February 6, 2023
After an extremely slow end to 2022, buyers are returning to the housing arena, demand is already up sharply, and market times are plunging fast.
Buyer Demand Coming Back
Pending sales are surging higher as housing bounces back from very low levels.
Getting to a movie theater early, sitting in the pews of an empty church with plenty of time until the service begins, and being seated immediately at a popular restaurant before the dinner rush are all examples of moments in time where it seems as if very few are going to show up. Yet, in the blink of an eye, the theater is packed, the church pews have been filled, and there is an hour-long waitlist at that favorite restaurant. That is precisely what is occurring right now in housing. A month ago, open houses were empty, showings were light, and there was little real estate activity as everyone’s collective brains were still in a holiday fog. Seemingly overnight, buyers have returned, demand has surged higher, and market times have plunged.
Demand, a snapshot of the last 30 days of pending sales activity, jumped 38% in just the past couple of weeks, adding 361 pending sales as it climbed to 1,300. It was the largest two-week rise since February 2021 and the strongest demand reading since October. The current level surpassed the low readings during the initial lockdowns of COVID in April 2020. Demand was lower than the lockdowns in December and January.
It is crucial to keep in mind that demand is still at shallow levels for this time of year. It is 23% below last year at the start of February and 38% below the 3-year average before the pandemic (2017 to 2019). Due to affordability constraints, the high mortgage rate environment still precludes many would-be purchasers from isolating a home. Demand would be much stronger if rates dropped to the mid-5s.
Demand is also muted due to the lack of available homes to purchase. From the first week of January to today, the inventory dropped by 5% and now sits at 2,415 homes. It usually rises by 13%. The 3-year pre-COVID average was 4,695, 94% higher than today. Feeding into this inventory crisis is that fewer homeowners are listing their homes. In January alone, there were 45% fewer sellers than the 3-year average, with 1,375 missing FOR-SALE signs. Fewer sellers mean there are fewer pending sales and less demand.
The current trend is rapidly increasing demand matched up against a lack of available homes to purchase, which is slowly dropping. As a result, market times are plunging. In the past two weeks alone, the Expected Market Time, the time between coming on the market and changing to pending status, tumbled from 81 to 56 days, shedding 25 days, its lowest level since June last year. For buyers in the trenches, the change is palpable. Suddenly, homes are selling a lot quicker. When a home is appropriately priced according to its Fair Market Value, considering location, condition, upgrades, amenities, and age, it will acquire plenty of immediate attention and sells fast. As market times drop, buyers are losing some of the momentum developed over the past six months. That does not mean that buyers are willing to stretch and pay over the asking price. Housing is not back to the heydays of the pandemic years of 2020 through the first half of last year. It does mean that the increased competition will slow the pressure on falling home values.
A WARNING TO SELLERS: Home values are NOT climbing right now. Overpricing a home in this market will result in a lack of success and waste valuable market time. Until rates fall considerably from here to at least the mid-5s, home values will not rise.
A WARNING TO BUYERS: Lowball offers to purchase and looking for a “deal” will be an exercise in futility. Due to the high mortgage rate environment, the market has lined up in favor of buyers up to this point. That advantage is diminishing with the significant drop in market times. Sellers are not desperate and are not panicking to sell, unable to afford their monthly mortgage payments. Instead, carefully arriving at an offer to purchase based on a home’s Fair Market Value is a winning formula for isolating a home.
The active inventory dropped by 5% in the past couple of weeks.
The active listing inventory decreased by 121 homes in the past couple of weeks, down 5%, and now sits at 2,415 homes. A falling inventory at the start of a year is reminiscent of 2021, when COVID still heavily influenced the housing market. Usually, the inventory slowly rises during the Winter Market, from January through mid-March, but not this year. The current level is at a tragically low level and will have difficulty climbing until more homeowners decide to sell. Due to the “golden handcuffs” of fixed low mortgage rates, homeowners choose to stay in their homes. An astonishing 89% of all homeowners with a loan have a mortgage rate at or below 5%, and 71% are at 4% or lower. There will continue to be fewer sellers until mortgage rates drop to the mid-5s or lower, closing the gap between current rates and their underlying fixed rates. Expect more homeowners to list their homes during the Spring Market, between mid-March and mid-June, the optimal time for families to place their homes on the market so that they can close during the summer months while the kids are out of school.
Last year, the inventory was 1,270, 47% lower, or 1,145 fewer.
Homeowners continue to “hunker down” in their homes, unwilling to move due to their current underlying, locked-in, low fixed-rate mortgage. The difference between their underlying rate and today’s prevailing rate is significant and precludes many homeowners from listing their homes for sale and moving to another house. This will continue until mortgage rates drop. For January, 1,680 new sellers entered the market in Orange County, 1,375 fewer than the 3-year average before COVID (2017 to 2019), 45% less. In 2022, there were 8,488 missing signs, down 22%. These missing signs counter any potential rise in the inventory.
Demand rocketed higher by 38% in the past couple of weeks.
Demand, a snapshot of the number of new escrows over the prior month, increased from 939 to 1,300 in the past couple of weeks, adding 361 pending sales, up 38%. It was the largest rise in demand since February 2021. The relentlessly rising mortgage rates market of 2022 is now in the rearview mirror. Since December, rates have danced between 6% to 6.5%, creating more stability and inviting many sidelined buyers to resume their search for a home. With the trend of slowly falling inflation, it appears that the days of 7% plus rates are a memory at this point. Expect demand to continue to rise through the month of February rapidly. If mortgage rates fall below 6% with duration, that will instigate more demand.
Last year, demand was at 1,683, 29% more than today, or an extra 383. The 3-year average before COVID (2017 to 2019) was 2,083 pending sales, 60% more than today, or an additional 783.
With demand surging higher and the supply falling, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) plunged from 81 to 56 days in the past couple of weeks, its lowest level since June. Last year the Expected Market Time was 23 days, substantially faster than today, and home values were screaming higher. The 3-year average before COVID was 70 days, a slower pace than today.
The luxury market has improved considerably over the past couple of weeks.
In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 581 to 592 homes, up 11 homes, or 2%. Luxury demand increased by 21 pending sales, up 20%, and now sits at 124. With supply only increasing slightly compared to surging demand, the Expected Market Time for luxury homes priced above $2 million decreased from 169 to 143 days, its strongest level since the start of November. The luxury market is not quite as slow as before COVID, but it is not as fast as in the past couple of years either. Expect the luxury market to continue improving over the next month.
Year over year, luxury demand is down by 93 pending sales or 43%, and the active luxury listing inventory is up by 210 homes or 55%. Last year’s Expected Market Time was 53 days, which is extremely hot for luxury.
For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 116 to 98 days. For homes priced between $4 million and $6 million, the Expected Market Time decreased from 245 to 225 days. For homes priced above $6 million, the Expected Market Time decreased from 882 to 523 days. At 523 days, a seller would be looking at placing their home into escrow around July 2024.
Orange County Housing Summary
- The active listing inventory in the past couple of weeks decreased by 121 homes, down 5%, and now sits at 2,415, the second lowest level to start February since tracking began. In January, 45% fewer homes came on the market compared to the 3-year average before COVID (2017 to 2019), 1,375 less. Last year, there were 1,270 homes on the market, 1,145 fewer homes, or 47% less. The 3-year average before COVID (2017 to 2019) was 4,695, or 94% more.
- Demand, the number of pending sales over the prior month, soared higher by 361 pending sales in the past two weeks, up 38%, and now totals 1,300, its largest two-week rise since February 2021. Last year, there were 1,683 pending sales, 29% more than today. The 3-year average before COVID (2017 to 2019) was 2,083, or 60% more.
- With demand soaring and the supply falling, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, plunged from 81 to 56 days in the past couple of weeks. It was 23 days last year, much stronger than today.
- For homes priced below $750,000, the Expected Market Time decreased from 63 to 43 days. This range represents 24% of the active inventory and 30% of demand.
- For homes priced between $750,000 and $1 million, the Expected Market Time decreased from 59 to 41 days. This range represents 20% of the active inventory and 27% of demand.
- For homes priced between $1 million to $1.25 million, the Expected Market Time decreased from 72 to 47 days. This range represents 11% of the active inventory and 13% of demand.
- For homes priced between $1.25 million to $1.5 million, the Expected Market Time decreased from 77 to 62 days. This range represents 11% of the active inventory and 10% of demand.
- For homes priced between $1.5 million to $2 million, the Expected Market Time increased from 117 to 127 days. This range represents 12% of the active inventory and 7% of demand.
- For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 116 to 98 days. For homes priced between $4 million and $6 million, the Expected Market Time decreased from 245 to 225 days. For homes priced above $6 million, the Expected Market Time decreased from 882 to 523 days.
- The luxury end, all homes above $2 million, account for 25% of the inventory and 10% of demand.
- Distressed homes, both short sales, and foreclosures combined, comprised only 0.3% of all listings and 0.5% of demand. There are only two foreclosures and five short sales available to purchase today in all of Orange County, with seven total distressed homes on the active market, down four from two weeks ago. Last year there were three total distressed homes on the market, similar to today.
- There were 1,393 closed residential resales in December, 44% less than December 2021’s 2,486 closed sales. December marked a 2% decrease compared to November 2022. The sales-to-list price ratio was 98.4% for all of Orange County. Foreclosures accounted for 0.1% of all closed sales and no short sales in December. That means that 99.9% of all sales were good ol’ fashioned sellers with equity.
Have a great week.
Quantitative Economics and Decision Sciences
Copyright 2023- Steven Thomas, Reports On Housing – All Rights Reserved. This report may not be reproduced in whole or part without express written permission from the author.