Market Time Report: The Holiday Market is Here, Time to Buy

November 1, 2007

Good Afternoon!
Now that the kids are coming off of their sugar rushes and Halloween 2007 is in the past, it is time for us to move into the Holiday Market, cyclically the slowest time of the year… but, not this year. We already experienced the slowest demand of the year due to the financial market crunch, September and October. November is already showing signs of improvement and December promises to be even better. Bernanke and the Federal Reserve lowered the short term rate by another quarter percent, but are beginning to warn that their cuts may be coming to an end. Yet, the financial crisis is not over, so we can expect at least one more cut. Rates have been dropping and so have jumbo loans (loans above $417,000). The discrepancy between conforming loans (loans at $417,000 or less) and jumbo loans is beginning to finally narrow. It really is a great time to be a buyer with tons of choices, low interest rates, plenty of motivated sellers and not a lot of competitions among buyers. It looks as if Congress has not properly heeded Bernanke’s feedback at Congressional hearings back in September where he stated that the conforming loan limit should be temporarily increased to increase liquidity in the financial market and NOT wait until March when the market will right itself. Sometime in 2008, we can expect the government to step in and correct the giant discrepancy between the current conforming loan limit, $417,000 and the median price for a detached home in the state of California, $531,000.

The bottom of the financial crunch, in terms of demand (escrow activity), was about a month ago. Demand, the number of homes placed into escrow within the prior month, increased from 1,113 homes four weeks ago to 1,241 homes today, that’s an increase of 128 homes, or a 12% increase. With the start to the Holiday market, it looks as if many homeowners are opting to pull their homes off of the market. The active inventory dropped by 305 homes in two weeks to 17,454 homes. With an increase in demand and a drop in the inventory, market time decreased from 15.11 months two weeks ago to 14.06 months today. Last year at this time there were an additional 746 escrows within the prior month, the active inventory was at 14,729, or 2,725 fewer homes, and market time was at 7.41 months. Two years ago, there were 9,195 fewer homes on the market, 1,509 more escrows within the prior month, and the market time was at 3.00 months.

I have created a new chart, the Orange County Foreclosure Report, to help isolate the cities and price ranges that are more or less affected by short sales and foreclosures. Currently, short sales and foreclosures in Orange County account for 17.5% of the active inventory and 18% of all escrows opened within the prior month. 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. 35% of the active inventory is comprised of homes below $500,000. That range has been impacted the most by the subprime shakeup; 30.1% are either bank owned or short sales. For homes between $500,000 and $750,000, another 35% of the active inventory, 17.1%, are either bank owned or short sales. They account for only 6.7% of the range of homes between $750,000 and $1 million. The higher the range, the lower the percentage.

The financial crunch had a tremendous impact on the market and an even more profound impact on detached homes. Even though the market is still feeling the effects of the financial crunch, it actually bottomed out about four weeks ago. The market time for detached homes dropped from 16.56 four weeks ago to 13.97 months today. Ever since the subprime meltdown in March, the detached home market has been better than the condominium market. But, that all changed in September as the financial crunch took a real bite out of the demand for detached homes. As rates for jumbo loans have dropped in recent weeks, demand is beginning to rise again. The detached market is once again better than the condominium market, slightly, but better. The market time for condominiums dropped from 15.08 months four weeks ago to 14.18 months today.

What can we expect for the remainder of the year and the beginning of 2008? Demand has continued its slow, but methodical rise over the past month as jumbo loan rates have dropped and confidence in our financial markets slowly returns. We can look for demand to continue to slowly ascend. Thus, the slowest time of the year is actually already in our rear view mirror, September and October. We can also expect the active inventory to drop as more homes are pulled off the market for the holidays. With demand on the rise and an inventory on the decline, the market time will actually continue to improve through the remainder of the year. With rates dropping, it will become more enticing for buyers to finally make the plunge. With the recent downturn in demand because of the financial crunch, there simply were not enough homes coming off of the market due to successfully placing a home into escrow. Thus, there has been 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 15,000 home level. That’s a lot of homes to start off the year. We started 2007 with a little over 11,000 homes and built up to nearly the 18,000 home mark. Starting the year at 15,000 makes the 20,000 inventory mark almost certain. Spring of this year was extremely slow due to the subprime shakeup. The Spring in 2008 will be even slower, about a 10% decrease in demand as some buyers sit on the fence a little longer and wait.

How should a seller approach the market? There are a lot of people who now have to sell because of economic circumstances where they simply can no longer afford their home because of recent adjustable mortgage rate resets. These sellers, short sale sellers and the banks that are foreclosing on homes really MUST sell. For sellers within areas or ranges with a higher percentage of troubled properties who are contemplating selling, they need to ask themselves if they have the stomach and ability to compete. There is a tremendous amount of competition in almost every city and every price range; thus, do NOT place your home on the market unless you absolutely HAVE to. Live in your home and do not panic, the market will return and surpass the recent highs. To be successful in this market, isolate the most recent comparable sale or escrow and price your home $10,000 below that mark. That still does not guarantee an immediate sale, but it is an attractive lure that will help your property stand out. Condition is also very important. First, address all cosmetic fixes from carpet to paint to repairing a leaking roof. Then, have the property in showing condition day in and day out. That is asking a lot given that homes are on the market for months, but you never know when the buyer that is going to buy your home is going to schedule an appointment and you want your home to be in its best showing condition prior to an offer being written. In a buyers market, keep in mind that the floorplan and location are also important factors in securing a sale. Odd floorplans, backing to power lines or a busy street are just a few examples that do well during a sellers market, but their value is heavily impacted during a slower market when there are so many alternatives. For perspective, there are 17,454 homes on the market and 1,241 new escrows within the prior month. Given current demand, 16,213 homeowners will NOT be successful over the course of the next month. The bottom line: if you are a seller, pack your patience, it will most likely take months to sell your home. Price your home to sell today and do not wait to drop the price or for a better market. This will result in chasing the market down in price.

How should a buyer approach the market? If you plan on owning your home for more than just a few years, rest assured that Southern California is not just a popular worldwide destination, it’s an excellent long term investment. It is important to note that you cannot believe everything you hear or read in the media:
"The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline." - Time Magazine 1947
"Houses cost too much for the mass market. Today's average price is out of reach for two-thirds of all buyers." - Science Digest 1948 (average price at the time: $8,000)
"The goal of owning a home seems to be getting beyond the reach of more and more Americans." - Business Week 1969 (average price at the time: $28,000)
"Most economists agree... a home will become little more than a roof and a tax deduction, certainly not the lucrative investment it was..." - Money Magazine 1981
"We're starting to go back to the time when you bought a home not for its potential money-making abilities, but rather as a nesting spot." - Los Angeles Times 1993
"Financial planners agree that houses will continue to be a poor investment." - Kiplinger's Personal Finance Magazine 1993
"A home is where the bad investment is." - San Francisco Examiner 1996
Rates are great. Sellers are motivated. There are a lot of choices. It is great to be a buyer. So, look for the home that best fits your family’s needs and write an offer. Keep in mind that the sales to list price ratio is 95%, erasing the necessity to bring in a lowball offer. If you are a buyer, you may be concerned about falling prices, which is understandable. But, if you are going to live in the home for several years, the market will surpass its record levels again. Also, rates are not going to always be this low. As soon as the market is on the mend, Bernanke and the Federal Reserve are going to increase the rates to ease their fears of inflation and monthly mortgage payments for new loans will rise. If you bought a home for the current detached median price, $655,000, with 20% down, at the current jumbo rate of approximately 6.5%, the mortgage payment would be $3,312. Even if values were to decline by 10%, bringing the $655,000 home to $590,000, if rates were to increase to 7.5%, they payment would be $3,298 per month, a savings of $14. If rates were to increase to 8%, that payment would rise to $3,460, or $148 more. Plus, if you bought today, the first year interest tax write off for taxes would be $34,000. So, buy now and have a place to call home knowing that you made a wise decision.

Written by 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/.