Potential buyers are being fooled into thinking it is not a good time to purchase and are delaying their plans, ignoring economic facts.
The housing boom has everything to do with supply and demand, and those fundamental features are not going to change anytime soon.
When housing is surging with seemingly no end in sight, society cannot help but flashback to 2001 through 2006. In 2004 and 2005, the Case-Shiller U.S. Home Price Index showed red-hot home price appreciation between 10% and 14.5%. Everybody knows what happened next, the housing bubble eventually popped and led to double-digit home price depreciation in 2008 and 2009. In May of this year, U.S. home price appreciation reached 14.6%, its highest level since tracking began in 1988. Yet, today’s housing market is glaringly different than the runup to the Great Recession. That housing stock was built on the backs of easy credit, pick-a-payment plan, subprime lending, zero-down loans, easy qualifying, and fraudulent lending. Prior to the bubble deflating, there were obvious signs of a pending housing collapse: way too much supply of available homes to purchase and diminished year-over-year demand. The simple principle of supply and demand painted the inevitable housing plunge.
Today, it is completely different. There is no credit bubble like before. Instead, they must qualify for loans, prove that they can afford the monthly payment. The process is intentionally cumbersome to prevent a repeat of 2007 to 2011. The current housing boom is quite simply due to supply and demand. Everyone is acutely aware of the current plight of the housing market: there just are not enough available homes to purchase. Recently the supply has been rising, up 14% in the past 4 weeks, but still at historical lows. In comparing it to the 5-year average from 2015 to 2019, it is 63% less. There are just not enough homes to satisfy the immense buying demand.
After COVID-19 hit, mortgage rates achieved 17 record lows, starting with 3.29% in March 2020. It dropped to 2.65% during the first week of January this year. The record prior to last year was achieved in November 2012 at 3.31%. Last Thursday, July 8th, according to Freddie Mac’s Primary Mortgage Market Survey®, rates dropped to 2.9%. Prior to COVID, rates were hovering around 3.75%. Combine today’s low rates with a strongest demographic patch of First-Time home buyers in decades, and it is easy to see where all the demand is coming from. Even as values rise, homes are still affordable when factoring in rates and incomes.
Recently, demand has been dropping, shedding 10% in the past 4-weeks, but it remains elevated compared to prior years. Demand, the last 30-days of new pending sale activity, is at 2,761. It is 9% less than last year’s 3,050 pending sales, but last year’s numbers were skewed because of COVID. In comparing it to the 5-year average from 2015 to 2019 of 2,699 homes, it is 2% more. And, today’s level is being achieved with a muted supply and a lot fewer homeowners placing their homes on the market.
ATTENTION BUYERS: now is a great time to buy due to historically low mortgage rates. Housing is going to remain strong due to low inventory levels and strong demand fueled by low rates. It is simple Econ 101. This is not going to change anytime soon with no anticipated flood of homeowners coming to market to change the supply side of the equation. It will be more of the same. Follow an economic model and stop watching TikTok, YouTube, and Facebook videos that are not rooted in a laundry list of economic principles, charts, and irrefutable data.
The current active inventory grew by 6% in the past couple of weeks.
The active listing inventory added 140 homes in the past couple of weeks, up 6%, and now sits at 2,528 homes, its highest level since January. In the past four weeks, it has grown by 14%, a very healthy trend and a welcome relief to the countless buyers waiting for more homes to hit the market. This is par for the course, a rising inventory during the summer months. As demand diminishes due to summer distractions, the inventory is finally able to grow, which is still occurring despite fewer homeowners opting to sell. Normally, housing peaks between July and August, but this year may peak a bit later if mortgage rates rise a bit by summer’s end.
Demand decreased by 5% in the past couple of weeks.
Demand, a snapshot of the number of new pending sales over the prior month, decreased from 2,906 to 2,761 in the past couple of weeks. In the past four weeks, demand has dropped by 10%. Demand is at its lowest level since February. It has been very challenging to be a buyer in today’s market with way too much competition. Expect demand to further downshift at the end of August.
Last year, demand was at 3,050, 10% more than today, with the arrival of a very late Spring Market due to COVID. It is better to compare today’s market to the 5-year average for demand from 2015 through 2019, which was at 2,699 pending sales, 62 fewer pending sales, or 2% less than today.
With both the inventory rising and demand falling, in the past two weeks the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased from 25 days to 27 days, its highest level since the start of February. At 27 days, it is still a HotSeller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly. Last year the Expected Market Time was at 46 days and falling. The 5-year average from 2015 through 2019 was at 76 days, much slower than today, but still a Slight Seller’s Market.