Orange County Housing Report: Coming up… Spring

March 7, 2022

Many mistaken the Summer Market as the busiest time of the year for housing, yet it is the Spring Market that is home to the most real estate activity year in and year out.

The Spring Market

More homes come on the market during the spring than any other time of the year and demand reaches a peak.

Spring is just around the corner. The days are growing longer, temperatures are slowly rising, trees that had lost their leaves are blanketed with new buds about to burst to life. Spring officially begins on Saturday, March 20^th, and it is also the start to housing’s Spring Market, the busiest time of the year for housing.

More homes are placed into escrow during the Spring Market than any other time of year. That is when the FOR-SALE sign is adorned with a smaller “SOLD” sign, letting the world know the home is no longer available to purchase. Many mistaken the Summer Market as the busiest season for real estate, but it is simply not true. Most families prefer to move when the kids are either out of, or about to get out of, school, between May and July. To accommodate that goal, they need to close escrow during those months. That means that they must come on the market during the spring, pound in that FOR-SALE sign, and open their home to potential buyers from March through June. The intention, of course, is to place their home into escrow as quickly as possible. It typically takes between 30 to 45 days to close escrow. A home is placed into pending status, the SOLD sign is installed, and an escrow is opened when a buyer and seller agree upon the price and terms of a contract. An escrow is when the home inspection take place, an appraiser comes out and appraises the property, home disclosures and a truck load of other documents go back and forth for signatures, the loan is put together, and money exchanges hands. All this occurs prior to closing when the buyer is finally able to move into the home.

The demanding escrow process takes time to complete. A home must come on the market, be exposed to buyers, open escrow, and close to complete the goal of selling and moving. This can take anywhere from a couple to several months. If families want to move while the kids are out of school, that means coming on during the spring. For Orange County, on average, more homes come on the market in May, the middle of spring, than any other month of the year. The number of homeowners coming on the market is heightened from March through July. That would enable families to move from May through August, prior to the kids going back to school. Real estate seasons center around the family and what is best for their children.

Demand, a snapshot of the prior 30-days of pending sales activity, gains momentum during the winter months, continues to rise and peak during the spring, downshifts a bit during the summer, slows further once the kids go back to school in the fall, and then plunges during the holidays. This is the normal, seasonal housing cycle, and 2022 will be no different. Demand has already been ramping up so far this year, rising from 1,295 pending sales on January 6^th to 2,195 today, adding 900 in the past eight weeks, up 69%. In just the past two weeks alone, it has risen by 10%, adding 197 pending sales. And it will continue to rise from here until it peaks between April and May. From there, demand will slowly fall.

Demand is a bit muted compared to 3-year average prior to COVID (2017 to 2019), 2,422 pending sales, an extra 10% or 227 more. This is entirely due to a combination of an extremely anemic inventory, currently at record low levels, and fewer homes coming on the market so far this year. In fact, there have been 1,140 missing FOR-SALE signs during the first couple of months of 2022, 18% fewer than the 3-year average. With fewer available homes to purchase, demand has been muted. Nonetheless, demand readings have exceeded the inventory level since February of last year, indicative of an insanely Hot Seller’s Market. Prior to last year, the inventory has always been considerably higher than demand.

The issue this spring is that there will be a tremendous number of buyers competing against each other and clamoring to purchase every home that hits the market. While demand levels may be less than prior years, the real story is that the scarcity of homes available will result in just about every home that enters the fray obtaining a massive number of showings, multiple offers, sellers calling all the shots, and sales prices typically above their asking prices.

Coming up… SPRING. Orange County’s housing is about to ramp up considerably for the next several months.

Active Listings

The current active inventory grew by 4% in the past two weeks.

The active listing inventory increased by 48 homes in the past couple of weeks, up 4%, and now sits at 1,406 homes, the lowest level by far for this time of year since tracking began 19 years ago. More homes are coming on the market, starting with this month. Cyclically, an elevated number of homes enter the fray from March through July. The issue is that it has been very hard to build the inventory as homes are placed into escrow nearly as fast as they are coming on, like a revolving door. The inventory has risen from 1,100 to 1,406, up 28%, or an additional 306 homes. Yet, these inventory levels are absurdly low. For comparison purposes, the 3-year average inventory prior to COVID (2017 to 2019) grew from 4,665 at the start of the year to 5,119 today, a 454-home rise. At 5,119, there were a lot more homes available compared to today’s anemic levels, 3,713 more, or 264% higher, more than triple. Expect the inventory to continue to slowly rise from here and peak sometime during the summer. The only way inventory can increase at a faster rate is if interest rates rise and break higher than 4%, which will ultimately begin to mute demand and allow for the inventory to rise. Yet, rates have dropped recently due to the war in Ukraine, which will only continue to fuel demand.

Last year, the inventory was at 2,366, 68% more, or an additional 960 homes. The biggest complaint last year was that there were not enough homes on the market, yet there were more homes available compared to today.

For February, there were 2,716 new FOR-SALE signs in Orange County, 416 fewer than the 3-year average from 2017 to 2019, 13% less. Every single missing sign magnifies the inventory crisis.

Demand

Demand continued its upward trajectory, up 10% in the past couple of weeks.

Demand, a snapshot of the number of new escrows over the prior month, increased from 1,998 to 2,195 in the past couple of weeks, adding 197 pending sales, up 10%. Yet, the current demand level is still the lowest reading for this time of the year since 2008. The lack of available homes combined with fewer homes coming on the market continues to impact and damper the demand readings. Fewer available homes mean fewer pending sales. But, with an elevated number of homes coming on the market now that spring is just around the corner, expect demand to continue to methodically rise. As the time changes this coming weekend, more light and longer days is the first real sign that the Spring Market has arrived. Demand will rise from here and peak between April and May.

Last year, demand was at 2,958, 35% more than today, or an extra 763. The 3-year average prior to COVID (2017 to 2019) was at 2,422 pending sales, 10% more than today. In Orange County, current demand readings have obviously been muted by a lack of available homes and not enough coming on the market.

With demand rising faster than the smaller rise in the inventory, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) dropped from 20 to 19 days, the lowest level ever reached since tracking began 19 years ago. At 19 days, it is an insane, Hot Seller’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 24 days, similar to today. The 3-year average prior to COVID was at 64 days, substantially slower than today and a Slight Seller’s Market (between 60 and 90 days).

Luxury End

Luxury slowed slightly in the past couple of weeks.

Despite the volatility on Wall Street and the increased geopolitical turmoil, the luxury market is still white hot. In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 363 to 393 homes, up 8%, or an additional 30 homes. Luxury demand increased by 8 pending sales, up 3%, and now sits at 252. With supply increasing faster than demand, the overall Expected Market Time for luxury homes priced above $2 million increased from 45 to 47 days, still an extremely hot market for luxury.

Year over year, luxury demand is down by 40 pending sales or 14%, and the active luxury listing inventory is down by 291 homes or 43%. Today’s lack of luxury homes available is no different than the lower end. There simply are not enough homes available to match current demand. The Expected Market Time last year was at 70 days, exceptionally hot for luxury, but slower than today, indicating just how unbelievably hot the luxury market is right now.

For homes priced between $2 million and $4 million, the Expected Market in the past two weeks increased from 30 to 35 days. For homes priced between $4 million and $8 million, the Expected Market Time decreased from 58 to 48 days. For homes priced above $8 million, the Expected Market Time decreased from 184 to 166 days. At 166 days, a seller would be looking at placing their home into escrow around August 2022.

Orange County Housing Summary

The active listing inventory increased by 48 homes, up 4%, and now totals 1,406 homes, its lowest level for this time of the year since tracking began 19 years ago. In February, there were 13% fewer homes that came on the market compared to the 3-year average prior to COVID (2017 to 2019), 416 fewer. Last year, there were 2,366 homes on the market, 960 additional homes, or 68% more.

Demand, the number of pending sales over the prior month, increased by 197 pending sales in the past two weeks, up 10%, and now totals 2,195. Last year, there were 2,958 pending sales, 35% more than today. The 3-year average prior to COVID (2017 to 2019) was 2,422, or 10% more.

With demand increasing faster than the rise in the inventory, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, dropped from 20 to 19 days in the past couple of weeks, an insanely Hot Seller’s Market (less than 60 days) and the lowest level since tracking began 19 years ago. It was at 24 days last year, similar to today.

For homes priced below $750,000, the market is a Hot Seller’s Market (less than 60 days) with an Expected Market Time of 15 days. This range represents 23% of the active inventory and 30% of demand.

For homes priced between $750,000 and $1 million, the Expected Market Time is 15 days, a Hot Seller’s Market. This range represents 21% of the active inventory and 26% of demand.

For homes priced between $1 million to $1.25 million, the Expected Market Time is 15 days, a Hot Seller’s Market. This range represents 9% of the active inventory and 12% of demand.

For homes priced between $1.25 million to $1.5 million, the Expected Market Time is 17 days, a Hot Seller’s Market. This range represents 9% of the active inventory and 11% of demand.

For homes priced between $1.5 million to $2 million, the Expected Market Time is 19 days, a Hot Seller’s Market. This range represents 10% of the active inventory and 10% of demand.

For homes priced between $2 million and $4 million, the Expected Market in the past two weeks increased from 30 to 35 days. For homes priced between $4 million and $8 million, the Expected Market Time decreased from 58 to 48 days. For homes priced above $8 million, the Expected Market Time decreased from 184 to 166 days.

The luxury end, all homes above $2 million, accounts for 29% of the inventory and 12% of demand.

Distressed homes, both short sales and foreclosures combined, made up only 0.1% of all listings and 0.2% of demand. There is only 1 foreclosure and 1 short sale available to purchase today in all of Orange County, 2 total distressed homes on the active market, down 1 from two weeks ago. Last year there were 7 total distressed homes on the market, similar to today.

There were 1,811 closed residential resales in January, 20% less than January 2021’s 2,250 closed sales. January marked a 27% drop compared to December 2021. The sales to list price ratio was 102.3% for all of Orange County. Foreclosures accounted for just 0.3% of all closed sales, and there were no closed short sales. That means that 99.7% of all sales were good ol’ fashioned sellers with equity.

Have a great week.

Sincerely,
Steven Thomas
Quantitative Economics and Decision Sciences