Orange County Housing Report:  Sellers Beware

April 22, 2018

 

A sudden spike in the inventory is an ominous sign for sellers to approach the market carefully. 

An Inventory Spike: In the past two weeks, the active inventory had its largest increase since July 2013.

The script for the Orange County housing market has been the same for quite some time now. The year starts with very few homes on the market. The inventory rises slowly, peaking sometime during the summer. The long-term average for the active listing inventory is 8,000 homes; yet, it cannot even hit that level for a day, falling astonishingly short year after year. The headlines have been the same: “Not Enough Homes on the Market” and “Buyers are Tripping Over Themselves to Purchase.” 

Suddenly, something has changed. More homes are coming on the market, a lot more homes. The active listing inventory spiked in the past two weeks, adding 436 properties, a 9% increase. Granted, the overall inventory, 5,016 homes, is still very low compared to the long-term average, but there is a palpable change in the air.

In 2017, the inventory jumped by 300 homes, up 6%, at the beginning of April; however, it was accompanied by an enormous 11% rise in demand, which equated to an additional 293 pending sales. Not this year. Instead, the 436 home climb in the inventory was accompanied by a scrawny 1% increase in demand, adding only 38 pending sales. 

This sudden surge in the inventory is the largest expansion since mid-July 2013. Back then, the supply of homes increased by 613 in just two weeks, up 13%. Yet, a drop in demand of 246 pending sales, or 8%, accompanied it. At least this year’s flood of homes hitting the market did not include a major drop in demand. 

Nevertheless, this unexpected development in 2018’s market is a warning sign that change is afoot. The increase occurred in every price range. An incredible 43% of the increase was isolated to homes priced below $750,000. That is Orange County’s lower end that has had a massive inventory shortage problem so far this year. The fact that the housing market is in the middle of the Spring Market, the busiest time of the year in terms of demand, pending sale activity, AND demand only grew by 38 pending sales is warning shot across the bow that buyers are not gobbling up every home that comes on the market. 

The gigantic increase in the inventory coupled with only a slight rise in demand resulted in the expected market time, the number of days it would take for a home that came on the market today to be placed into escrow, to increase from 54 days to 58 days. It is still a hot seller’s market, below 60 days; however, it is knocking on the door of a slight seller’s market, 60 to 90 days. A slight seller’s market would mean that appreciation would slow; there would be fewer multiple offers; and, sellers would still be able to call most of the shots. 

This sudden surge in the expected market time is the largest increase for this time of year since 2007. This change typically means that buyers are more price sensitive and that sellers are not going to get away with stretching their asking prices by that much more than the most recent comparable sale. The word from Orange County’s real estate trenches is that many homes are overpriced and simply will not sell until they adjust their asking prices much closer to their Fair Market Values.

How does one arrive at a home’s Fair Market Value? A seller must take into consideration their home’s condition, location, and upgrades compared to the most recent comparable pending and closed sales. Today’s buyers are quite sophisticated and educated on deferred maintenance and the cost and time it takes to update and upgrade a home thanks to the plethora of cable television shows devoted to flipping, renovating, and purchasing homes. Most buyers are looking for homes that do not need a makeover; they do not want to deal with the hassle in revamping a home. These homes will ultimately just sit on the market until the price reflects the outstanding work that needs to be done. 

Last year at this time the active inventory was at 5,263 homes, 119 more than today, a 2% difference. 

Demand:  Demand increased by a meager 1% in the past two weeks.

Typically, demand, the number of new pending sales over the prior month, increases rapidly in April. That just has not been the case this April. In fact, after rising by only 3% for the first couple of weeks of April, demand only increased by 1% in the past two weeks, 38 additional pending sales. It now totals 2,640, the lowest demand reading for this time of the year since 2008. This lower demand level will affect the number of closed sales for Orange County in comparison to the last few years. 

Last year at this time, demand was at 2,981 pending sales, 13% more than today.  

Luxury End:  The luxury inventory and luxury demand both increased in the last couple of weeks.   

In the past two weeks, demand for homes above $1.25 million increased by 18 pending sales, up 5%, and now totals 371. The luxury home inventory increased from 1,859 homes to 1,974, up 6%. Year over year, luxury demand is down by 42 pending sales, or 10%, and the active luxury listing inventory is up by an additional 128 homes, or 7%. With more supply and less demand, the luxury market feels a bit more sluggish this year. The overall expected market time for all homes priced above $1.25 million increased from 158 to 160 days over the past two-weeks, a lot higher than the 138 days last year.

For homes priced between $1.25 million and $1.5 million, the expected market time increased from 95 to 104 days. For homes priced between $1.5 million and $2 million, the expected market time decreased from 155 to 129 days. For homes priced between $2 million and $4 million, the expected market time increased from 187 days to 208. For homes priced above $4 million, the expected market time increased from 313 to 386 days. At 386 days, a seller would be looking at placing their home into escrow around mid-May 2019. 

Orange County Housing Market Summary:

The active listing inventory increased by a staggering 436 homes in the past two weeks, up 9%, and now totals 5,144. Expect the inventory to increase from now through mid-Summer. Last year, there were 5,263 homes on the market, 119 more than today.

This year, 19% fewer homes have come on the market below $500,000 today compared to last year, and there have been 28% fewer closed sales so far this year. Fewer and fewer homes and condominiums are now priced below $500,000. This price range is slowly vanishing.

Demand, the number of pending sales over the prior month, increased in the past two-weeks by 38 pending sells, up 1%, and now totals 2,640. Last year, there were 2,981 pending sales, 13% more than today. 

The average list price for all of Orange County dropped from $1.8 million to $1.7 million over the past two weeks. This number is high due to the mix of homes in the luxury ranges that sit on the market and do not move as quickly as the lower end.

For homes priced below $750,000, the market is HOT with an expected market time of just 36 days. This range represents 34% of the active inventory and 55% of demand.

For homes priced between $750,000 and $1 million, the expected market time is 45 days, a hot seller’s market (fewer than 60 days). This range represents 18% of the active inventory and 23% of demand.

For homes priced between $1 million to $1.25 million, the expected market time is 71 days, a slight seller’s market (between 60 and 90 days).

For luxury homes priced between $1.25 million and $1.5 million, the expected market time increased from 95 days to 104. For homes priced between $1.5 million and $2 million, the expected market time decreased from 155 to 129 days. For luxury homes priced between $2 million and $4 million, the expected market time increased from 187 days to 208 days. For luxury homes priced above $4 million, the expected market time increased from 313 to 386 days. 

The luxury end, all homes above $1.25 million, accounts for 39% of the inventory and only 14% of demand.

The expected market time for all homes in Orange County increased from 54 days to 58 in the past two weeks, a hot seller’s market (fewer than 60 days). The expected market time is knocking on the door of a slight seller’s market (from 60 to 90 days). 

Distressed homes, both short sales and foreclosures combined, make up only 0.4% of all listings and 0.4% of demand. There are only 22 foreclosures and 21 short sales available to purchase today in all of Orange County, that’s 43 total distressed homes on the active market, up four in the past two weeks. Last year there were 89 total distressed sales, 107% more than today.

There were 2,613 closed residential resales in March, down by 6% from March 2017’s 2,792 closed sales. March marked a 44% increase from February 2018. The sales to list price ratio was 97.6% for all of Orange County. Foreclosures accounted for just 0.5% of all closed sales, and short sales accounted for 0.6%. That means that 98.9% of all sales were good ol’ fashioned sellers with equity.

 

 

 

 

SOURCE:
Steven Thomas
Quantitative Economics and Decision Sciences

 

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