Orange County Housing Report: It’s a Demand Problem
August 12, 2018
The focus has shifted from not enough homes on the market to extremely soft demand.
A Demand Problem: Demand was 20% higher last year and 23% higher two years ago at this time.
Everybody has been acutely aware that there have not been enough homes on the market for years now. The storyline has been the same year in and year out: with only a trickle of homes coming on the market, buyers have been tripping over themselves to purchase them. REALTORS® have become accustom to 50, or 100, or even more, potential buyers touring their Open Houses. Multiple offers have been the norm. In the lower ranges it was customary for homes that were priced well to lure 10 to 20 offers. It was no wonder that values have skyrocketed over the last 6½ years.
The type of market and home values are determined by supply and demand, and housing has been experiencing a supply problem for years. Quite simply, not enough homeowners have been entering the real estate arena since 2012. It has been a hot Seller’s Market ever since. Unfortunately, everybody has become used to the market lining up heavily in the seller’s favor. It has everyone’s expectations out of whack. The expectation is for the Seller’s Market to continue forever. That is just now how economics and housing works.
Suddenly, in 2018, the market evolved. The year started like every other year of the housing run, there were not enough homes on the market. But, this year the inventory climbed at a very fast pace during the Spring and Summer markets, the fastest since 2008. The active inventory has more than doubled this year and sits at 6,893 homes today, but it is still shy of the long-term average of 8,000 homes. Nonetheless, the market was redefining itself. The supply problem morphed into a demand problem.
As the inventory was increasing rapidly in the spring, the number of pending sales was subdued. Demand, the number of pending sales over the prior month, was slightly off from the very beginning of the year. It slowed further in February, but did not really become apparent until April when the year over year difference widened. At that point, REALTORS® in the trenches and sellers began to feel a noticeable shift in the market. The “normal” market that everybody had been used to with a steady stream of buyers, instantaneous, multiple offers, and sellers wondering if they had underpriced their homes even though they had achieved a record sales price for the neighborhood, was quickly vanishing.
Even though everybody has become accustom to a hot seller’s market, it is NOTa normal market. Today, we are experiencing a “NORMAL” market, also referred to as a Balanced Market, one that does not really favor sellers or buyers. That is where housing has evolved to today. It is a market where properly pricing is fundamental in order to find success. Both buyers and sellers need to carefully approach the market. Sellers cannot stretch their asking prices, like so many do today, or they will just sit. Buyers cannot bring in low, unrealistic offers either, or they will never buy. It is not a buyer’s market. Homes will sell at their Fair Market Values. Buyers are willing to pay very close to the last comparable sale, so sellers need to meet them there by pricing their homes appropriately.
How did we get here? Home values have increased by 80% from the lows of 2011. Appreciation has been off the charts for a very long time. The increase in values has outstripped the rise in incomes substantially. That simply cannot continue forever. Affordability has been further rocked by a healthy rise in interest rates. Today’s rate of 4.75% is a lot higher than last year’s 3.9%. With higher interest rates and home values reaching record levels, buyers are not as eager to purchase. Instead, they are carefully approaching the housing market. They do not want to overpay.
It is time for everybody’s expectations to adjust. A normal housing market is here, and it looks like it’s not going to evolve further anytime soon. That means that one of four homes on the market will not find success. Sellers will have to recalibrate and often reduce their asking prices to be more inline with reality. In fact, 13% of the entire active listing inventory reduced their asking price just last week. Slowly but surely, everybody will get used to the normal, balanced market. Those that realign their expectations today will find success.
Active Inventory: The active inventory grew by 2% in the past two-weeks.
The active listing inventory continued its climb in the past two-weeks, adding 134 homes, or 2%, and now totals 6,893, its highest level since September 2016. Expect the active inventory to peak within the next few weeks. From there, housing transitions into the Autumn Market with fewer homes entering the fray and many sellers throwing in the towel and pulling their homes off the market after not finding success in both the spring and summer.
Last year at this time, there were 5,877 homes on the market, 1,016 fewer. That means that there are 17% more homes available today. The year over year difference is growing week by week. The trend of more homes on the market year over year is here to stay.
Demand: Demand did not change over the past two weeks.
In the past two-weeks, demand, the number of pending sales over the prior 30-days, increased by 1 pending sale and now totals 2,394, the lowest demand reading for this time of the year since 2007. Lackluster demand that has not been seen since 2007 is a trend that started in April and looks to continue. Expect demand to drop further from now through the end of the year. Typically, demand downshifts from here because the best time to sell is in the rearview mirror. Fewer families desire to make a move once the kids are back in school, which for many starts as early as next week. Many families pull out of the house hunt in August and demand drops.
Last year at this time, demand was at 2,890 pending sales, 21% more than today, or 496 additional pending sales.
The expected market time, the amount of time it would take for a home that comes onto the market today to be placedinto escrow down the road, increased from 85 to 86 days in the past two-weeks. Last year, the expected market time was at 61 days, substantiallyhotter than today.
Luxury End: Luxury demand increased, and the inventory dropped.
In the past two-weeks, demand for homes above $1.25 million increased by 18 pending sales, up 6%, and now totals 331, nearly identical to one month ago. It’s still down 24% from the end of May. The luxury home inventory decreased by 40 homes and now totals 2,152. The overall expected market time for homes priced above $1.25 million decreased from 210 to 195 daysover the past two-weeks.
Year over year, luxury demand is down by 38 pending sales, or 10%,and the active luxury listing inventory is up by an additional 80 homes, or 4%. The expected market time last year was at 168 days, much better than today.
For homes priced between $1.25 million and $1.5 million, the expected market time decreased from 107 to 93 days. For homes priced between $1.5 million and $2 million, the expected market time decreased from 187 to 183 days. For homes priced between $2 million and $4 million, the expected market time decreased from 300 to 294 days. For homes priced above $4 million, the expected market time decreased from 718 to 523 days. At 523 days, a seller would be looking at placing their home into escrow around mid-January 2020.
Orange County Housing Market Summary:
- The active listing inventory increased by 134 homes in the past two weeks, up 2%, and now totals 6,893. Expect the inventory to peak within the next few weeks. Last year, there were 5,877 homes on the market, 1,016 fewer than today.
- This year, 16% fewer homes have come on the market below $500,000 compared to last year, andthere have been 25% fewer closed sales so far this year. Fewer and fewer homes and condominiums are now pricedbelow $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 1 pending sale and now totals 2,394. Demand peaked in mid-May at 2,726 pending sales. Last year, there were 2,890 pending sales, 21% more than today.
- The average list price for all of Orange County remained at $1.6 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 still a seller’s market (less than 90 days). This range represents 39% of the active inventory and 56% of demand.
- For homes priced between $750,000 and $1 million, the expected market time is 84 days. This range represents 21% of the active inventory and 21% of demand.
- For homes priced between $1 million to $1.25 million, the expected market time is 94 days, a balanced market (between 90 to 120 days).
- For luxury homes priced between $1.25 million and $1.5 million, the expected market time decreased from 107 to 93 days. For homes priced between $1.5 million and $2 million, the expected market time decreased from 187 to 183 days. For luxury homes priced between $2 million and $4 million, the expected market time decreased from 300 to 294 days. For luxury homes priced above $4 million, the expected market time decreased from 718 to 523 days.
- The luxury end, all homes above $1.25 million, accounts for 31% of the inventory and only 14% of demand.
- The expected market time for all homes in Orange County increased from 85 to 86 days in the past two weeks and is just about a balanced market (from 90 to 120 days).
- Distressed homes, both short sales and foreclosures combined, made up only 0.9% of all listings and 1.5% of demand. There are only 24 foreclosures and 35 short sales available to purchase today in all of Orange County, 59 total distressed homes on the active market, identical to two weeks ago. Last year there were 88 total distressed homes on the market, 49% more than today.
- There were 2,766 closed residential resales in July, nearly identical to July 2017’s 2,768 closed sales. July marked a 3% decrease from June 2018. The sales to list price ratio was 97.8% for all of Orange County. Foreclosures accounted for just 0.4% of all closed sales, andshort sales accounted for 0.5%. That means that 99.1% of all sales were good ol’ fashioned sellers with equity.