Orange County Housing Report 7/25/2011

Orange County Housing Report: A 2011 Midyear OC Housing Update

July 21, 2011

Good Afternoon!

Not a lot is changing in regards to the Orange County housing market, but it looks as if the second half is poised to be better than a year ago. So, how’s 2011 shaping up thus far and where is housing headed from here? Let’s dig a little bit deeper...

Demand: no tax credit this year, but demand is much more predictable and following a normal cyclical pattern.
This is the first time since 2008 where demand has been able to function on its own without an $8,000 first time home buyer tax credit to skew the numbers. In 2009, the credit expired on November 30th. From April 2009 through November 2009, demand remained well above the 3,000 pending sale threshold, enabling 2009 to be the best year in total sales since 2005, prior to the beginning of the current downturn. In 2010, in order to take advantage of the tax credit, a home had to be pending by April 30th. The market sizzled for the first four months of the year, but dropped considerably after the pending sale deadline. The second half of 2010, with no tax credit, demand was off by 8% compared to 2009. Through today, demand is off by 10% compared to last year. Closed sales are off by 10% as well. Naysayers who have followed this housing report have often pointed to the fact that pending sales are not an accurate gauge of the housing market because many pending deals fall out. True, many pending deals do fall through, but that has been going on for years. There’s really no difference in the frequency of unsuccessful pending sales this year compared to prior years. Thus, if there is a decrease in pending deals this year compared to last year, closed sales will decrease as well. Pending sales is the absolute best gauge for knowing what’s going on in the housing market trenches TODAY. So much attention is placed on closing sales, but that is a very accurate gauge for what was happening in the market two months ago. For example, year over year demand has been off up until this month. Today, demand, the number of new pending sales over the prior month, sits at 2,894 pending sales, 24 more homes than last year. That’s not much, but I will bet all the money in the world that year over year closed sales in September will be nearly the same or slightly higher than last year. Where do we go from here? Demand will continue to follow a normal housing cycle and will be just a little bit better than last year’s numbers. The end of the summer market will occur with the beginning of the new school year. We can expect demand to drop slightly during the autumn market, September through the first couple of weeks of November. Demand will drop to its lowest levels of the year during the holiday/winter market, from Thanksgiving through February. Do to all of the distractions of the holidays, the absolute slowest, rock bottom time of the year for demand is from Thanksgiving through the first few weeks of the New Year.
The Active Listing Inventory: after slightly increasing this year, the inventory will continue to drop through New Year’s Day
After a painful 2007 and 2008, homeowners finally understood that the heydays of the earlier 2000’s were gone and were not coming back anytime soon. Those years were marked by a swelling of the active listing inventory and a majority of sellers were simply unsuccessful. In 2007, the inventory blossomed to nearly 18,000 homes on the market. In 2008, it almost reached 16,000 homes. In 2009, after being fooled for two years, the discretionary homeowner emerged. For the most part, homeowners knew that either they had the stomach to do what it takes to successfully sell or they simply did not place their homes on the market. The active listing inventory dropped by 35% that year, finishing the year at just 7,381 homes, levels not seen since 2005. The first time home buyer tax credit that expired in November helped clean up the inventory substantially. But, it was the discretionary homeowner that saved the day that year. In 2010, the discretionary homeowner took a hiatus and from the beginning of the year until mid-September, the inventory grew by an astonishing 63%, erasing all of the progress of 2009. That happened despite the second $8,000 credit. In the trenches, agents were stating that sellers were placing their homes on the market at unrealistic levels. Bank foreclosures, short sales and equity sellers all fell into the trap of being overzealous. With the spring and summer markets gone, the inventory dropped from September through the end of the year by 14%. 2011 started with an active listing inventory of 9,987 homes and increased by 14% until it reached a 2011 peak a month ago at 11,388. In the past month, the listing inventory shed 68 homes, less than 1%. The agents in the trenches state that there are still plenty of unrealistic homeowners. Most successful sellers have to reduce their price at least once. Homes sell due to three factors: price, location and condition. A homeowner can do nothing about changing their location. They do have control over price and condition. In this market, where every buyer is looking for a “deal” and not willing to pay a dime over the market value, price is by far the most important element to success. Buyers do not care what a seller needs to net from their home. They don’t care if a seller thinks there home is the best and has top notch upgrades. Instead, these spreadsheet buyers are going to carefully arrive at price and will walk away if they feel a seller is not being realistic. They would rather wait for another home to come onto the market than overpay. So, where will the active listing inventory go from here? The inventory may even increase a little through August, but will start to drop during the autumn market and at a more accelerated rate during the holiday/winter markets. Many sellers will throw in the towel after being unsuccessful in their attempts to sell, and will avoid the slower seasons. The listing inventory will not start to increase until after the New Year.


Three Distinctly Different Markets: the expected market time is vastly different depending upon the price range.
In terms of expected market time, there are three distinctly different price ranges. For the county as a whole, the expected market time is just shy of four months. But, we need to drill down a little bit deeper to get the real story. The below $500,000 price range makes up 51% of the active inventory and 68% of demand. That means that only 32% of demand can be found in homes above $500,000. The expected market time for homes priced below the $500,000 mark is only 2.95 months, a seller’s market. In that range, buyers can expect a lot more competition, multiple offers and sales prices at or near their asking prices. The average sale is just 2% lower than the asking price. That’s not a lot of room in the price. Buyers in this range often get burned a couple of times before sharpening their pencils and writing very realistic offers to purchase. Many sellers start off too high, but when they come down to realistic levels, sell very fast. The second distinctly different market is the $500,000 to $1 million range. The expected market time is 4.6 months, very close to equilibrium. Realistic pricing is an absolute must and can still take a while to procure an offer. Buyers in this range still should not get too zealous. The average sale is only 3% off of the asking price. That’s a little bit of room, but buyers who desire to submit low ball offers should not waste their time. The final range is homes priced above $1 million. The expected market time is just under a year. The higher the range, the longer it will take to sell. For homes priced above $4 million, 306 on the market today, the expected market time is 51 months. Buyers looking to buy above $1 million need to know that many homes are unrealistically priced. The average sale is 7% off of the asking price. In this range, 7% is sizable. Sellers need to very carefully arrive at price. They also need to know that there just are not enough buyers in the market looking for high priced homes. Even with an accurate price, many sellers need to pack their patience and wait for the right buyer to come along.

The Distressed Market: the active distressed inventory has remained basically the same all year long.
Yes, everybody is looking for a deal, but this market has its share of definite challenges. The active distressed inventory currently sits at its lowest level of the year, 3,713 homes and has shed 404 homes since the start of the year. Everybody has heard of the infamous “shadow inventory,” but that does not mean there is going to be a wave of distressed homes to hit the market. Instead, the market will go up or down only slightly will be very slow to change. For foreclosures, there are only 687 on the market today with an expected market time of 1.73 months, a very HOT seller’s market. Buyers can expect tremendous competition. Short sales appear to be a great bargain, but when they are priced too far below market value, they procure a lot of attention and so many offers, that they often sell way above their asking prices. Then, the waiting game begins. The average short sale takes months to put together as everybody has to wait on the first trust deed holder, all junior loan holders, and, often, a homeowner association attorney. The deal is not put together until all players agree to take less than what is owed. Some short sales that are not as complicated can take just a few weeks for lender approval, while others can take as long as a year to put together. There are currently 3,026 short sales on the active market, 26% of all active listings in Orange County. The expected market time for short sales is 2.83 months and they attract a lot of attention. Expect more of the same when it comes to the distressed market. It’s not going to change much anytime soon.

Copyright 2011 - Steven Thomas, Broker, www.ReportsOnHousing.com - All Rights Reserved. This report may not be reproduced in whole or part without express written permission by author.