August 8, 2022
Many buyers are looking for a deal or waiting for the housing
market to crash before they purchase, but that is not going to
happen anytime on the horizon.
The looming recession has buyers on the edge of their seats fully aware that the housing market has slowed considerably. From the flood of online news articles describing the real estate slowdown to the countless YouTube and TikTok videos detailing in only a few minutes how housing is about to crash, many buyers are convinced that the Orange County housing market is on the brink of collapse. Homes are taking a lot longer to sell. The number of price reductions has surged higher in the past couple of months. As a result, many buyers sit on the sidelines waiting for prices to plunge. They are waiting for a deal, a total bargain.
Just because so many people are jumping to the conclusion that home values must plummet does not make it so. Merely mention a recession and everyone’s collective minds recall the devastating blow to housing during the Great Recession. Instead, homeowners across the country purchased their homes with huge down payments, extremely strong credit scores, money in the bank, and qualified for their mortgages. Buyers over the past many years have not been purchasing homes utilizing subprime loans, pick-a-payment plans, teaser rate adjustable mortgages, or zero down programs. This is not 2005 to 2008 all over again.
Instead, with an Expected Market Time (the time between hammering in the FOR-SALE sign to opening escrow) of 67 days, it is a Slight Seller’s Market (between 60 and 90 days). It is not a Balanced Market (between 90 and 120 days). It is not a Buyer’s Market (over 120 days). The market still lines up in favor of sellers. In fact, in the past two weeks, the Expected Market Time dropped from 72 to 67 days. Surprisingly, the Orange County housing market got a little hotter. It appears as if this year’s rise in market time has stopped and will remain a Slight Seller’s Market for the remainder of the year. This is due to the active inventory nearing its 2022 peak, rising by only 28 homes in the past couple of weeks, and demand jumping by 7% with rates falling to levels last seen in April.
The issue is that everyone had grown accustomed to two years of an auction like atmosphere where there were only a limited number of homes available and an ocean of buyers willing to purchase, prompted by historically low mortgage rates. Open houses were flooded with potential buyers. It was not uncommon for homes to procure 20 or 30 offers in just days after coming on the market. Sales prices soared above their purchase prices. The trajectory was up, up, up, and up. That market was extremely unique and home values rose nationally at a record pace. Flash forward to today and the housing market is distinctly different.
Most homes are not selling instantly. Busy intersections are now adorned with weekend Open House signs. It is not uncommon to see the same home open for several weeks in a row. Price reductions are quite common in today’s market. There are fewer multiple offer situations, and most homes are selling below their asking prices. This is a “normal” market. The issue is that nobody has experienced a normal market in several years. It is hard to recall when housing was just ordinary.
An astounding 39% of the active inventory has reduced their asking price at least once. Many believe that price reductions are indicative of a buyer’s market where prices are falling. That is just not the case. Given today’s 67-day Expected Market Time, the price adjustments reveal the considerable number of homeowners who simply overpriced and did not cautiously approach pricing. When the Expected Market Time drops below 40-days like it did between August 2020 and May of this year, sellers got away with stretching their asking prices. Many real estate professionals scratched their heads in disbelief as their sellers picked arbitrary prices much higher than what was suggested by the professional, yet they still were able to obtain multiple offers and sell above their inflated asking prices. That market is now in the past. Arbitrarily pricing a home and stretching the asking price above the last comparable sale will result in limited activity and the need to readjust pricing.
Many sellers are pricing their homes in line with a sale from earlier this year when there was nothing available and buyers paid way over the asking price. This occurred even while mortgage rates climbed from 3.25% at the start of this year to over 5% in May (according to Mortgage News Daily). The problem was that there was nearly nothing available to purchase and plenty of buyers ready to pounce on anything new that hit the market. On January 1st there were only 954 homes available, a record low compared to the 3-year average reading prior to COVID (2017 to 2019) of 4,665. Eager buyers who had written offer after offer with no success were willing to do whatever it took to finally purchase, including paying way over the asking price, often $50,000, $75,000, or even $100,000 plus over the list price. The underlying, changing mortgage rate environment did not justify these extremely high sales prices, yet it occurred, nonetheless. This was a frothy stage of this year’s market.
Sellers who price their homes according to these frothy comps are finding that they are not able to sell. While a home may have closed for a top dollar record price in one neighborhood, there are often adjacent neighborhoods with comparable properties that did not experience a frothy sale this year and have homes available to purchase for far less. Buyers shopping around will notice the disparity in pricing and will opt to purchase the cheaper homes.
It is a Slight Seller’s Market. That means that sellers still get to call more of the shots, but homes are not selling instantly, and home values are no longer soaring higher. In order to find success, sellers must carefully consider the most recent pending and closed sales and take into consideration the location, condition, upgrades, and amenities. While it may have been a place they called “home” for years, buyers do not have that emotional tie and will instead rely on the Fair Market Value based on comparable properties. With today’s higher interest rate environment, they do not want to overpay.
Buyers must understand that the market is still not lining up in their favor. Yes, Orange County housing has slowed. They no longer have to make an instantaneous decision. They no longer are competing with a busload of other offers to purchase. They no longer need to write offers tens of thousands of dollars above the asking price. Yet, the market is still hot enough that they are not going to get a “deal” or buy a home at a “bargain” price. Values are not dropping. Instead, it is finally a normal market.
The active listing inventory increased in the past couple of weeks by only 28 homes, up less than 1%, and now sits at 4,069, the highest level since October 2020. Typically, when interest rates rise considerably with duration, the inventory peaks later in the year, between October and Thanksgiving. A normal peak occurs between July and mid-August. Despite much higher mortgage rates, the 2022 peak looks imminent. This is occurring due to a recent rise in demand as mortgage rates have dropped from their June and July highs, and fewer homeowners opting to sell their homes. In July there were only 2,986 homes that were placed on the market compared to the 3-year average prior to COVID (2017 to 2019) of 3,707. That is 19% fewer, or 721 missing FOR-SALE signs. That has been the trend all year. So far in 2022, through July, there have been 4,389 missing signs, down 17%. Most homeowners are locked in at incredibly low interest rates, preventing many from considering selling their homes. With a muted inventory, it appears as if the lack of available homes is going to continue to be the prevailing issue facing the housing market for the rest of 2022 and into 2023. After peaking later this month, expect the inventory to slowly drop for the rest of the year.
Last year, the inventory was at 2,520, 38% lower, or 1,549 fewer. The 3-year average prior to COVID (2017 to 2019) is 6,753, an extra 2,684 homes, or 66% more. There were a lot more choices back then.
Demand, a snapshot of the number of new escrows over the prior month, increased from 1,693 to 1,812 in the past couple of weeks, adding 119 pending sales, or up 7%. It was the largest two week increase since the start of March. It is still the lowest demand reading for this time of the year since 2007, but a surprising, sudden shift in the Orange County housing market. The increase in demand is due to mortgage rates trending lower ever since reaching 6.28% in mid-June. In fact, according to Mortgage News Daily, they nearly hit 5% several times so far in August, considerably lower than the recent highs. As mortgage rates drop, the pool of potential buyers increases, enabling demand to rise. When the economy slows, mortgage rates almost always decline. Expect demand to not change much over the coming months, only slowly drop for the remainder of the Summer and Autumn Markets, from now until Thanksgiving. If rates drop further, demand could rise. Carefully watching mortgage rates will indicate the direction of demand for the remainder of the year.
Last year, demand was at 2,809, 55% more than today, or an extra 997. The 3-year average prior to COVID (2017 to 2019) was at 2,630 pending sales, 45% more than today, or an extra 818.
With the rise in supply slowing to a trickle and demand jumping higher, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) decreased from 72 to 67 days in the past couple of weeks, where it was at the start of July. At 67 days, it remains a Slight Seller’s Market (60 to 90 days) where sellers get to call most of the shots, there are fewer multiple offers and home values are not appreciating as fast as they have been over the past couple of years. The market is no longer instant and properly pricing is crucial to find success. Last year the Expected Market Time was at 27 days, substantially faster than today. The 3-year average prior to COVID was at 78 days, also a Slight Seller’s Market and a touch slower than today.
In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 823 to 837 homes, still its highest level since November of 2020. Luxury demand increased by 16 pending sales, up 9%, and now sits at 201, its highest reading since June. With demand increasing faster than the rise in the inventory, the overall Expected Market Time for luxury homes priced above $2 million decreased from 133 to 125 days, its best reading since June. It still takes nearly three times longer to sell a luxury home today compared to February when the market time was at 45 days in February, an insanely HOT Seller’s Market. The continued volatility on Wall Street has significantly impacted the luxury housing market.
Year over year, luxury demand is down by 48 pending sales or 19%, and the active luxury listing inventory is up by 242 homes or 42%. The Expected Market Time last year was at 72 days, considerably stronger than today.
For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 107 to 99 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 173 to 179 days. For homes priced above $8 million, the Expected Market Time decreased from 372 to 320 days. At 320 days, a seller would be looking at placing their home into escrow around June 2023.
- The active listing inventory is approaching a peak and rose by only 28 homes in the past couple of weeks, less than 1%, and now totals 4,069 homes, its highest level since October 2020. In July, there were 19% fewer homes that came on the market compared to the 3-year average prior to COVID (2017 to 2019), 721 fewer. Last year, there were 2,528 homes on the market, 1,549 fewer homes, or 38% less. The 3-year average prior to COVID (2017 to 2019) was 6,753, or 66% more.
- Demand, the number of pending sales over the prior month, increased by 119 pending sales in the past two weeks, up 7%, and now totals 1,812, its largest rise since the start of March. It is still the lowest reading for a start to August since 2007. Last year, there were 2,809 pending sales, 55% more than today. The 3-year average prior to COVID (2017 to 2019) was 2,630, or 45% more.
- With supply only rising slightly compared to the jump in demand, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, decreased from 72 to 67 days in the past couple of weeks, a Slight Seller’s Market (between 60 and 90 days). It was at 27 days last year, much stronger than 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 46 days. This range represents 19% of the active inventory and 28% of demand.
- For homes priced between $750,000 and $1 million, the Expected Market Time is 68 days, a Slight Seller’s Market. This range represents 26% of the active inventory and 25% of demand.
- For homes priced between $1 million to $1.25 million, the Expected Market Time is 56 days, a Hot Seller’s Market. This range represents 12% of the active inventory and 15% of demand.
- For homes priced between $1.25 million to $1.5 million, the Expected Market Time is 66 days, a Slight Seller’s Market. This range represents 11% of the active inventory and 11% of demand.
- For homes priced between $1.5 million to $2 million, the Expected Market Time is 80 days, a Slight Seller’s Market (between 60 and 90 days). This range represents 11% of the active inventory and 10% of demand.
- For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 107 to 99 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 173 to 179 days. For homes priced above $8 million, the Expected Market Time decreased from 372 to 320 days.
- The luxury end, all homes above $2 million, accounts for 21% of the inventory and 11.5% of demand.
- Distressed homes, both short sales and foreclosures combined, made up only 0.2% of all listings and 0.2% of demand. There are only 6 foreclosures and 1 short sale available to purchase today in all of Orange County, 7 total distressed home on the active market, up one from two weeks ago. Last year there were 13 total distressed homes on the market, similar to today.
- There were 2,362 closed residential resales in June, 33% less than June 2021’s 3,545 closed sales. June marked a 6% decrease compared to May 2022. The sales to list price ratio was 101.5% for all of Orange County. Foreclosures accounted for 0.1% of all closed sales, and there were no closed short sales. 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 2022- Steven Thomas, Reports On Housing – All Rights Reserved. This report may not be reproduced in whole or part without express written permission by the author.