The official start to the Spring market was marked by the New York Giants stunning victory. Along with their victory came a sharp increase in demand for Orange County housing. The best barometer of future activity for local real estate continues to be our office coffee rooms. It is from there that we have come to expect increased demand. The conversations continue to center around buyers climbing back into cars to isolate their next “home” and much more open house activity. Based upon the coffee rooms, we can expect demand to increase through March. Demand, the number of homes placed into escrow within the prior month, increased 29% over the past two weeks from 1,219 escrows to 1,568 escrows. In the past month, demand has increased by 570 homes or 57%. The current active inventory was almost unchanged in the prior two weeks, increasing by only 14 homes to 15,259 homes. It appears that home owners are reluctant to place their homes on the market for now. With the active inventory virtually unchanged, coupled with a sharp increase in demand, it is no wonder that the expected market time has dropped substantially from 12.51 two weeks ago to 9.73 months today. Just four weeks ago the market time was at 14.97 months. There are now many cities with expected market times well below 10 months and approaching equilibrium versus a buyer’s market; equilibrium exists with a market time between five and six months and there are 10 areas knocking on that door. The only caveat is if a throng of homeowners place their homes on the market in the coming weeks with the expectations of cashing in on the Spring market, resulting in increased market times. Last year at this time there were 11,983 homes on the market, demand was at 2,463 escrows and the market time was at 4.87 months. Two years ago, there were 8,569 homes on the market, demand was at 2,647 escrows and the market time was at 3.24 months.
How about some FANTASTIC NEWS for the real estate market? Congress passed the economic stimulus package this week and it is now on President Bush’s desk for his signature. Of course it is great news for most of the population who will be receiving a tax rebate sometime in the next two to three months, but the news is even better for real estate. The stimulus package increases the conforming loan limit to 125% of the median price for a region. For Orange County, that would put the limit somewhere around $700,000. Raising the limit was specifically designed to help high cost markets like California and New York who were hit the hardest by the financial crunch. Currently jumbo loans, loans above the $417,000 mark, are hovering around a whole percentage point higher than conventional loans. Back in July, a month prior to the beginning of the crunch, jumbo loans were just two tenths of a percent higher. Only major national lenders have been offering jumbo loans and most require the borrower to have a minimum down payment of 20%. The new limit will open up financing to a large pool of buyers and will enable many homeowners to refinance. Another provision of the stimulus package is to raise the FHA loan limit permanently. FHA loans allow borrowers with damaged credit and little down payments to obtain financing. With the current Orange County limit of $362,790, very few homes qualify. Borrowers with damaged credit and low down payments flocked to the subprime arena to obtain their financing. The big difference between FHA and subprime is that FHA requires a ton of documentation. FHA financing will replace the void left by the absence of subprime, but will do a much better job of properly qualifying a borrower’s ability to pay. These fixes will give the financial markets time to heal and restore liquidity to the markets in time. It will also allow thousands of homeowners to refinance their loans to more favorable rates and terms. It will take a few weeks before the change will take effect. As a direct result of the stimulus package, expect demand to increase in Orange County along with a huge refinance boom.
The stimulus package will help our local market with increased demand; however, the market still has to digest the large number of foreclosures and short sales currently on the market and more to come. 29% 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 lender’s approval. Most of the troubled home activity, 69%, is below the $500,000 mark. 94% is below $750,000. The areas hardest hit, with over 40% of the active inventory either a foreclosure or short sale, are Santa Ana, Anaheim, Lake Forest, Garden Grove and Rancho Santa Margarita. They account for 46% of ALL troubled home activity. The areas with the lowest percentage of troubled homes, with 2% or less, are Laguna Woods, Seal Beach, Newport Coast and Corona Del Mar.
The recent run-up in demand had a pronounced effect on both the detached home market and the condominium market, with detached homes continuing to fare a bit better. The detached home market’s supply dropped from 11.96 months two weeks ago to 9.37 months today. In comparison, the condominium market dropped from 13.47 months to 10.37 months today.
What can we expect in 2008? Now that the Super Bowl is behind us, the Spring market has officially begun. The stimulus package will take effect sometime in March; cyclically the highest demand is in the Spring. As a result, demand may continue to increase through April or May, rather than reaching a plateau in March. This is great news for the real estate market. Demand should start to mirror year over year comparisons by the end of March. Expect the active inventory to continue to grow throughout the Spring as more homeowners enter the game. Unfortunately, inventory is already standing tall, above the 15,000 mark, so more homeowners coming on the market will only push the inventory towards the 20,000 mark, which could be reached during the Summer market. With the inventory climbing along with demand, we can anticipate the expected market time to hover around the 10 month mark. During the Summer market, June through the first half of August, we can expect demand to drop slightly and the inventory to continue its slow climb. As a result, the expected market time will increase. During the Autumn market, the end of August through Halloween, we can expect the inventory to drop as sellers begin to pull their homes off of the market if they were unable to sell their homes during the Spring or Summer markets. Demand will drop slightly again as the expected market time remains relatively unchanged. Cyclically the slowest time of the year for the real estate market, the Holiday season, Halloween through the first couple of weeks of the New Year, we can expect demand to fall to the lowest levels of the year as a larger number of sellers throw in the proverbial towel and pull their homes off of the market. The expected market time would then increase slightly.
Buyers, what to do? With the Federal Reserve, the White House, Congress, our governor, Arnold Schwarzenegger, and the California legislature working to repair the ailing housing market, and the passing of the economic stimulus bill, a bottom to this market is on the horizon. But, as a buyer, understand that nobody is going to ring a bell to signal the bottom of the current housing cycle, just as nobody signaled the end of the housing boom in 2005. To wait for the bottom is foolish. Instead, cash in on the fact that it is a buyer’s market that has already erased some of the boom’s appreciation. Currently, rates are near historical lows, loan limits are increasing for both conventional and FHA loans, there is very little competition among a sea of housing choices and sellers are eager for an offer. So, if you are a buyer, sit down with a lender and ascertain your affordability limits and payment comfort levels and then go find the home the best fits the needs of your family. Avoid writing lowball offers and, instead, consider that the current sales to list price ratio for the county is 94%. Rather than just take a percentage off of the asking price, research the fair market value based upon the most recent sales and current escrow activity. There are still homes that receive multiple offers and obtain their full asking price. Most buyers forget to consider the importance that the current historically low interest rates will undeniably NOT last forever. Unfortunately, that is an unmistakable fact that very few consider because everybody has grown accustomed to low rates and expect them to continue. As soon as the market starts to turn around, be completely assured that Bernanke and the Federal Reserve will continue their long term plans to thwart the risk of inflation and increase rates. For perspective, let’s compare a $600,000 mortgage at 5.5% today (soon possible with the increase in the conventional limit), $3,407, to past benchmarks. With an 8% interest rate in 2000, the monthly payment would be $4,403, almost a $1,000 per month increase. With a 10% interest rate in 1990, the monthly payment would be $5,265, an increase of $1,858 per month. As a buyer, it is simply foolish to just watch prices to gauge the “perfect time to buy.” Even another 10% drop in prices will hardly make up for a change in interest rates. With rates low and selection high, this IS the year to buy. You can take comfort in the statistical fact that Southern California real estate has always been a historically wonderful long term investment.
Sellers, what to do? The message is simple: do not place your home on the market unless you unequivocally have to sell. It will take a great price, great condition and plenty of time to sell. So, price according to the market and the comparable sales and escrow data. Make every attempt to offer a home in nothing less than excellent condition. Be ready for the sales process to take six months or more, or price it accordingly for a quicker sale if necessary. The stimulus package will help demand, but we will remain in a buyer’s market. Given last month’s demand, there are still 13,691 sellers who will not be successful in selling their homes over the course of the next month. There is a lot of competition, which includes sellers who are upside down on their loans and bank foreclosures who don’t have a choice and MUST sell.
Steven Thomas RE/MAX Real Estate Services President
f 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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