Market Time Report: Housing Demand Stronger than a Year Ago

April 3, 2008

Today marks the FIRST time since September 22, 2005 where demand is better than one year ago. The sold statistics, which garner front page headline attention in most media outlets, will not reflect the year over year statistics until May or even June of this year. So, you are hearing it here first, demand is actually better right now compared to last year. You can hear it in our offices too. Here’s the scoop from the trenches: increased showing activity, increased open house activity, buyers are writing more offers, multiple offers in the lower ranges and significantly more first time buyer activity. And, most of this activity was already in the works prior to the new FHA and conventional loan limits taking root in the marketplace. Buyers have been methodically entering the market since the beginning of the New Year. We started the year with demand, a snapshot of the prior 30 day escrow activity, at 944 escrows. There were only 1,473 total escrows on January 1st in all of Orange County with 14,724 homes on the market. That was an inventory of 16.45 months! Since then, demand has increased to 2,286 escrows within the prior 30 days, a 142% increase. Now there are 3,066 total escrows throughout Orange County, a 108% increase from the beginning of the year. Additionally, the active inventory has only grown by 750 homes since we sat on our comfortable sofas and sleepily watched the Rose Parade, bringing the inventory to 15,474 homes. Expected market time has dropped substantially to 6.75 months. Remember, the new FHA and conventional loan limits of $729,750 are just hitting the market now. We are achieving the increase in demand despite a major liquidity problem in the financial markets, meaning loans above $417,000 have been extremely challenging to put together unless a borrower had a lot of money to put down and cream of the crop credit scores. The new loan limits will have a powerful impact on demand. At 10% down, the old $417,000 conventional limit only covered 37% of the current active inventory. The new limits now encompass a stunning 75% of the inventory. The old $367,000 FHA loan limit covered only 23% of the active inventory. The real estate market also has the added benefit of Washington D.C. and every major player that has anything to do with the financial markets focusing programs and legislation aimed at further increasing demand and restoring the financial engine that runs our economy.

Last year there were1,464 fewer homes on the market, but demand was lower by 159 escrows. Demand was dropping fast last year due to the beginning effects of the subprime meltdown that started in March of 2007. Expected market time was almost the same at 6.57 months. Two years ago, the active inventory was at 10,714, demand was at 2,958 and market time was at 3.62 months. Bank owned foreclosures and short sales, homeowners that owe more on their home than the current value, now account for 34.5% of the active inventory. That figure was at 26% at the beginning of the year and 32.8% a month ago.

What about all of the distressed properties in the market place? Bank owned foreclosures are HOT and growing hotter by the minute with an expected market time of just 1.67 months. Two weeks ago that figure was at 2.11 months. Foreclosures only account for 20% of the total distressed market and only 7% of the entire active inventory. Thus, foreclosures are in demand and lenders are calling the shots with multiple offers and no emotional attachment to their “assets.” Their market is similar to the heydays of 2004 and 2005 for all of Orange County. Statistically, short sales have an expected market time of 10.60 months compared to 12.05 months two weeks ago. But, these numbers are not a true reflection of what is really going on in the marketplace. The numbers are grossly understated. Short sales are a totally different animal and should be treated as such. Realtors® out in the field keep a home on the market as an active listing through the Multiple Listing Service until they have formal lender approval of an offer already accepted by the seller. Even when a seller and a buyer agree upon the terms of a contract, escrow is not technically opened until formal lender approval occurs. The lenders have to determine whether or not they are willing to take less than the full loan amount currently encumbering the property. And, if there is more than one loan, each and every lender must sign off on the deal in order for an escrow to proceed. Short sales are “subject to lender approval” and can take anywhere from weeks to months. One of our associates reported from the trenches that they just closed a short sale after a seven month delay in a formal approval. That’s not even the worst case scenario, as many go unapproved and are instead foreclosed upon, wiping out any and all offers currently written on the property. So, when a buyer climbs into a car and finds a short sale that they have interest in, chances are that the home already has an accepted offer that is somewhere in the “lender approval” process. They too can add their offer to the mix and play the waiting game. Many of these short sales are priced at levels to attract buyers, discounting well below the true market price. In this case, the odds of “lender approval” on even full price offers are slim to none. As a consumer, it is best to do a bit of homework and write an offer closer to the market value, above the asking price, increasing the odds of lender acceptance. With more and more homes acquiring multiple offers, that is exactly what is occurring in the market: offers are being submitted for bank approval above the list price.

Everybody needs to keep in mind some fundamental statistics regarding distressed homes. 75% of all distressed properties, foreclosures and shorts sales, are below $500,000 and 94% are below $750,000. Santa Ana accounts for 20% of the entire distressed market in Orange County, 1 in every 5. Anaheim accounts for another 15%, 3 in every 20. The top 5 in total numbers, Santa Ana, Anaheim, Garden Grove, Orange and Lake Forest, account for 49% of all distressed properties, virtually 1 in every 2. With the exception of Orange, all have average list prices below $500,000.

What are FHA loans? The Federal Housing Administration (FHA) offers loans to consumers with some credit blemishes and/or a small down payment. A buyer can put down as little as 3%, all of which can be a gift. FHA is NOT subprime and has been around for years. This is not a program that the government cooked up to replace the void left by the sudden absence of subprime. Rather, with prior FHA loan limits well below the median sales price in Orange County, subprime filled the void. FHA loans require documentation and the buyer must actually qualify.

Buyers, what to do? Slowly but surely, more headlines are starting to illustrate improved demand and a great time to buy. It will take the better part of the next 60 days for the recent increased activity to start changing the tone of the headlines and stories completely. The facts are the facts; the lower ranges, where most of the junk loans occurred, are turning up the heat first. The increased loan limits should restore demand all the way up to $800,000. As liquidity is slowly restored to the financial markets, the upper ranges above $800,000 will in turn start to gain momentum as 2008 plods along. Demand has slowly improved as value has seeped its way back into the market. The conditions are perfect to purchase now and into the horizon: motivated sellers, plenty of homes to choose from, rates are low, new loan programs are available and there are great values out there right now. As a buyer, do not let price be your only determining factor in choosing to purchase. Price is important, but current favorable rates will not stick around forever. Prior to the financial subprime meltdown and financial crunch, the Federal Reserve was methodically raising rates to counter the threat of inflation. The threat of inflation is now high with all of the easing that the Federal Reserve has had to undertake to jump start the economy and the financial markets. Do not get comfortable with today’s interest rates, they WILL eventually increase. As soon as the economy starts humming along again, expect the Federal Reserve to reverse course and push rates up higher. By the way, for every 1% that interest rates increase, it erases approximately all of the benefits of waiting for property values to decrease 10%. The payments are virtually identical.

Sellers, what to do? So far this Spring, homeowners are NOT placing their homes on the market in foolish anticipation of a wonderful Spring real estate market. Thank goodness!!! Quite simply, sellers should continue to bide by a simple rule of today’s market: do NOT place your home on the market unless you absolutely must sell and are motivated to do what it takes to procure a sale, with the right price and condition. With only 2,285 successes over the past month, that leaves the vast majority waiting another month or months. In such a competitive market, it is all about price, location and condition. As a seller, you can do absolutely nothing about the location other than take it into consideration in determining price. Sellers do control their price and condition. After carefully determining an asking price, it still may take time, so pack your patience and be prepared to make changes as the market evolves. Unless you are prepared to market your home as a major or cosmetic fixer, great showing condition is imperative in maximizing your proceeds. Last, be prepared on day 100, just as you were during the first week, for a buyer to walk through the door. Set the stage with the lights on, soft music in the background, window covering opens and make sure your home is neat as a pin inside and out.