Market Time Report: The Perfect Season to Shop… For a Home

December 13, 2007

As shopping centers overflow with cars, it is obvious that many of us are last minute shoppers; but, as in real estate, you can find the best deals when there is a lot in stock and you shop early. It’s too bad that so many potential buyers are frozen in fear that they will purchase and it won’t be the bottom, leading them to sit idly for some sort of sign. Unfortunately, nobody is going to ring a bell when we hit bottom. Experts who have spent their lives studying the swings in markets differ on precisely when that will be. However, take heed, most experts are calling for the bottom in mid-2008. They may be correct, but current demand has been at a low since the financial crunch hit the worldwide financial markets in August, and it is only going to improve from here. With the Federal Reserve, Central Banks, and international banks working together to improve liquidity to the financial markets, the current sluggish demand due to the crunch is going to dissipate, restoring banks’ willingness to do loans. Throw in historically low interest rates, and buyers would be foolish to pass up the opportunity. So, if you are a buyer with splinters from sitting on the proverbial fence, waiting for a bell… DING, DING, DING. Do not waste the opportunity to purchase when all of the conditions are perfect for buying, just as they were from 1994 through 1996. Take a look at this history of median prices:
1990 $242,358
1991 $239,680
1992 $230,860
1993 $217,210
1994 $214,540
1995 $209,400
1996 $213,370
1997 $229,840
1998 $261,700
1999 $280,900
2000 $316,240

I remember article after article, news report after news report highlighting every blow of the downturn during the 1990’s. It was enough to scare anyone into not purchasing. We experienced foreclosures and short sales on almost every block. Buyers wanted to buy at the bottom. There is not a person in Orange County who would not jump at the opportunity to buy at those prices again; yet, very few really wanted to take the plunge. If I would have purchased every listing that I had in my own personal inventory during those years, I would be in the Bahamas typing this report. Many skeptics would point to the grossly high prices and affordability issues. Well, the same was said back in the 1990’s. Shoot in 1980, the median price was at $114,000; I am sure that many buyers were hoping that prices would come back to those levels. So, let’s learn from history. Historically, Southern California is not only a great place to live, but a wonderful long term investment. It is important to reiterate that interest rates are at historical lows once again. In 1990 they were above 10%. In 2000, they were above 8%. As a buyer, don’t think that these low rates below 6% are here to stay. As a matter of fact, as soon as Bernanke and the Federal Reserve see a restoration of the financial markets and the economy heating up again, they are going to return to their methodic raising of rates to curb inflation and restore strength in the dollar. Most economists agree that the current rates, hovering around 6%, are about as low as they will go. If you bought a condo for the current detached median price, $650,000, with 20% down, at the current jumbo rate of approximately 6.5% (5.75% 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% (7% for conventional loans or about 1 point higher than they are today), the payment would be $3,272, a savings of $8 per month. If rates were to increase to 8.5% (8% for conventional like they were at the beginning of this decade), that payment would rise to $3,599, or an extra $319 per month. If inflation was out of control and rates popped up to 10.5% (10% for conventional like they were at the beginning of 1990), the payment would be $4,281, $1,001 more every single month. So, buyers should do their homework and not just rely on the constant reporting on the pressures in pricing. There’s a lot more to making this decision, not to mention, as a buyer, it is much easier to shop when only a few are shopping. Remember the Cabbage Patch Kids craze of the 1980’s? It will happen to real estate again too.

More homeowners are pulling their homes off the market, which is evident in the current active inventory reading. The active inventory has fallen by 464 homes in the past two weeks and 1,105 homes in the past month, bringing the current inventory to 16,128 homes. Demand, the number of homes placed into escrow within the prior month, decreased by 95 homes to 1,148 new escrows. With the drop in demand, the market time increased to 14.05 months from 13.49 months two weeks ago. Last year at this time there were an additional 691 escrows within the prior month, the active inventory was at 12,661, or 3,467 fewer homes, and market time was at 6.88 months. Two years ago, there were 8,329 fewer homes on the market, 1,027 more escrows within the prior month, and the market time was at 3.59 months.

Currently, short sales and foreclosures in Orange County account for 23% of the active inventory, up from 21% two weeks ago and 19.3% a month ago. We can attribute a lot of the rise to homeowners pulling their homes off of the market; foreclosure and short sales, for the most part, don’t. Short sales and foreclosures now account for 30% of all escrows opened within the prior month, up from 26% two weeks ago. Of all the short sales and foreclosures currently on the market, 65% are below $500,000, up from 63% two weeks ago and 62% four weeks ago. 93% of all short sales and foreclosures currently on the market are below $750,000, unchanged over the past six weeks. 38.3% of the all homes under $500,000 are either a short sale or a foreclosure. For the 1,872 detached homes in Orange County priced below $500,000, 54% are either a short sale or a foreclosure.

The disparity between the detached home market and condominiums continues its normal pattern where the detached market is outperforming condominiums. Market time for detached homes is at 13.57 months versus 14.85 months for condominiums.

What can we expect for the remainder of the year and the beginning of 2008? For the remainder of the year we can expect sluggish demand due to the holiday market and more homes pulled off the market. The active inventory will start the year with a bit more than 15,000 homes. More and more homes will be placed on the market after we bring in the New Year in anticipation of more demand and a decent Spring market. The worldwide financial market will right itself within the first quarter, boosting demand and leaving us with incredible rates. Unfortunately, demand will just not meet the heavy expectations of homeowners and the active inventory will continue to rise until it eclipses the 20,000 home mark. Demand during the Spring will march along at about 15% to 20% less than last year, a healthy increase from its current stagnant levels.

What if you are a seller, how should you respond to the market? The market is a buyers market. To be successful in 2008, it is all about having the right attitude and doing what it takes to get a home sold. But, if you are a homeowner and do NOT really have to sell, don’t. If you choose to play the game, go into the venture with the knowledge that it will take patience and perseverance to be successful. Know the market. Price homes according to the comparable sales and escrows with the knowledge that many short sales are artificially priced too low in order to attract potential buyers, yet the lender will never ultimately agree to those low figures. Remember, “short sales” are not a deal even if a seller has a signed contract in hand until a lender is willing to sign off on their loss. Many are priced so low that a lender simply will not sign off on a full price offer from a willing and able buyer. Sellers need to prepare there home for showings on day 120 just as they did in the first week: all the lights are on, there’s a hint of vanilla in the air, soft music is playing in the background. You never know when THE buyer of your home is going to step through your doorway and it needs to be ready when they do. Now more than ever, sellers must rely on the expertise of a professional, experienced and knowledgeable real estate agent. The real estate agents that are still in the game are the ones that have survived the change in the market and can represent buyers and sellers in any market.

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/.