Orange County Housing Report: Brisk Activity Despite the Financial Crunch

October 16, 2008
Despite stock market gyrations and all eyes on the international financial crunch, current demand is still much stronger than the last two years. Demand, the number of new pending deals within the prior 30 days, would be even stronger right now had interest rates not bumped up significantly over the past week. Since higher interest rates are the last thing our government desires, they will continue to exercise all of their powers to stabilize the financial system until it starts showing signs of recovery. The first major sign is going to be lower interest rates, much lower. I don’t ever recall government intervention in the financial system like we are experiencing today. Starting on September 7th, a little over a month ago, the federal government took over both Fannie Mae and Freddie Mac. From that point forward, our government has been working feverishly on thawing out the frozen financial markets. Unfortunately, the financial crunch started in August of 2007; so, they are a little bit late to the party. Yes, they tinkered a little bit over the past year, but it just was not enough to thaw the financial system. Their tardiness has everything to do with the severity of the current financial crunch. The system will mend, it just will take longer than if they had made their sweeping changes six months ago. Some argue that the government should do nothing and let the markets correct on their own. They logically blame investment houses who invested with no caution, banks willing to loan anybody with a pulse and buyers willing to purchase homes utilizing loans that they simply could not afford after their adjustable rates reset. However, even with minor tinkering over the past year, both the United States and INTERNATIONAL financial markets have come to a virtual standstill. So, letting the markets work themselves out is not the remedy to the current situation in order to avert a major international disaster. The time to act was a year ago when the crunch was in its infancy. The government has always been reactionary in nature; and, now that the crisis has grown to an unprecedented level, everybody is now ready to do whatever it takes to turn our economic engine around. So, the recent acceleration in government action is not only expected, it is only the beginning of sweeping changes to thaw the financial markets.

So, how do the numbers look? Demand dropped by 174 homes in the past two weeks to 2,673 pending sales. For proper perspective, there were only 1,175 pending deals a year ago, 1,498 fewer. The big difference over the past year is that pricing has finally dropped to an affordable level where first time home buyers and investors have reemerged. One can only imagine how much stronger demand would be if financing was more readily available. Two years ago demand was at 2,011 pending deals, 662 fewer than today. The current active inventory dropped by another 218 homes in the past two weeks to 12,722. There were an additional 5,037 homes a year ago, totaling 17,759. Two years ago the inventory was at 15,263 homes, 2,541 additional homes compared to today. The expected market time increased slightly from 4.55 months two weeks ago to 4.76 months today. In comparison to the past two years, the expected market time is at a much healthier level. Last year the expected market time was at 15.11 months and two years ago it was at 7.59 months. Demand is much hotter in the lower ranges, detached homes and condominiums below $750,000. Below $500,000, 50% of the active inventory and 69% of demand, the expected market time is at 3.43 months. Between $500,000 and $750,000, 19% of the active inventory and 19% of demand, the expected market time is at 4.83 months. From there, it jumps to 5.27 months from $750,000 to $1 million. After that it jumps to double digits, a deep seller’s market. Above $750,000, demand is much lower due to the effects of the financial crunch. In order to secure a jumbo loan, currently all loans above $729,750, buyers need to have a healthy down payment, almost perfect credit, the ability to document everything and the willingness to accept a much higher interest rate compared to conventional buyers.

Distressed homes, foreclosures and short sales, dropped from 43.3% of the inventory two weeks ago to 42.9%. The total number dropped by 144 homes, bringing the total to 5,453. The distressed inventory peaked on August 7th at 5,950 homes and has dropped slowly ever since. The biggest contributing factors are the fact that the number of subprime resets has been steadily dropping coupled with a low unemployment rate. There is a lot of buzz centered on the “next wave” of resets, Alt-A adjustable. But, this group is a bit different since there are fewer of them and the government has been working on programs to help homeowners refinance their homes and continue making payments (homeowners are penalized for selling early and must share in any appreciation with the FHA). So, more distressed homes will continue to come on the market throughout the rest of the year and into 2009, yet the number will continue to slowly diminish over time. As the government programs unfold and the financial markets thaw, demand will continue to rise and stabilize the Orange County housing market long term.

How should sellers approach the current market? It is extremely apparent that discretionary homeowners who have equity in their homes are acutely aware of the current market conditions and place their homes on the market with full knowledge that competition is brisk. Lenders are in absolute control of the market. They may account for 42.9% of the inventory, but they also account for 64.2% of demand. That means that only 35.8% of demand is devoted to homeowners with equity. More and more non-distressed homeowners are opting to pull their homes off the market since the Spring and Summer markets are now in the past. If you are a non-distressed homeowner contemplating placing your home on the market, exercise extreme caution. Move up sellers tend to do better than move down sellers. After markets recover, hypothetically, if homes appreciate 5%, higher ranges realize a larger gain in terms of net dollars. 5% of $500,000 is $25,000; 5% of $800,000 is $40,000. In today’s market, homes that back up to busy streets, or back up to power lines, or are in poor showing condition, take a major hit in terms of value. If a buyer has the choice between two similar homes, one that backs to a busy street and one that does not, they are only willing to look at the home that backs to a busy street if the price is substantially less. In an appreciating market with no competition and very little available, a home that backs to a busy street will fetch a much higher price. So, sellers need to be acutely aware of their location and condition in arriving at their asking price. A seller does not have control over their location, but they do have control over their condition and amenities. Sellers should also prepare their homes to sell and be certain that their homes are in showing condition each and every day, regardless of the amount of time it takes to sell their home. You never know when the buyer that wants to buy your home will walk through your door.

How should a buyer approach the current market? It is hard to imagine, but the lower ranges in many cities are actually experiencing stiff competition. That holds true for most foreclosures and short sales. Foreclosures are currently experiencing an expected market time of 1.22 months, a major sellers market. Multiple offers are the norm and most sell at their list price or for even more. Short sales, homeowners with outstanding loans that total more than their current market value, are much different since most are on the market as active listings even thought they have already consummated an acceptable written offer between a buyer and seller. The reason they are still actively marketed: they are awaiting the lender’s written approval to allow the seller to pay off less than the loan amount. This process can take anywhere from days to months. Buyers quickly realize that lower prices result in increased competition. After competing and losing in their effort to secure a home, many buyers are turning to non-distressed sellers with equity in their homes. Buyers end up purchasing a home that is in better condition and they typically do not have to compete to purchase. Buyers looking for a short term purchase should steer clear of the current market. This is the perfect time to purchase for buyers that plan on being in their home for a minimum of several years. Even if housing values drop in the short term, Orange County housing values have proven to be an excellent long term investment. So, buyers should isolate the perfect house for their family and make it their “home” with full knowledge that in time, their “investment” will appreciate.

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/

Orange County Housing Report: Inventory Drops Below 13,000

The Orange County active listing inventory dropped to its lowest point in 18 months, dipping below the 13,000 mark. Typically, the Autumn market begins to drop after reaching a peak during the Summer, but not this year. The current active inventory in Orange County has dropped by 642 homes in the past month. Last year at this time the active inventory was at 17,759 homes, 4,819 additional homes, or 27% higher. Two years ago it was at 15,482 homes, an additional 2,542, or 16% higher. We started the year at 14,724 homes, 1,784 more than today. The active listing inventory has been dropping since July and it picked up steam in August. In mid-April, the inventory peaked at 15,566, 2616 additional homes compared to today. The inventory has dropped 17% in that time. During the same timeframe in 2006 and 2007 the inventory actually increased by 37% and 20% respectively. This can be attributed to stronger demand and discretionary homeowners. Demand has surged with an appreciable drop in home pricing, especially in the lower ranges where there are more distressed properties and much more first time home buyer activity. Affordability has been reintroduced to the Orange County housing market. This is simple Economics 101, as prices fall, demand rises and the number of sales increases as a result. As the United States government fixes the financial system and money starts to flow again, we can expect rates to drop considerably, including in the Jumbo loan arena, homes above $700,000. Falling rates lowers monthly payments, which is similar to falling prices. We can expect demand to increase and the number of sales to increase as well. This may be six months from today, so right now is probably the most opportunistic time to be a buyer. I recall back in 1995 many were still predicting a continued slide to values reached in the 1980’s. I am hearing the same drum beat again, this time calling for prices to fall to mid-1990’s levels. I would be careful if I was a consumer on the sidelines waiting for a much more appreciable drop. Prices took their biggest drop from August of 2007 through March of this year. There is so much demand in the lower ranges and in many areas that pricing is a little stickier, much different than the freefall I just described. Another contributing factor to the drop in the inventory is the fact that homeowners understand the current market situation and, for the most part, homeowners with equity are steering clear of the market, opting to not compete with the distressed inventory. The discretionary sellers that do enter the market do so with the understanding that the process may take a while. Now that the Spring and Summer markets are behind us, many sellers have decided to pull their homes off the market and sit on the sidelines until Spring of next year. The discretionary seller in today’s market is a harsh contrast to the majority of unrealistic sellers with high expectations of the Spring and Summer of 2006 and 2007. It takes the right mindset to be successful in competing with so many distressed homes. There is plenty to consider in selling today: location, upgrades, condition, the ability to answer quickly (unlike foreclosures and short sales), the local market and pricing, carefully considering the difference between a distressed sale and a non-distressed situation. Now more than ever, it is absolutely essential for sellers, and buyers, to enlist the help of an experienced, proven REALTOR® to navigate through this market with a successful outcome.

So how do the rest of the numbers look? Demand, the number of new pending sales within the prior 30 days, dropped by 127 homes in the past two weeks, but matched the level reached two weeks ago at 2,847. HOWEVER, the disparity between this year and the last two years continues to grow, indicating that the current market is healthier and more robust in comparison. And, demand has almost eclipsed 2005 levels! Demand is 156% stronger than last year (152% two weeks ago) and 43% stronger than two years ago (34% two weeks ago). In 2007, demand was only at 1,113 pending sales, 1,734 fewer than today. In 2006, demand was at 1,991, 856 fewer than today. In 2005, demand was at 2,868, 21 additional pending sales, less than three-quarters of 1% difference. This is a very good sign for the Orange County real estate market as a whole.
With both inventory and demand dropping, the expected market time increased slightly from 4.43 to 4.55 months. Still, the current market time is another unbelievable contrast to the 14.97 months mark established at the beginning of this year. Last year the expected market time was at 15.96 months and two years ago it was at 7.78 months. This is a reflection of a healthier market in comparison to prior years due to better pricing, higher demand and discretionary homeowners.

The disparity in Total Pending Sales, a statistic that I started tracking back in September of 2006 to show ALL pending activity and not just the past months activity (demand), from last year to this year continues to grow unabated. The disparity has grown to 170% greater than last year. Today it stands at 4,276 total pending sales. Last year the total pending count was at 1,581, a difference of 2,695. This is yet another unbelievable contrast to just one year ago.

Even though the distressed inventory has been dropping, it has not dropped as swiftly as the discretionary seller inventory; thus, the percentage of distressed homes on the market has actually increased over the past month. A month ago there were 5,744 distressed homes on the market, foreclosures and short sales, representing 42.3% of the market. Today there are 5,597 distressed homes, 147 fewer than four weeks ago, representing 43.3% of the overall active inventory. Any drop in the distressed inventory is a welcome sign for the Orange County housing market because it establishes that even as more distressed homes come on the market, they are actually going off the market faster. We can expect the distressed market to be a major player in the marketplace throughout the rest of this year and 2009 as well. For the rest of the year, demand will continue to drop slightly as will the active listing inventory. After the Autumn market and Holiday market, from Halloween through the first couple of weeks of the New year, housing demand has the potential of taking a larger bite out of the distressed inventory and could, ultimately, finally stabilize the market. I am not referring to the heydays of a few years ago with rapid appreciation; instead, I am referring to more of an equilibrium, where demand meets the supply and prices no longer drop. An equilibrium calls for a stabilization of pricing with very little change in one direction or another. If you are a buyer looking for a distressed home to purchase, please know that you have a lot of company. Distressed homes in great condition and a great location attract many buyers and generate multiple offers. Be prepared to compete.

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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