November 15, 2007
Horn of plenty, cornucopia, feast, buffet… if you are a buyer sitting on the fence, the conditions are ideal; it is TIME to gobble up a home. There are many buyers out there who are thinking that the inventory is high, demand is low and there is still a lot of pressure on pricing; so, why buy now? Thus, many buyers are sitting on the proverbial fence waiting for some sort of sign that “today” is the perfect time to buy, the “bottom of the market.” Just as nobody predicted the financial credit crunch that hit the world in August, nobody will be able to isolate THE bottom of the market without quite a bit of luck. Instead let’s take a closer look at the current market condition. Yes, the fence sitting buyers are correct: the inventory is high, demand is low and there is pressure on pricing. But, many are missing the often overlooked OTHER conditions of the current market: historically low interest rates that will not remain at these low levels forever, a cornucopia of choices not seen in over a decade, the wonderful tax advantages of owning a home, and, historically, real estate as a super long term investment.
RATES: You can put good money on the fact that Bernanke and the Federal Reserve will not leave rates at artificially low levels for as long as they did throughout the 2000’s. We will have to wait and see how the history books are written, but Alan Greenspan (the prior Federal Reserve Chairman) and the Federal Reserve, under his guidance, may share quite a bit of the blame for artificially fueling the excesses in the past housing boom. Just as everybody grew accustomed to housing appreciation for years, everybody has also grown accustomed to these historically low interest rates. At the beginning of 2000, rates were at about 8%. At the beginning of 1990, rates were at 10%. Buyer’s are just looking at pricing but are overlooking the fact that an increase in rates affects affordability substantially. If you bought a home for the current detached median price, $650,000, with 20% down, at the current jumbo rate of approximately 6.5% (6% for conventional loans which are loan amounts less than $417,000), the mortgage payment would be $3,280. Even if values were to decline by 10%, bringing the $650,000 home to $585,000, if rates were to increase to 7.5%, the payment would be $3,272 per month, a savings of $8. If rates were to increase to 8%, that payment would rise to $3,434, or $154 more. If inflation was out of control and rates popped up to 10% (they were much higher than that in the late 1970’s and early 1980’s), the payment would be $4,107 per month, $827 more every single month. As you can imagine, the higher the purchase price, the higher the loan amount, the greater the affect on the payment as interest rates rise.
CHOICES: With a large inventory and low demand, buyers have a lot of choices in their search to find their home. Just a few years ago buyers were writing offer after offer on one home after another, only to settle for their third or fourth choice and pay above the asking price, competing with several other buyers every step of the way. Many agents were reluctant to work with a buyer unless they were realistic in their expectations of the market. Sellers ruled the real estate kingdom and called the shots (within reason of course). The current market is polar opposite, this time with sellers competing for the attention of a much smaller buyer pool. Today, agents are reluctant to work with sellers unless they are realistic in their expectations of the current market and are motivated to do what it takes to procure an offer. Now, buyers rule the real estate kingdom and call the shots (within reason). A buyer has the luxury of patiently isolating their home of choice, knowing that all the cards are stacked in their favor. Why wait for the market to change before making a strike? Often times, buyers that wait too long end up competing with other buyers and have to settle for a second or third choice.
TAX BREAK: I would be remiss if I did not remind everybody of the wonderful tax write offs that Uncle Sam has so generously provided to all home owners; the larger the loan, the bigger the tax break. Homeowners are able to write off their interest and tax payments, a gift from our uncle.
LONG TERM INVESTMENT: It’s quite simple, over time, real estate along the golden coast of California has and always will do well. There aren’t that many areas in the United States that match the weather, plenty of sun and low humidity, the close proximity to some of the best beaches in the world, and year round outdoor activities where one can ski one day or work on a tan reclined in a favorite beach chair the very next day. In 1972, 35 years ago, the median price was at $28,400 in Orange County. In 1977, 30 years ago, the median price was at $70,100. In 1982, 25 years ago, the median sales price was at $129,641 in Orange County. In 1997, the median price was at $229,840 in Orange County. People from around the world aspire to live in Orange County. That will not change. Throw in the fact that builders are running out of raw, buildable land, and there is considerable upward pressure on price for the long term. Buy for the long term, it’s not only “home,” it’s an excellent investment.
Currently, as more and more homeowners who really don’t have to sell are pulling their homes off of the market, the active inventory continues its descent, falling by 221 homes to 17,233 homes. Over the past four weeks, the active inventory has dropped 526 homes. Demand, the number of homes placed into escrow within the prior month, has increased by 182 homes to 1,295 new escrows since bottoming out at its lowest level of the year on October 4th. It looks as if the Orange County real estate market is starting to shake off the affects of the financial crunch. With another increase in demand and another drop in the inventory, market time continues its decrease from the 2007 height, 15.96 months, reached on October 4th, to 13.31 months today. Last year at this time there were an additional 692 escrows within the prior month, the active inventory was at 14,165, or 3,068 fewer homes, and market time was at 7.13 months. Two years ago, there were 8,850 fewer homes on the market, 1,352 more escrows within the prior month, and the market time was at 3.17 months.
Currently, short sales and foreclosures in Orange County account for 19% of the active inventory and 21% of all escrows opened within the prior month. Of all the short sales and foreclosures currently on the market, 62% are below $500,000, up from 59% two weeks ago and 57% four weeks ago. 93% of all short sales and foreclosures currently on the market are below $750,000, unchanged over the past two weeks and up slightly from 92% posted four weeks ago. 32.9% of the all homes under $500,000 are either a short sale or a foreclosure. For the 1,662 detached homes in Orange County priced below $500,000, 48.3% are either a short sale or a foreclosure, a staggering statistic.
There is almost no difference between the detached home market, a market time of 13.37 months, and the condominium market, a 13.20 month market. Until the financial crunch is completely in the rear view mirror, these numbers should remain close.
What can we expect for the remainder of the year and the beginning of 2008? We can probably expect demand to continue to rise slightly, after of course taking a brief hiatus for Thanksgiving, as there is nowhere but up from the lows stemming from the financial crunch. September and October promise to be lows for closed sales for 2007. The active inventory will continue its march downward as more and more sellers pull their homes off of the market. Yes, there are homeowners who don’t really have to sell and who no longer have the stomach to do what it will take to successfully sell in this market. We should start the New Year with a current inventory of about 15,000 homes, almost 4,000 more homes than the beginning of this year. Market Time will continue to drop through the end of the year. We will most likely start the New Year with an expected market time of 12.5 months. Towards the end of January, demand will rise and market time should drop to about 10 months. But, as many homeowners with flawed expectations of a good Spring place their homes on the market, the inventory will once again rise. If too many overzealous homeowners opt to enter the market, the inventory will easily reach the 20,000 home mark. Demand in the Spring could be off by about 10% compared to this year.
What if you are a seller, how should you respond to the market? WARNING: do NOT place your home on the market unless you absolutely, unequivocally MUST sell NOW. The only exception to this rule is the high end, homes above the $2 million mark. Contrary to what many think, if all of a sudden every seller on the market priced their home below the last comparable sale or escrow, the fence-sitting buyers would not jump off of their perches in droves and there would be very little affect on demand. So, be careful in navigating the tough waters of the current real estate market. Now more than ever, sellers really need an experienced, tuned-in real estate agent to guide them. “For Sale By Owner” and discount brokerages are a thing of the past. With so many short sales in the marketplace, it is tough to determine price. Many buyers are learning quickly, if a price is too good to be true and “subject to lender approval” (a short sale) it is too good to be true. After waiting a very long time for an answer, sometimes weeks, buyers are realizing that the artificially low prices may be priced to entice a buyer, but they are too low for a lender to accept. The price affixed to a short sale is NOT a value provided by the lender; rather, it is a value determined by the agent and seller. A few short sales are priced appropriately and are already approved by the bank. However, this requires everybody, the seller and their agent, to do all of their homework up front. Just as in school, very few like to do their homework early; but, that is what it takes to successfully represent a short sale. So, as a seller, most short sales that surround their home are artificially priced. An experienced agent can help ascertain the real values from the artificial. The bottom line, be careful in pricing. It is still imperative to price a home at or slightly below the last comparable sale or escrow, but a drastic drop is not necessary. Stay in close contact with all changes in the marketplace. Sellers should address all cosmetic repairs inside and out. With so many choices, the better the condition, the better the odds of success. If a roof is leaking, fix it or replace it. Chances are there are plenty of homes with a roof that does not leak. The home should be in showing condition ALWAYS. If a seller needs a break from selling their home for months on end, then they can place their home on “hold do not show” for a week or two of rest. A seller never knows the precise date when the buyer that is going to fall in love with their home walks in. A seller wants the impression to be the absolute best impression; so, the home must be staged day in and day out.
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/.
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