Market Time Report: Demand 50% Stronger Compared to Last Year

The surge of first time home buyer activity has equated to tremendous demand in the lower end of the market. Demand surpassed last year’s level by 51% and 2006’s level by 23%. Demand, the number of pending sales over the past month, now totals 2,743, an increase of 61 over the prior two weeks. For the first half of 2008, demand ignored conventional trends, growing week after week, uninterrupted. That changed at the very end of June and beginning of July where demand is now following a normal summer cycle. Demand should continue to increase slightly through the rest of the summer and dip slightly in September, the beginning of the Autumn market. Last year at this time demand was at 1,822 pending sales, 921 fewer. Two years ago it was at 2,235, 508 fewer. This wave of first time home buyer activity has been fueled by the volume of the distressed home market, foreclosures and short sales (homeowners who have outstanding loans that total more than the current market value of their homes). The distressed home market accounts for 40% of the active inventory and 51% of demand. This market has afforded tremendous opportunities for buyers and has quickly eroded prices, increasing home affordability, and, ultimately, fueling the spike in demand this year. Total Pending Sales, a statistic that I started tracking back in September of 2006 and revealed for the first time in the last report, is now at 4,270, an increase of 78. Remember, this statistic is different than demand, which shows the prior month’s activity. These are TOTAL pending sales, including those that have been pending for months. Compared to last year, total pending sales are up 66%. That comparison was up 61% two weeks ago, so the disparity is growing. Last year, total pending sales reached only 2,575, 1,695 fewer. The bottom line: there are many distressed homes on the market and prices have dropped; however, demand is much, much healthier than last year.


I have read so many reports, forecasts, predictions and prognostications that it would make your head spin. They run the gamut, from the ridiculous, the next Great Depression, to the absurdly optimistic, that the market will improve in the second half of 2008 and accelerate in 2009. I have heard that prices may fall as low as the mid-1990’s, which is utterly ridiculous and ignores too many economic fundamentals. I think the real problem is that in the information age, there’s just too much information. If you Google news articles for “housing,” there are 187,126 articles within the last month. Fact: a majority of the subprime resets will have concluded by year’s end. Fact: prime adjustable resets will be next. Conventional wisdom tells us that this will not be nearly as devastating as subprime. In sifting through all of the information and data, and drawing from my quantitative economics and decision sciences background, I think we can expect more of the same. That means we can expect increased demand in the lower ranges due to affordability; increased pressure on pricing in the upper ranges due to the lack of financing, distressed properties staying at or close to their current plateau of under 6,000 active listings (currently 40% of the market), and discretionary homeowners with equity avoiding selling unless they absolutely must sell. We will most likely realize a normal, slight, cyclical drop in demand in the Autumn and an even further drop with all of the distractions of the Holiday market, from Halloween through the first couple weeks of the new year. In 2009, distressed properties will begin to drop from its plateau in the middle of the year, as the last of the subprime tsunami is absorbed. Yes, there will still be distressed properties from the prime and subprime sectors, just not at the rate that we have all become accustomed to seeing. 2009 will be the year we absorb the distressed properties. Right now, the problem is that the homes coming off the market due to increased demand in the lower ranges are constantly being replaced by a fresh, steady stream of distressed properties. As the tap of distressed properties is turned down at the beginning of 2009, demand will finally have an opportunity to erode the inventory and further stabilize the market. This is of course if there are no hidden surprises. For example, the naysayers are quick to point out that I thought the last Holiday market would be a great time to buy. However, I was stating that prior to the surprise beginning of the financial crunch in August of 2007. But I was not alone. Nobody accurately predicted that the entire international financial markets would become frozen overnight. But, the likelihood of another surprise of the magnitude of the financial crunch is very small. Many forecasts and predictions fail to take into account that Congress, the Federal Reserve, the White House, and financial institutions are doing everything in their power to reverse the trend in housing and stabilize the market. Oil, food and housing have become such a drag on the economy that EVERYBODY is going to do whatever it takes to bring stability. Congress is working on a bill right now that addresses a permanent change to the increased conventional and FHA loan limits, a first time home buyer credit, and foreclosure relief.

So, what does the rest of the data look like? The active inventory increased slightly in the prior two weeks by 45 homes, now totaling 14,746 homes. It continues to buck the trend to grow during the Summer market and has remained at its current level for all of 2008. Last year there were 2,850 additional homes on the market after adding 262 homes in two weeks. In 2006, there were 989 more homes on the market after adding 377 homes in two weeks. The current active inventory is obviously not following a normal cycle. The expected market time dropped slightly from 5.48 to 5.38 months. In comparison, last year the expected market time was 9.66 months and it was 7.04 months two years ago. The distressed home inventory, foreclosures and short sales, dropped by the largest amount in the past two weeks, 59 homes, and remained 40% of the overall active inventory. Remember, there is a lot of competition for distressed properties, with most fetching multiple offers, and there are still many selling for above their asking price. The current expected market time for foreclosures is 1.42 months. 21% of the distressed inventory is foreclosures. In comparison, 79% are short sales. The market time for short sales is 8.52 months. However, this is not really the “expected” market time since so many short sales remain on the market until they receive formal lender approval on the sale. One of our associates highlighted an offer that had been accepted by the seller and submitted to the lender for eight months before receiving lender approval. The home remained active on the market the entire eight months, even though they had a buyer and seller that agreed upon the contract. So, expect competition on short sales too.
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/

Market Time Report: June 2008 Closed Sales 11% Better than June 2007

The big story for the Orange County real estate market is that the pace of closed sales, especially the last couple of weeks, has been brisk. According to residential resale data, there were over 220 additional closed sales in Orange County, 11% stronger than last year. After starting the first few months with demand down by over 30% compared to 2007, the trend in a slow, continual increase in demand for the first six months finally translated to better sales in comparison to 2008 for the month of June. July is shaping up to continue that trend and we can expect more of the same for the remainder of the year. I can already hear the skeptics out there pointing to the coming Autumn market and Holiday market, from Halloween through the first couple of weeks of the New Year. Yes, the real estate market will experience a cyclical slowdown during that period of time, just nothing compared to 2007. In 2007, the market was plagued by the initial stages of the financial crunch, which began in August. That initial stage lasted six months until prices fell to a point where first time home buyer demand began to rise with an enormous improvement in home affordability. Since then, the market has only been aided by the increased conventional and FHA loan limits. Right now Congress is looking to create a temporary first-time home buyer tax credit, increase the conventional and FHA loan limits permanently and expand the FHA program to provide additional authority to refinance at-risk homeowners and help prevent foreclosures. Many turn their collective heads in disgust to any form of government bailout, but everybody is coming to the quick realization that dealing with falling house prices in conjunction with rising food and gasoline prices is not a healthy mix. Be assured, that our government and the Federal Reserve will do whatever is necessary, but with measured steps. Expect to hear more regarding resurrecting the Resolution Trust Corporation (RTC) to help stabilize the current housing dilemma. The RTC was formed in 1989 to "bail out" the rapidly deteriorating financial market due to the insolvency of savings and loan associations. Today, a similar agency could purchase bad debt of distressed, owner-occupied homes at a discount from the debt holder and restructure the loan for the owner in areas hit hard by foreclosure activity. This in turn would ultimately stabilize the current financial crunch.

So, what does the rest of the data look like? For the first half of the year, the market marched to the beat of its own drum, shirking cyclical twists and turns. Demand steadily increased, the active inventory remained the same and market time progressively dropped. Then, starting a couple of weeks ago, many buyers started to enjoy the summer, vacationed, went to the beach, and they took the Fourth of July holiday weekend off. Demand responded and reacquainted itself with a normal cycle. Today’s demand reading is cyclically the lowest point of the Summer selling season and consistently drops significantly from the snapshots of demand in June. The good news for the real estate market, the demand trend line shows an increase through the end of the Summer market and peaks at the end of August. Today’s demand, the number of homes placed into escrow within the prior month, is now at 2,682 homes, dropping 324 homes from two weeks ago, an 11% drop. As tempting as that drop is for the naysayers and headline editors to embrace, demand is still 51% better than last year and 26% better than 2006. The real story is that demand is now following a normal Summer market cycle. A normal cycle calls for a drop in today’s reading compared to June. I have been tracking Orange County housing demand, a snapshot of the prior 30-days activity, since June of 2004. I started tracking an additional statistic, Total Pending Sales, beginning in September of 2006. It is different than demand, which shows the prior month’s activity. These are ALL pending sales, including those that are pending for months. Yes, some of the pending sales fall out, but the higher the number, the more that become closed sales. At the beginning of the year, the total pending count was 34% less than the beginning of 2007. Today, the total pending count is at 4,192 compared to 2,606 last year at this time, that’s 61% higher. The bottom line, demand is much healthier today due to increased home affordability and the wave of first time home buyer activity.

The active inventory still refuses to follow a normal cycle. Cyclically, Sellers mistaken the Summer market as the best time to place their homes on the market, when in reality it is the Spring market. Thus, during the summer months, the inventory typically grows. In the last two weeks, the active inventory has dropped by 139 homes, bringing the total to 14,701, the lowest point of the year. Last year, there were 2,633 additional homes on the market. In 2006 there were 657 additional homes on the market. The expected market time increased from 4.98 months two weeks ago to 5.48 months today. The expected market time was at 9.73 months last year and 7.2 months two years ago. The distressed homes, foreclosures and short sales, grew by only 7 homes in the past two weeks and remains at 40% of the overall active inventory. For those looking for a distressed property “deal,” remember that lenders are in the driver’s seat and there is tremendous competition with multiple offers and homes fetching above their asking price. I was just informed of a large home in Ladera Ranch that was grossly underpriced as a foreclosure. After procuring a hoard of offers, the home is now a pending sale for a ridiculous amount over the asking price. In essence, the agent and lender created a “mini-auction” on their home with a successful outcome.If you are a seller, how do you compete? The secret to success is a great price and great condition. As a seller, the danger of overpricing is that as prices drop, there are only two options: chase the market and drop the price or pull your home off the market. To avoid chasing the market down in price, carefully arriving at the initial asking price is crucial. Lower price ranges are subject to increased competition from foreclosures and short sales. However, non-distressed home sellers have a way to differentiate from most distressed properties, condition. Most foreclosures and short sales are in poor to average condition. Under the circumstances, their motivation to keep a home in tip-top shape just is not present. Non-distressed, traditional home sellers have the ability to showcase their homes as the home in a neighborhood that stands out because it is in move-in condition. A home that is clean from top to bottom with lush green landscaping, a fresh coat of paint and even new or newer carpeting stands out. Distressed homes often have dead or no landscape and are in need of many cosmetic fixes. Most buyers require a major discount in price to compensate for the trouble to fix up a home. Sellers need to be in tune with the changing market conditions and strategically position their homes for success. For sellers in the higher ranges, above $750,000, demand has dropped compared to prior years because of the financial crunch. Financing is much harder to get in the upper ranges, cutting into demand. In these ranges, the keys to success are price, condition and a ton of patience.
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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