Fueled by the value and affordability of foreclosures and short sales, demand below $500,000 has swelled to its highest level of the year. Total Orange County demand now exceeds last year’s level by 63% and 2006’s level by 26%. Demand, the number of pending sales over the past month, increased by 197 in the past two weeks to 2,940. After unstoppable growth in the first half of 2008, demand is now following a typical summer cycle. For the first couple of weeks it diminished from June’s record highs and has continued to grow ever since. Typically, demand then starts to drop with the beginning of the Autumn market and the beginning of the school year. However, with the distressed inventory continuing to replenish, value and affordability may continue to provoke demand through the end of the year. Our agent reports from the streets indicate that fence sitters for the past couple of years, and even investors, are sensing a great opportunity to enter the market. 64% of demand, 1,892 pending sales, is found below $500,000, compared to 30%, 537 pending sales, one year ago. In looking at the chart, it is important to note that the beginning of the financial crunch took place in August 2007. As lenders tightened their requirements overnight, demand dropped by 18% in just two weeks and by 33% in a month. Demand dropped to a trickle and lasted six months. There will be no repeat this year. Value and affordability is a major difference in comparing 2008 to 2007, fueled by a major drop in prices due to that six month abyss. It will be interesting to see where Orange County demand travels from here. It may very well start doing its own thing just as it did at the beginning of the year, breaking from the traditional cycle of diminishing through the Autumn and Holiday markets and either sustaining its current levels or, shockingly, even increasing. Sprinkle value and affordability along with waiting on the fence for a few years and you have ingredients that will at the very least continue to spark demand. Time will tell.
So, what does the rest of the data look like? The active listing inventory has shed 398 homes in the past two weeks, bringing it to the lowest level of the year, 14,358. The inventory continues to buck the trend of growing through the Spring and Summer markets. Instead, it has remained just below the 15,000 mark for most of 2008 until its recent drop, bringing it closer to the 14,000 threshold. At the beginning of the year, with demand at such a historically low level, I pessimistically thought that there was a good chance that the inventory could swell to 20,000. However, two things occurred: demand increased unabated and discretionary, non-distressed homeowners remained off the market and nobody tested the waters like prior years. Unlike 2006 and 2007, absent this year was any foolish anticipation of a phenomenal Spring market. 14,358 homes on the market is still high, but it is a lot less pressure on pricing and demand compared to 20,000 homes. Last year at this time the inventory had blossomed to 17,611, 19% higher compared to today, or 3,263 additional homes. Two years ago, the inventory had grown to 15,875, 10% higher, or 1,527 additional homes. The expected market time for Orange County dropped from 5.38 months two weeks ago to 4.88 months today. The expected market time in 2007 was 9.76 months, almost double, and in 2006 it was at 6.81 months. The distressed home market, foreclosures and short sales, now accounts for 41% of the active inventory and 57% of demand. The distressed inventory grew by 56 additional homes in the past two weeks. An interesting statistic is the portion of distressed homes in the various ranges in comparison to a year ago. Last year 55% of all distressed homes were found below $500,000 and 92% were below $750,000. Today 78% of all distressed homes are located below $500,000 and 94% are below $750,000. It is easy to conclude that the distressed inventory is driving demand. As painful as the distressed inventory has been to pricing, that erosion in pricing has not only brought affordability and value back into the Orange County housing market, it has planted the seeds to an eventual housing recovery.
Total Pending Sales, a statistic that I started tracking back in September of 2006 and revealed for the first time a month ago, are now at 4,248, a decrease of 22 homes. 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 73%. The year over year discrepancy continues to grow. Four weeks ago, total pending sales were up 61% compared to 2007. The markets are moving in opposite directions. Last year, total pending sales reached only 2,461, 1,787 fewer. Current sold homes not only surpass 2007 levels, it now eclipses 2006 levels as well. The number of sold homes has continued to grow unabated ever since March. The trend is almost identical to demand, the only difference, an apparent 60-day lag in the sold numbers compared to demand.
It is time, once again to clear up the misconception in the short sale market. Short sales occur when a seller can no longer afford their monthly obligations and their outstanding loan(s) exceed the current market value. The seller must be able to document that they truly have a hardship, that their total outgoing monthly bills exceed their monthly income and they do not have a large savings or other source of capital. When this occurs, the homeowner places their home on the market subject to lender approval. Thus, even though the buyer and seller may agree upon price and terms, the pending sale does not close until formal lender approval (and in many cases, more than one lender). HOWEVER, this is where the misconception occurs: a majority of short sales are on the market as active listings even though they already have received an offer, and often multiple offers, and have submitted a ratified contract to the lender(s). They remain as active until they obtain formal lender approval. This is due to a contract that is signed by both the buyer and seller that allows the seller to continue to market the home until lender approval. Unfortunately, this process can take anywere from weeks to months. The end result, buyers encounter homes that already have had tremendous activity and generated many offers. In most cases, short sales are just as popular as foreclosures due to their affordability and value. There are 1,249 active foreclosures on the market and demand for them is at 1,034, representing an expected market time of 1.21 months. In comparison, there are 4,701 short sales on the market. With reported demand for short sales at 656 pending sales, the expected market time is at 7.17 months. This is grossly understated because so many go unreported. Thus, it is hard to navigate among all of the active short sales. The bottom line, expect a lot of competition and activity when dealing with both foreclosures AND short sales.
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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