February 21, 2008
The beauty of up-to-the-minute data is that we know which direction we are headed REGARDLESS of the countless television stories and news articles. This report is a snapshot of the market today. In comparing it to prior snapshots, we can pinpoint trends that won’t reach the pages of a newspaper or the teleprompter of a newscast for weeks, if not months, down the road. The data often confirms the buzz among the agents working in the trenches of the real estate market. Here’s the buzz: increased open house activity; many buyers climbing in cars who are extremely cognizant of value; plenty of short sales; more realistic sellers on the market; and, homeowners opting to NOT market their homes as they are acutely aware of the current market conditions. Let’s see if the “buzz” correlates with the data. Demand, the number of homes placed into escrow within the prior month, increased by 49% over the past month from 1,219 to 1,820 escrows. We have not seen demand at this level in six months, since just before the beginning of the credit crunch in mid-August. The current active inventory climbed by only 147 homes in the past month to 15,392 homes, only a 1% increase. With the active inventory virtually unchanged, coupled with a sharp increase in demand, the expected market time has dropped substantially over the course of the past month from 12.51 to 8.46 months today. We started off the year with a 15.60 month inventory, almost double today’s snapshot. By no means am I insinuating that sellers should be jumping for joy with the return of a seller’s market, since for most economists, anything over a six month inventory is dubbed a “buyer’s market.” “Equilibrium” is a market between five and six months. A “seller’s market” doesn’t even register until the market time drops below five months. But, there are a few cities below the six month mark: Aliso Viejo, Anaheim Hills, Brea, Foothill Ranch, Fountain Valley, Huntington Beach and Mission Viejo. To be fair, there are a few areas that are still in a deep buyer’s market with over a year in inventory: Coto de Caza, Laguna Beach, La Habra, Newport Beach, Newport Coast, Portola Hills, San Juan, Santa Ana and Villa Park. Most of these cities will improve as the credit crunch begins to release its stronghold in the coming weeks and months. Last year at this time there were 12,194 homes on the market, demand was at 2,654 escrows and the market time was at 4.59 months. Two years ago, there were 9,038 homes on the market, demand was at 2,892 escrows and the market time was at 3.13 months.
What’s the difference between the condominium market and the detached home market? The detached home market is faring a little bit better with an 8.22 month inventory. For condominiums, there is an 8.85 month inventory. 27% of the detached home inventory is either a foreclosure or short sale and 27% of that inventory is vacant. 35% of the condominium inventory is either a foreclosure or short sale and 34% of that inventory is vacant.
Is the foreclosure market as bad as reported? Foreclosures and short sales are a significant part of the current Orange County real estate market. Currently, they account for 32% of the active inventory. The flip side of that coin leaves 68% of non-distressed homeowners marketing their homes. But, that percentage has climbed from 27% one month ago, a trend to continue to watch. Of all of the distressed homes on the market, currently 4,859 of the 15,392 total inventory, bank owned foreclosures make up only about 26% of that total. The remaining 74% are short sales, homeowners who are attempting to sell their homes for less than their total outstanding loan balance subject to the lenders’ acceptance. The good news is that most lenders do NOT want to foreclose on a home and WANT to work it out with the homeowner. Lenders are a lot more organized than they were just six months ago, able to handle the increased volume and bring about an amicable solution. Sellers in this situation should only work with a professional Realtor® well versed in the short sale process.
How is the recent passage of the stimulus package going to effect the market? First, the smart buyer will use the tax rebates to buy down their interest rates for the life of the loan. More importantly, the increasing of the conventional and FHA loan limits will provide a much needed boost to demand in the higher ranges, which have slowed dramatically since the drying up of the financial markets since August. For conventional loans, we can expect rates to be slightly higher than the current conventional rate, but much less than the current jumbo rate. There has been little talk about the importance of the new FHA limits, but they are an important replacement to the demise of the subprime loan. Actually, FHA loans were extremely common just a decade ago; that is until they went out of vogue with the refusal of the Federal Government to change the limits in rapidly appreciating markets. The limit had been $367,000; thus, the subprime was born to fill the need to finance borrowers with damaged credit and little down payments. Unfortunately, without much regulation, the lending industry established a product that paled in comparison to the strength of FHA financing. FHA requires documentation of income and does not allow “payment shock” where a buyer jumps from a low rental payment to a high mortgage payment. FHA has all of the safety gaps and education in place so that buyers do not get in over their heads like they did with subprime financing. The end result: the stimulus package will provide a much needed resource for many to obtain financing, which will ultimately translate to an increase in demand. With the signing of the bill into law last week, we can expect the change to take hold sometime next month.
What can we expect in 2008? With all of the attention at the federal level to righting the housing ship, the Orange County resale market will probably not follow the normal cyclical patterns of the best demand in Spring, followed by a little less demand in the Summer, followed by another drop in the Autumn, followed by the lowest levels of the year during the Holiday market. Instead, we can probably expect stronger traction with the increased liquidity due to the new loan limits throughout the Spring and Summer. We very likely can see higher demand numbers at the end of Summer compared to Spring. This could create a catalyst of “bargain hunters” who will want to feed on the distressed inventory at the end of the year and through the beginning of next year. Stay tuned, there is more to come!
Buyers, what to do? Quite simply, do NOT wait for the bottom of the market. Nobody is going to ring a bell to signal the point at which we reach that bottom. We will not know the precise bottom until months after it has already occurred. Take solace in the fact that the conditions are perfect. It reminds me of my days in my youth at the beach. I would sit on the sand and wait for the perfect set of waves to unfold in front of me while I basked in the warmth of the summer sun. Often, I got so comfortable sitting in my warm chair that I would see a pretty decent set of waves, only to talk myself out of jumping and paddling out to enjoy the thrill of the surf. Instead, I greedily enjoyed my warm chair and decided to wait for the next set, after all, it had to get better. The lifeguards, the most experienced observers of the surf, never signaled the best moment to enter the water. At the end of the day, I would come to the realization that I should have already been out in the water, ready for a great ride. The moral to my flashback: the conditions are perfect with low interest rates, hungry, motivated sellers, and plenty of choices, so jump into the water now and go find the best home for your family. Please understand that these historically low interest rates will NOT last. Just this week, the economic reports are pointing towards inflation, which is not good for interest rates. The Federal Reserve released their “minutes” from their last meeting; policymakers said that when prospects for economic growth improved, “A reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.” These low interest rates that the entire nation has grown so accustomed to will increase to levels not seen in a while. In 2000, they were at 8%, and in 1990 they were at 10%. A change in interest rates to more historical norms will seriously erode a buyer’s purchasing power and will result in much higher payments. Any advantage gained by waiting for prices to reach a “bottom” will be lost in much higher long term monthly payments. Take tremendous comfort in the fact that Southern California real estate has always been a historically wonderful long term investment.
Sellers, what to do? I will stick to my simple message for over a year now: do not place your home on the market unless you undeniably have to sell. It is all about location, price, condition and patience. Price is based upon a home’s location and condition. As a homeowner, you only have control over condition. The homes that are priced well and in great condition sell. That means aggressively pricing according to the comparable sales. Be ready to pack your patience; depending upon the area, it may take six months or more to sell. Given last month’s demand, there are still 13,572 sellers who will not be successful in selling their homes over the course of the next month. For sellers, the competition is fierce, which includes emotionless banks that have to purge their assets from their books.
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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