Monday, May 12, 2014 / by John Steele Davidson
May 11, 2014
The Orange County housing market has been evolving, leaving many
scratching their heads wondering where it’s headed.
The Top 10 Housing Trends: the latest housing trends gives a definite sense how the market is developing.
After dramatically appreciating throughout 2012 and most of 2013, this year has a completely different feel and has been unpredictable. To get a better sense where the market is currently at and where we are headed, it is best to take a closer look at the latest trends. Here’s a breakdown of the “Top 10” current Orange County housing trends:
1. The active listing inventory is moving towards a long term average. After dropping unabated for 19 months beginning in mid-June 2011 through January 2013, the active inventory bounced around an anemic, historical low. In mid-March of last year, there were only 3,183 homes on the market. Today there are 6,667, more than double. We have not seen the inventory this high since March 2012, and there are no signs that the increase will slow anytime soon. It will probably tap out at around 8,000 homes in August before it starts to fall as homeowners throw in the towel with the transition into the Autumn Market. The inventory is rising on the backs of overzealous, overpriced sellers who will not achieve success until they are priced right.
2. Homeowners with equity, “Equity Sellers,” dominate the Orange County real estate scene. For the past three months, equity sellers represented 94% of all closed sales. Distressed homes dominated Orange County real estate three years ago, but the real estate market has been in recovery mode ever since. With only 5% of all mortgage homes under water (it was over 20%) and with massive appreciation, more good ol’ fashioned homeowners have been encouraged to place their homes on the market.
3. Distressed properties, both foreclosures and short sales, have only a small role in housing today. Distressed homes made up nearly 50% of the market three years ago. Banks had a chokehold on housing as they were in charge of all foreclosures and short sales required the bank’s approval to take less than what was owed. They have moved from the driver’s seat to the back of the bus, making up only 6% of closed sales today. Only 1% of all sales are foreclosures and 5% are short sales. For the first four months of this year, there were only 571 closed distressed sales compared to 1,944 a year ago, down a mind-blowing 71%. Two years ago there were 3,861.
4. Total closed sales are down. So far this year there are 8,272 closed sales, down 12.6% from last year when there were 9,469. Sales have not been this low in three years. What’s changed? Distressed sales have dramatically dropped while the number of equity sellers is actually up by 2% compared to last year. The increase of equity sellers is just not enough to make up for the lack of foreclosures and short sales. It doesn’t help that many equity sellers start out grossly overpriced and often will not adjust their prices enough in order to successfully sale.
5. Unrealistic, overzealous, overpriced sellers are back this year with a vengeance. Sellers were able to get away with overpricing their homes in 2012 and 2103. Values were low enough that buyers were willing to pay more than the last closed sale. That changed a year ago; new sellers reached for the stars and priced way above recent sales, buyers balked. What began last year has morphed into the dominating theme of 2014. Sellers are not getting away with overpricing so they are sitting on the market with no offers. As a result, the inventory has risen dramatically and buyers have a lot more homes to choose from.
6. Buyers want to pay the Fair Market Value of a home. Now that home values have risen substantially from a couple of years ago, buyers are not eager to pay much more than recent closed sales, the Fair Market Value of a home. This explains why so many homes have been sitting on the market. Buyers are now willing to wait for the right home to hit the market at the right price. Homes that are priced in line with reality fly off the market; unfortunately, they are the exception to the rule.
7. The expected market is rising. The expected market time takes into consideration the total inventory and current demand. A rise in inventory pulls the expected market time up. Stronger demand pushes the expected market time down. Demand has been a bit softer than last year and the listing inventory has been on the rise; thus, the expected market time has doubled since last year. Last year it was at 37 days compared to 74 days today. Anything below five months is a seller’s market, but that does not mean that sellers get to choose their sales price. As the inventory rises and demand slightly softens during the summer months, the expected market time will continue to increase.
8. There are three distinct price ranges. The hottest market is homes priced below $1 million, 87% of closed sales in 2014. The expected market time is at 2 months. Last year these homes had upwards of 20 offers that were generated immediately after placing the For Sale sign in the yard. Today, when priced right, they can still generate multiple offers, just not nearly as many. The more unrealistic and higher the price, the fewer offers obtained. The next range is homes priced between $1 million to $2 million, 9% of all closed sales this year. The expected market time is 4.43 months, an ever-so-slight seller’s market. 5 months is equilibrium. The last price range is homes priced above $2 million. This price range makes up 11% of the active inventory, but only 3% of all closed sales. The expected market time for this luxury market is 9 months. This range marches to the beat of its own drum and sellers are very aware that it can take a long time to sale. Prices are a lot stickier and sellers are not quick to drop their asking price.
9. Interest rates are flat. After the Federal Reserve announced that they were “tapering” their involvement in the secondary market, rates rose 1% overnight. Since then, rates have remained pretty steady bouncing around 4.5%. It is important for everybody to understand that even though rates have remained the same, there is tremendous pressure on rates to rise because of the amount of money that the United States has dumped into the system to get housing back on its feet. It is only a matter of time before interest rates rise beyond 5% and many people will be kicking themselves at the missed opportunity of cashing in on historically low rates.
10. There are a lot of vacant homes on the market. One year ago there were 682 vacant homes on the market, representing 18% of all homes. Flash forward to today and there are 1,852 vacant homes, 28% of the active market. This increase is most likely due to the number of investors who have purchased, rehabilitated, and now are selling at a premium and profit. Many have been a bit overly optimistic in their numbers and after a while need to dial their expectations back a bit and reduce in order to sale.