Market Time Report: Demand Surges as the Inventory Drops

June 12, 2008

From day one of 2008, demand has improved week after week unabated. This week it surged and the inventory dropped as a result. Demand, the number of new pending sales over the prior month, grew by an additional 390 homes in the past two weeks to 3,060. Demand has not been at this level since September of 2005. That date is significant because it was the end of the nine year housing run. The Autumn of 2005 was the beginning of the end for the long run-up in Orange County housing. One year ago today, there were 1,075 fewer pending sales, totaling only 1,985. Current demand is 54% better than last year. Two years ago there were 548 fewer pending sales. We have not experienced demand at this level in 33 months. This year’s demand has broken from traditional cycles and has continually increased. The total pending count has increased substantially as well, growing from a low of 1,456 pending sales at the beginning of the year to 4,256 today.

The other half of the story is that the active inventory has dropped below the 15,000 mark for the first time since the beginning of January. Over the past two weeks the Orange County active inventory has dropped by 390 homes to 14,880. Over the past month the inventory has dropped by 577 homes. The last time I reported inventory below 14,880 dates back to April 19 of last year. There’s a big difference between last year and this year though. In 2007, the inventory grew from 11,643 homes at the beginning of January to its peak in September of 17,898 homes. From April 19, 2007, to June 14, 2007, the inventory grew by more than 2,000 homes. Just like demand, the active inventory has broken away from the traditional real estate cycle. Even in a hot seller’s market, the active inventory tends to grow beginning in the Spring and peaking in the Autumn. The big difference this year is that many homeowners do not want to market their homes and compete with the volume of short sales, sellers who owe more than their homes are worth, and foreclosures. It is difficult to compete with distressed sellers and the unemotional banks that currently control our market. The general public is acutely aware that it is a buyer’s market and that it takes a lot of time and patience to sell. So, sellers were not hastily placing their homes on the market in anticipation of an incredible Spring. I was expecting the inventory to grow to 20,000 homes, but I simply did not factor that the public would perceptively refrain from marketing their homes without proper motivation.

Where is all of this demand coming from? I am unaware of any forecasts that called for demand to increase unabated. The continuous newspaper and televised news reports have described a desperate and bleak real estate market. There are also countless real estate blogs that are so extremely negative, they implicitly seem to be cheering for the “sky to fall.” Yet, demand has blossomed. Therefore, we know that buyers in today’s market did not make their decisions based upon any economic forecasts, media reports or Internet blogs. The general public, once again, exceeded my expectations tremendously. Based upon where we started at the beginning of the year, less than 1,000 pending sales, I personally did not expect demand to increase beyond the 2,000 mark. Instead, it just surpassed the 3,000 mark. Once again, I simply did not factor that the public would perceptively see the real value in today’s marketplace. We know that there are no cheerleaders on the sidelines encouraging buyers to buy. The naysayer would argue that the real estate industry and the agents out in the field may be pushing buyers along. That simply is not the case. Instead, prices have come down significantly because of distressed properties, sellers that absolutely have to sell regardless of the market. Also, affordability has improved dramatically. The increase in the FHA and conventional loan limits to $729,750 has improved financing. Ultimately, these factors have fueled the current wave of first time homebuyer activity. Many first time homebuyers have been priced out of the market for years. The current market has paved their way to homeownership. Many prognosticators mistakenly attempt to treat housing simply as a commodity and attempt to diagnose and forecast based upon numbers and lines. Yet, there is something deeper to consider, a place we affectionately refer to as “home.” Not somebody else’s home, your very own home. There is an inherent desire for homeownership. It is an emotional attachment that goes beyond the data.

What other trends can be discerned from the current data? As a result of the increase in demand and the decrease in the active inventory, the expected market time has dropped significantly from 5.82 months two week ago to 4.86 months today. This is the first time in 16-months that the market time has dropped below the five month mark. Last year, the expected market time was at 8.5 months. Two years ago, it was at 5.68 months. The sold data is just now surpassing year over year levels. Last year, there were 2,081 sales in the prior 30-day period compared to 2,300 today. In July, all media outlets will be reporting that this month’s sales will be better than last year. That is an incredible lag compared to what is going on in the market today. Two years ago, there were 2,899 closed sales. 39.6% of the current active inventory and 48.8% of demand is either a short sale or a foreclosure. The non-distressed conventional home seller is still a larger portion of demand. These are sellers that are carefully approaching the market with proper motivation, patience and market knowledge. Many are successful because the pride in their homes show in their superior condition and upgrades compared to the distressed homes that they are competing with. Superior condition and a competitive price in the marketplace is a recipe for success. 78% of all distressed homes are priced below $500,000 and 94% are below $750,000. There just are not as many distressed “deals” in the upper ranges, as many buyers in the marketplace would attest to. Due to the financial crunch, the interest rates and lender requirements for super jumbo loans, loans above $729,750, has really negatively affected demand in the upper ranges. Demand for homes above $750,000 is off by 27% compared to last year. With homeowners intuitively keeping their homes off the market, the current active inventory of homes in the upper ranges is also off by 23% compared to last year. The surge in demand is really isolated to homes below $500,000, where demand is up 233% compared to last year and yet the active inventory is up only 57%. The expected market time is 4.05 months compared to 8.58 months last year. For homes between $500,000 and $750,000, demand is up only 2% compared to last year; however, the active inventory is down by 51%. The expected market time is 4.14 months compared to 8.63 months last year. Not until liquidity is restored and the financial crunch eases will demand for homes in the upper price ranges increase. Currently, there are only slight signs of improvement. It is going to take the better part of the rest of this year for conditions to improve for the upper tier. In the lower ranges, due to the nature of distressed homes, there will still be pressure in pricing. However, with demand rising and so many multiple offers, the drop in pricing will not be as steep as it has been over the last 12-months.
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/