Market Time Report: It’s a SPOOK-Tacular Time to Be a Buyer

October 18, 2007

Good Afternoon!
With Halloween fast approaching, the absolute prime buying season is at our doorstep, the Holiday market, from Halloween through the first few weeks of the New Year. Throw into that mix a drop in rates, choices not seen for buyers in years and a ton of pressure on pricing. The end result is it’s a good time to be a buyer. It looks as if the economic indicators are pointing towards another rate cut at the end of this month when Bernanke, the Federal Reserve chairman, and the rest of the Federal Reserve meet again. The remaining fixes needed to stabilize the financial market are extremely slow to evolve. Congress and the United States Treasury are providing more debate than actual firm solutions. So, it looks as if the credit crunch will take the better part of the rest of this year to right itself. In the meantime, at the prompting of the Treasury, Citigroup, Bank of America and JPMorgan Chase and Co. are working together to develop a $100 billion fund to buy up bad debt and restore confidence in the credit market so that investors will enter the game once again. Investors have been on the sidelines since August waiting to be sure that when they reenter the commercial paper market their investments will be safe and sound with almost guaranteed short term profits. They have long memories and it was just in August that everybody realized that commercial paper was laced with bad subprime debt. With strict qualifications now in place and virtually no subprime loans to speak of, the commercial paper market will slowly become more enticing. As the government continues to debate the merits of increasing the conventional loan limit (where rates are cheaper and are backed by government formed agencies) beyond its current $417,000 limit, it appears that by the time they react, the market will have righted itself. Bernanke warned everybody to act now and not wait until March of 2008. It appears as if nobody was listening. Stay tuned!!

It appears as if the bottom of the financial crunch hit a couple of weeks ago. Demand, the number of escrows placed into escrow within the prior month, increased from 1,113 homes two weeks ago to 1,175 homes today, that’s an increase of 62 homes, or a 5.6% increase. The current active inventory did not change at all over the past two weeks and remains at 17,759 homes. With an increase in demand and the inventory not changing, market time decreased from 15.96 months two weeks ago to 15.11 months today. Last year at this time there were an additional 836 escrows within the prior month, the active inventory was at 15,263, or 2,496 fewer homes, and market time was at 7.59 months. Two years ago, there were 9,493 fewer homes on the market, 1,606 more escrows within the prior month, and the market time was at 2.97 months.

Currently, short sales and foreclosures in Orange County account for 13% of the active inventory, up from 12% two weeks ago, and 15% of all escrows opened within the prior month, unchanged in two weeks. Of all the short sales and foreclosures currently on the market, 59% are below $500,000, up from 57% two weeks ago, and 93% are below $750,000, up from 92% two weeks ago.

The increased demand must have come from the detached home market, because the condominium market was virtually unchanged over the past two weeks, dropping from 15.08 months to 15.04 months. On the other hand, detached homes dropped from 16.56 months two weeks ago to 15.15 months today, a significant change that can most likely be attributed to buyers slowly reentering the jumbo loan market (loans above $417,000). 28.7% of the overall active inventory is vacant; 32.7% of the condominium market and 26.2% of the detached market.

What can we expect for the remainder of the year and the beginning of 2008? We are realizing a bit of an increase in demand as more and more jumbo loan buyers reemerge in the market. As rates for jumbo loans start dropping, we can expect this trend to continue. Demand really cannot drop much from its current levels; it is what can be referred to as inherent demand, those buyers who simply will buy regardless of the market because they want to own a home and just don’t want to rent: newlyweds, relocation buyers, empty nesters, etc. Rates are starting to fall as Wall Street has been nervously and negatively reacting to recent economic and earning reports. It appears as if Bernanke and the Federal Reserve are poised to drop rates again. As rates drop, it will become more enticing for buyers to make the plunge. The Autumn market is nearly behind us, but it did not really amount to much since all of the typical cycles were not able to play out, with the financial crunch dominating the market instead. Typically, we would have seen a bit more demand, a ton of sellers pulling their homes off of the market and the active inventory dropping. Instead, we experienced minimal demand, but since few homes were coming off of the market due to being placed into escrow and instead just sat on the market, the inventory did not really drop. For the remainder of the year, the Holiday market, Halloween through the first few weeks of the New Year, we can expect demand to rise a little, a number of sellers to pull their homes off of the market for the holidays and a decrease in the active inventory. With a delay in the reduction of the active inventory, it appears as if we are going to start the New Year off at a very high level, around the 14,000 home level. That’s a lot of homes to start the 2008 market. We started 2007 with a little over 11,000 homes and built up to nearly the 18,000 home mark. Starting the year at 14,000 increases the likelihood of eclipsing the 20,000 inventory mark as many homeowners will opt to place their homes on the market in what is cyclically the best time to sell, the Spring market.

How should a seller approach the market? It is worth repeating every time I have the opportunity, as a homeowner in beautiful Orange County, if you do NOT have to sell, DON’T. If you would like to sell, DON’T. Sell IF AND ONLY IF you absolutely HAVE to sell. There is simply way too much competition on the market and a lot of people that really MUST sell because they are in a financial pinch. Homeowners that can’t afford their monthly obligations, bank owned homes, “divorce forced sales,” etc., are the true motivated sellers. If you want to compete you must take into consideration that you will be competing with extremely motivated sellers who eventually must sell. They will do what it takes to sell, which is often times an aggressive price to procure a rapid sale. So, if you don’t HAVE to be a part of the market, simply LIVE in your home and enjoy one of the privileges of the American Dream: home ownership. Yes, it can feel uneasy sitting on the sidelines as prices are coming down off of their historic highs; but, be assured that the market will eventually bounce back, it always does. Long term, home ownership in Southern California has ALWAYS been an excellent investment. For perspective, there are 17,759 homes on the market and 1,175 new escrows within the prior month. Given current demand, 16,584 homeowners will NOT be successful over the course of the next month. So, if you are a seller that MUST sell, pack your patience, make your home shine by addressing ALL cosmetic fixes and have your home in showing condition every day that it is on the market. Keep in mind that in a buyers market, price is determined by condition and location. If a home has a poor location or condition, be prepared to discount heavily to entice buyers to purchase. Do NOT fall into the trap of chasing the market down in price by not pricing a home properly NOW. This occurs when 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.

How should a buyer approach the market? To many, it sounds like I am speaking out of both side of my mouth when I inform the general public that we are going into one of THE best times to buy in years. Shoot, I am in the real estate industry, why wouldn’t I say buy now, it is in my own best interest, right? Not so fast. Rates are dropping because the Federal Reserve Board wants to prop up the real estate market so that it does not have a negative impact on the overall general economy. The housing market is on the brink of doing just that. Once the general economy is on solid footing, they will increase rates again, cutting into a buyers buying power. Prices have dropped and they will very likely drop a bit more. But forecasting the exact bottom of the market is about as hard as pitching a no-hitter in baseball. If the professionals can’t do it, the general public certainly will have a difficult time isolating the precise point as well. My own best guess is towards the end of the first quarter of 2008. However, there will be more buyers in the marketplace then. Currently there is very little competition. As a buyer, if you plan on actually living in your home beyond the unrealistic expectations of flipping in a couple of years, then buy now. Be assured that owning a home in sunny Southern California and Orange County is not only an excellent tax write off, it is an exceptional, historical long term investment that will eventually erase the current downturn in the market. I would prefer purchasing in a climate where I can take my time, have a lot of choices, find a great interest rate and isolate the perfect home for my family. That is a sharp contrast to just a couple of years ago where many buyers were forced to purchase their third, fourth or fifth choice in a lopsided seller’s market. The shoe is on the other foot now. So, isolate the right home, find a motivated seller who really must sell in the current market, which means they will be motivated with a realistic price in today’s market. Then, write an offer with the knowledge that successful sellers in today’s market are still obtaining 97% sales price to list price. That virtually eliminates the low ball buyer. If you are a buyer, don’t waste everybody’s time and throw out the 80% or 90% offers.

The following areas have inventories of less than thirteen months: Aliso Viejo, Brea, Buena Park, Costa Mesa, Fountain Valley, Huntington Beach, Laguna Niguel, Laguna Woods, Mission Viejo, Portola Hills, Rancho Santa Margarita, San Clemente, Seal Beach, Talega and the range of homes priced below $500,000.

The following areas have inventories at eighteen months or greater: Anaheim, Coto de Caza, Cypress, Dove Canyon, Ladera Ranch, Laguna Beach, La Habra, Lake Forest, Newport Beach, Newport Coast, Santa Ana, Villa Park, and all ranges above $2 million.



Written by Steve 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/.