continue to impact areas with a higher proportion of subprime loans funded within the last few years. For example, Santa Ana has a market time of 45.88 months, almost four years, and Anaheim has a market time of 21.59 months, almost two years.

The latest hurdle in the market has spilled over into the disparity between the condominium market and the detached home market. For the first time since April, the detached home market is actually slower than the condominium market. For condominiums, market time has increased from 12.66 months two weeks ago to 14.39 months today. The market time for detached homes has increased from 11.79 months to 14.94 months today. 32.2% of the current active condominium inventory is vacant versus 24.8% of the current active detached home inventory. Overall 27.7% of the active inventory is vacant. Because of the long market times, many homeowners will opt to lease out their homes in anticipation of a stronger future market.

Here’s the big question of the day: where do we go from here? It looks as if Bernanke and the Federal Reserve will be cutting rates when they meet on September 18th between a quarter to a half percent. This should give a moderate boost to housing demand depending upon how large of a cut is made. Depending upon future economic indicators, this could be the beginning of rate cuts. Current demand is 45% less than last year and 63% less than two years ago. Demand will continue to plod along at these anemic levels until the Department of Treasury, the Federal Reserve, congress, Wall Street, etc., repair the secondary financial marketplace. This is just the beginning of the Autumn market when demand drops from the Summer market (just not typically as much as it did over the prior month) and the inventory drops as more and more unsuccessful sellers pull their homes off of the market. However, with demand at such low levels, the inventory will most likely not drop as swiftly as it did last year. The Holiday market, Halloween through the first couple of weeks of the New Year, will be marked be low demand, typically the lowest levels of the year (we may be experiencing the lowest levels right now), and a further drop in the active inventory as even more sellers opt to pull their homes off of the market.

By Steven Thomas
President Remax 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/.