October 30, 2008
The Holiday Market, from Halloween through the first couple of weeks of the New Year, starts now as demand begins to slow; HOWEVER, current demand is almost double last year at this time. With the election upon us, the stock market bouncing all over the place along with interest rates, and all loans outside of FHA and conventional frozen from the effects of the financial crunch, it is no wonder that demand has dropped recently. Current demand, the number of pending homes within the past month, dropped by 210 homes in the past two weeks to 2,463. Still much improved compared to the 1,241 pending sale mark in 2007 or 2,011 in 2006. The additional demand is only in the lower ranges,though, where the majority of all distressed sales exist. Distressed sales are the fuel that is igniting the first time home buyers market and inviting investors (only those with a lot of cash) back to the housing market. Last year at this time there were 6,095 active listings below $500,000 and demand at 477 pending sales. Today, there are 6,450 active listings below $500,000 and demand at 1,736, that’s a 263% improvement year over year. 67% of the current active inventory below $500,000 is either a foreclosure or short sale and 85% of ALL distressed sales are found within this range as well. In exploring prior downturns, it is always the lower ranges that heat up first and fuel an eventual recovery. One can only imagine how much better demand would be if interest rates weren’t bouncing around and loans outside of conventional and FHA did not require unrealistic FICO scores and much higher interest rates. In the jumbo loan arena, loans above $729,750, demand is very low, even lower than one year ago in the midst of the beginning of the financial crunch. For example, for the range of homes between $750,000 to $1 million, demand is at 140 homes today, 23% lower than the 181 mark last year and 58% lower than the 332 mark two years ago. Every range above $1 million is either similar or even worse. This has everything to do with the frozen financial markets; all products that do not have some sort of government backing are mired in conditions and restrictions where only the cream of the crop with a lot of cash on hand need apply. Since fewer distressed sales are within the higher ranges, discretionary sellers with equity are simply avoiding competing in the housing market under the current conditions. There are only 1,364 active listings between $750,000 and $1 million, 41% fewer than the 2,306 level last year and 49% fewer than the the 2,663 level in 2006. The market has changed and discretionary sellers with equity are wisely avoiding the market if at all possible. We can expect more of the same until all of the government legislation and manipulation past, present and future start to thaw the frozen financial system. Signs of thawing are lower rates for ALL financial products, the resumption of lending for jumbo loans, commercial loans and all forms of credit, and the return of demand in homes priced above $750,000.
So, how do the numbers look? The current active inventory increased by 68 homes in the past two weeks to 12,790. Last year there were 4,664 additional homes on the market, totaling 17,454. Two years ago there were 2,473 additional homes on the market, totaling 15,253. With a decrease in demand and a slight increase in the active inventory, the expected market time increased from 4.76 months to 5.19 months. 5.19 months is still much better than an expected market time of 14.06 months last year and 7.59 months in 2006. The TOTAL pending count is currently at 3,960 pending sales. The TOTAL pending count is 137% higher compared to the 1,671 level last year. Distressed homes, foreclosures and short sales, increased slightly from 42.9% of the inventory two weeks ago to 43.0%. The total number increased by 46 homes, bringing the total to 5,499. 46% of all distressed home activity is confined within just eight areas (ranked from highest concentration to lowest):
· 939 in Santa Ana (79.2% of the 1,186 listings)
· 658 in Anaheim (76.9% of the 856 listings)
· 321 in Garden Grove (72.1% of the 445 listings)
· 137 in Rancho Santa Margarita (70.6% of the 194 listings)
· 159 in Lake Forest (69.4% of the 229 listings)
· 38 in Foothill Ranch (69.1% of the 55 listings)
· 129 in Buena Park (60.8% of the 212 listings)
· 128 in La Habra (59.3% of the 216 listings)
· Totaling 2,509 of the 5,499 in all of Orange County
With the exception of La Habra (an expected market time of 4.6 months) all of these areas have expected market times at 3.32 months or lower, a SELLER’s market. For all of Orange County, foreclosures make up just 10% of the distressed market inventory and have an expected market time of 1.22 months, a deep seller’s market. Short sales make up the remaining 90% of the distressed inventory and have a skewed expected market time of 6.92 months, what would normally be a buyer’s market. However, ask any buyer actively looking for a home in the current marketplace and most short sales have an agreed upon contract between a buyer and seller and yet the home is still actively marketed. This is due to the fact that there really is not a pending sale until the lender (or lenders) in a short sale agrees to decrease the outstanding loan balance in order for the sale to take place. Short sales are “subject to the lender’s acceptance” because the seller owes more than the home is worth and they necessitate the lender forgiving some of the loan balance. So, even though a short sale may be on the market as an active listing, there is a high probability that a consummated contract has already been submitted to a lender. Thus, demand, a willing and able buyer, is actually much stronger than the current 6.92 month mark suggests.
How should sellers approach the current market? We are moving into the Holiday market where we can expect demand to drop further with plenty of competition sticking around. Distressed properties have no alternative and will remain on the market no matter what. So, if you are a homeowner contemplating placing your home on the market, be prepared for a lot of competition and fewer buyers in the marketplace. As a homeowner with equity, the absolute best bet is to hold onto your home for the next few years and allow for the market to eventually stabilize and reverse course. Homeownership has historically always been a super long term investment. To sell at the bottom is not wise unless a homeowner is moving up to a higher range. The Spring market, typically marked with the strongest demand of the year, does not begin until the end of January, 2009. But, make no mistake, values are not going to be appreciating from now until then and they will not be appreciating anytime next year as well. Instead, we will eventually reach equilibrium in the market where prices will just hold steady, most likely towards the end of Spring. Carefully pricing a home is fundamental to achieving success in selling in today’s market. 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, and the location needs to be carefully factored into the price. Sellers 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? Buyers can either take heed of the following warning or learn their own lessons through the school of hard knocks: there is tremendous competition in the lower ranges, especially regarding distressed properties. Understand that the sales to list price ratio is very close to 100% for distressed properties. I have heard countless stories of buyers writing offers at 10% to 20% off of the list price, only to be burned by another buyer (or buyers) willing to pay at or close to the list price. For lower ranges and the distressed inventory, multiple offers are the norm. 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 may pay a little bit more, but there is less hassle and, in most cases, the condition is distinctly much better. Buyers looking for a short term purchase should just rent. If a buyer plans on staying in a home for several years, then it is a great time to buy. Low rates, lower prices, improved affordability , and with the lower ranges showing definitive signs of an eventual recovery, it is a great time to buy and hold. Eventually the market will turn and you will have purchased at a much slower, opportune time.
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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