Orange County Housing Report: The Sky: NOT Falling

Posted by Hartanov Real Estate Team on Thursday, May 26th, 2022 at 12:42pm.

Orange County Housing Report:  The Sky: NOT Falling

 

Many are jumping to extreme conclusions about the impact of higher rates, high inflation, and a potential recession on the housing market.

A Seller’s Market Will Prevail

While the market is slowing, it is gradually evolving from its out of control, insane pace, to a normal Seller’s Market where pricing will be fundamental in finding success.

In flipping open a Merriam-Webster Dictionary and looking up “Chicken Little,” it states, “one who warns or predicts calamity especially without justification.” Economists are used to the constant chatter about recessions, bubbles, and plunging home prices. The current economic environment has amplified the noise: surging interest rates, highest inflation since 1981, and a volatile stock market. This will definitely have an impact on the economy and housing, yet it will not be to the extent of the fearmongering masses who immediately jump to the worst possible outcome. The sky is NOT falling when it comes to housing.

Most people remember the burn of the Great Recession. It either happened to them specifically, a family member, or a friend. There was an unstoppable wave of foreclosures and short sales. Home prices plummeted, erasing years of incredible gains. Unemployment jumped and took over six years to recover. The Great Recession was the largest economic downturn since the Great Depression, and it has left deep scars on society at large. Flash forward to today and home prices continue to soar, interest rates remain elevated above 5%, housing is just starting to slow, and many are calling for an imminent recession.

Only two of the last six recessions negatively impacted housing values here in Southern California, and both were caused by the housing industry. The savings and loan crisis of the 1980’s and early 1990’s led to a recession and an erosion in homes values that started in August 1990. One of the main reasons for the recession: unsound real estate lending practices. The Great Recession began in 2007 after the March subprime meltdown. Easy credit, pick-a-payment plan, subprime lending, zero-down loans, easy qualifying, adjustable teaser rates, and fraudulent lending all led to the largest downturn since the depression.

When pundits start talking about a potential recession, everyone’s collective brains immediately recall the Great Recession and expect the economy and housing to behave just like it did in 2007. They forget about the other recessions where housing values continued to rise. Today’s housing has an extremely strong foundation with years of tight lending qualifications, large down payments, fixed rate mortgages, plenty of nested equity, and limited cash-out refinances.

In housing, during a slowdown, demand falls, the active inventory rises, and it takes longer to sell a home. During the Great Recession there was a glut of homes available to purchase and it was matched up with muted demand. Consequently, home values plunged. In Southern California there were nearly 120,000 homes available in 2007 compared to the 19,000 homes available today, over six times more. Today’s missing ingredient that would lead to falling home values is supply. The number of homes on the market today is far below averages prior the start of the pandemic when values were still rising, but at a much more methodical pace.

The Orange County supply is at 2,452, a sharp rise from the 994 homes on January 1st, but still far below the 3-year average prior to COVID (2017 to 2019) for this time of year of 6,255. That is 155% more than today, more than double. Even with a 348-home climb, or 17% rise, in the past couple of weeks, it is still off by 3,803 homes. That’s a lot to make up just to get back to more normal levels. Keep in mind that the inventory levels since 2012 have been remarkably muted compared to the Great Recession and it has become even more pronounced each year.

With swiftly rising mortgage rates so far this year, demand, the prior 30-days of pending sales activity, began to slide after reaching an early peak on March 31st, when it normally rises. After initially dropping slightly, demand has stabilized and rose in the past couple of weeks by 25 pending sales. It now sits at 2,179, which is still 21% lower than the 3-year average prior the COVID, and 30% lower than last year at this time. But it is not going to plunge from here. The housing market has already digested 5% plus rates and there are still plenty of buyers looking to purchase at these higher rates. The recent rise is indicating that demand has indeed become more stable and has found its footing.

Demand is muted compared to its elevated levels of the last couple of years, and lower than the normal levels prior to the pandemic, yet it is matched up against an abnormal muted supply of homes available today. This has resulted in the Orange County housing market remaining at an insanely, Hot Seller’s Market level. The Expected Market Time, the time it would take between hammering in the FOR-SALE sign to opening escrow, has risen from 20 days on March 31st to 34 days today, a two-week increase. However, at 34-days, the housing market is still at an insanely hot level. Anything below 60-days is considered a Hot Seller’s Market. From 60 to 90, it is considered a Slight Seller’s Market. The market is balanced between 90 and 120 days. It does not become a Slight Buyer’s Market until the Expected Market Time eclipses 120 days. And values do not fall swiftly until it is a Deep Buyer’s Market above 150 days. Today’s 37-day mark is nowhere close to a Balanced or Slight Buyer’s Market.

 

As the inventory rises and demand remains stable, the Expected Market Time will continue to slowly rise. It will remain a Seller’s Market this year, but it will take longer for sellers to find success, especially as the year progresses. Sellers will no longer get away with overpricing their homes. To find success, sellers will have to carefully arrive at their asking prices, taking into consideration the most recent comparable pending and closed sales.

The sky is not falling. Instead, housing is in the midst of transitioning from an insane, unhealthy velocity to a much more normal, methodical, “steady as she goes” pace.

Active Listings

The current active inventory continued to rapidly grow. 

The active listing inventory surged higher, adding 348 homes in the past couple of weeks, up 17%, and now sits at 2,452 homes, its highest level since last August. For the first time since August 2019, there are more homes on the market than the prior year. It is the middle of the Spring Market when more homes come on the market than any other time of the year. As more homes come on market, they are being matched up against muted demand due to 5% plus mortgage rates, allowing the inventory to rise. Homes that are overpriced, in poor condition, or an inferior location are going to be harder to sell and will accumulate on the market. Sellers should no longer expect instantaneous success, which will become less likely as the year progresses and market times continue to rise.

A new trend has emerged this year, fewer homeowners placing their homes on the market compared to the 3-year average prior to COVID (2017 to 2019). The inventory would rise much more swiftly if a normal number of homeowners came on the market. In 2020, there were 2,611 missing FOR-SALE signs. In 2021, it was 2,368. So far this year, from January through April, there are 18% fewer homes compared to that average, 2,493 missing signs, more than all of 2021. Many homeowners quite simply are opting to not participate in the current housing market.

Last year, the inventory was at 2,247, 8% lower, or 205 fewer. The 3-year average prior to COVID (2017 through 2019) is 6,255, an extra 3,803 homes, or 155% more, more than double today. There were a lot more choices back then, though this is slowly changing.

 

Demand

Demand slightly increased in the past couple of weeks. 

Demand, a snapshot of the number of new escrows over the prior month, increased from 2,154 to 2,179 in the past couple of weeks, up 25 pending sales, or 1%. Demand peaked early this year on March 31st due to experiencing the largest climb in rates since 1994. Typically, demand peaks between the end of April to the end of May, but rising rates and affordability took a giant bite out demand. The rise indicates that demand has found its footing and will bounce along these levels as long as mortgage rates remain elevated above 4.5% with duration and they don’t spike further from here. This is still the lowest level for demand at this time of year since 2007, intentionally omitting the COVID lockdowns of 2020.

 

Last year, demand was at 3,127, 44% more than today, or an extra 948. The 3-year average prior to COVID (2017 to 2019) was at 2,765 pending sales, 27% more than today, or an extra 586.

With the supply surging higher and demand only increasing slightly, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased from 29 to 34 days in the past couple of weeks, its highest level since January of last year. At 34 days it remains an insane, 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 still rising rapidly; BUT, the number of multiple offers is dropping and it is taking a little longer to sell for many. Last year the Expected Market Time was at 22 days, faster than today. The 3-year average prior to COVID was at 68 days, substantially slower than today and a Slight Seller’s Market (between 60 and 90 days).

Luxury End

The luxury market improved slightly in the past couple of weeks. 

In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 568 to 616 homes, up 9%, or an additional 50 homes, its highest level since August. Luxury demand increased by 30 pending sales, up 14%, and now sits at 244. With demand climbing faster than the supply, the overall Expected Market Time for luxury homes priced above $2 million decreased slightly from 80 to 76 days, an extremely hot market for luxury. At 76 days it is considered a Slight Seller’s Market (between 60 and 90 days).

Year over year, luxury demand is down by 64 pending sales or 21%, and the active luxury listing inventory is down by 14 homes or 2%. The Expected Market Time last year was at 59 days, considerably stronger than today.

For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 61 to 54 days. For homes priced between $4 million and $8 million, the Expected Market Time decreased from 107 to 106 days. For homes priced above $8 million, the Expected Market Time increased from 201 to 401 days. At 401 days, a seller would be looking at placing their home into escrow around June 2023.






Leave a Comment

Format example: you@domain.com
Format example: yourwebsitename.com