Market Time Report: A 29% Increase in Demand Since January 1st

January 24, 2008

As is customary for this time of year, the Orange County real estate market is beginning to rev its engine before we begin the Spring market. The buzz in the coffee room, what I refer to as the trenches, is one of the absolute best barometers for gauging upcoming activity not yet reflected in the numbers. Two weeks ago I detailed how agents are busy chauffeuring buyers around Orange County and open house activity had picked up. That has translated into offers being written and an increase in demand. It looks as though this increase in demand will continue to pick up continuously through March, the cyclical height for the past three years running. The current active inventory is now at 15,245 homes, an increase of 301 homes in the past two weeks, or 2%. The inventory will continue to grow, as more and more sellers come onto the market in anticipation of better demand in the Spring. At least the inventory is not growing at a ridiculous pace given the slower pace of demand, which leaves me to conclude that everybody is growing accustomed to this market. Sellers are no longer expecting a fantastic Spring and are only entering the market if they really have to. Gone are the speculative sellers placing their homes on the market to “test the waters.” I sincerely hope that this trend continues. Demand, new escrows within the past month, increased by 222 homes in the past two weeks to 1,219 escrows, a 22% increase. With the inventory climbing at a slow pace and a sharper increase in demand, the market time dropped in the past two weeks from 14.99 months to 12.51 months. There are many cities with a market time of less than 10 months. But, we must remember that anything above six months is considered a buyers market. For perspective, last year at this time there were 11,895 homes on the market, demand was at 1,930 escrows and the market time was at 6.16 months. Two years ago, there were 8,068 homes on the market, demand was at 2,061 escrows and the market time was at 3.91 months.

How about some EXTREMELY GOOD NEWS for the real estate market? Interest rates have dropped substantially in recent weeks and are reaching historic lows. President Bush and Congress’ economic stimulus package that they are pushing through at warp speed will not only put checks into taxpayers pockets around May of this year, it will also include an increase to the conforming loan limit, temporary, and the FHA limit, permanent. The ramifications of this change will be felt in the Orange County real estate market like an earthquake. There is a liquidity problem in the financial markets, where the six lenders that are offering jumbo loans, loans above the $417,000 conforming loan limit, have to keep every loan made within this category because Wall Street and the rest of the worldwide financial markets have not warmed to purchasing pools of loans yet. That will eventually happen, but for now, an increase in the conforming and FHA loan limits equates to much lower interest rates, historically low, enabling buyers to afford more. Demand WILL increase. The increase in the FHA loan limit is important because it allows borrowers to borrow up to 97% of the value of a home even with more risky credit. This increase will replace the loss of subprime loans. The FHA is much better at financing riskier consumers and they have been doing that with great care for years. It is obvious that subprime needs to be regulated and FHA is the way to go to regulate it. This will allow many consumers to refinance their subprime and riskier loans and will save many homeowners from losing their homes. Not all foreclosures are due to the home being worth less than the market value; many homeowners simply cannot afford their payments that have reset or will eventually reset. Expect demand to increase right here in Orange County as a direct result of the stimulus package and a huge refinance boom.

Even with the passing of the economic stimulus bill, we will not be out of the woods because we still have to digest the large number of foreclosures and short sales currently on the market, with more to come. 25.7% of the current active inventory is either a foreclosure or a short sale, where a seller tries to sell for less than the total loans against the home, subject to the lenders approval. Most of the troubled home activity, 69%, is below the $500,000 mark. 94% is below $750,000. 44.5% of all properties below $500,000 are either a short sale or a foreclosure. If you look at just detached homes, that number climbs to 58.4%. It is important to note that with so many homes in the lower ranges weighing down the inventory, we can expect the median price for the county to continue to drop in the coming months.

The recent run-up in demand had a pronounced effect on the detached home market compared to the condominium market. The detached home market’s supply dropped from 15.14 months to 11.96 months. In comparison, the condominium market dropped from 14.27 months to 13.47 months.

What can we expect in 2008? The market is going to continue to ramp up as we enter the Spring Market, from Super Bowl through May. The active inventory will grow, but at a much slower pace. We can expect market time to drop through March. As soon as the economic stimulus package is passed and the gate to increased conventional and FHA loan limits is opened, we can expect demand to receive almost an instant boost. We may be able to point to the bottom of this cycle to that point in time; only time will tell. The Summer market, June through most of August, could be interesting, with decent demand due to the stimulus package. Cyclically, most Summer markets include a drop in demand from the Spring highs, a continued increase in the active inventory and an increase in market time. This year, the big difference could be more demand. In the Autumn market, the end of August through Halloween, the current active inventory typically reaches a peak and then starts to drop as many sellers throw in the towel, anticipating the slower market to come. The active inventory will most likely peak at around 20,000 homes, depending upon how far the economic stimulus package stimulates the market. It may only reach 18,000 homes. Demand will drop slightly and Market Time will not change much. The Holiday market, from Halloween through the first couple of weeks of the New Year, will show the largest reductions of the year in inventory due to sellers pulling their homes off the market. Demand will drop to its lowest levels of the year.

Buyers, what to do? If you are a buyer, the economic stimulus package is designed to stimulate you. You are the beneficiary of legislation that increases your borrowing capacity, coupled with rates that drop your monthly obligation. For a buyer it’s the perfect storm: historically low rates, increased loan limits for both conventional and FHA loans, a ton of choices and plenty of sellers and banks eager to receive an offer. With the passing of the stimulus package, I am confident that we will reach the bottom of this cycle shortly. HOWEVER, nobody will be ringing a bell to signal the bottom. Instead, know that you are entering the housing market at a very opportunistic time. After pre-qualifying for a loan, isolate the ideal home that best matches your “wish list” and write an offer. Carefully arrive at the offer price by evaluating the most recent sales and escrow activity. Avoid writing low ball offers considering that the average sales to list price ratio for the entire county is 94%. That does not mean that as a buyer you should bring in an offer at 6% below the asking price; instead, do some diligent research with your real estate agent and take a look at the sales to list price ratio in that area and consider that the seller’s asking price may be aggressive and could ultimately lure other buyers to write an offer. There are still homes that sell for full price in today’s market. As a buyer, do not kid yourself into thinking that these historical rates will last forever. Instead, we have all become accustomed to low rates. Bernanke and the Federal Reserve, who just dropped the short term rate by ¾ of a percent, will definitely raise rates to avert inflation just as soon as the economy is out of the woods. So, in the future, we can EXPECT higher rates. As a buyer, you MUST consider how the future interest rates in comparison to current historically low rates will affect your future payments and borrowing capacity. For example, a home at $625,000, 20% down with a 5.5% interest rate will have a monthly payment of $2,839. If prices were to drop another 10% for the year, but rates were to increase to 6.5%, the $625,000 home would become $562,500 but the monthly payment would still be $2,844, slightly higher. If rates were to increase to 8%, the same rate as in 2000, the payment would then increase to $3,302, an increase of $463 per month. If rates were to increase to 10%, the same rate as 1990, the increase in payment would be $1,110 per month! So, looking at price as the only barometer to purchase is foolish and only a piece of the puzzle. This IS the year to buy. Be assured that Southern California real estate has always been a historically wonderful long term investment.

Sellers, what to do? For sellers, do not become overzealous given the latest developments. Given last month’s demand, there are still 14,026 sellers who will not be successful in selling their homes over the course of the next month. There is tremendous competition, which includes sellers who are upside down on their loans and bank foreclosures who don’t have a choice and MUST sell. If you are a homeowner contemplating selling your home in the current market, you too should sell if and only if you really have to sell. In this market it is all about location, condition and price. As a seller, you really only have control over price and condition; so, make sure that you have an excellent asking price based upon a realistic and careful analysis of the market and a home that is in excellent condition and shows well. Your real estate agent can provide guidance on enhancing the showing experience and the cosmetic repairs that may need to be addressed in preparing your home for the market. As a seller, remember to pack your patience and be just as ready for a showing on day 120 just as you were in the first week of placing your home onto the market.



Steven ThomasRE/MAX Real Estate Services President



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/