Orange County Housing Report: Reduce and Net Less

November 14, 2022

For sellers who must reduce their asking price to achieve a
successful outcome, they likely will net less at the closing table.

Price Reductions

Carefully pricing a home allows sellers to walk away with the most money possible and achieve success quickly.

For professional track sprinters, getting out of the starting blocks quickly, fast, and first is often the difference in a race. There is plenty of preparation and training to be that runner that is the fastest off the blocks. The initial lunge is crucial and is an advantage that often propels the athlete with the best start across the finish line with arms raised high in the air.

Similarly, when a home initially comes on the market, pricing a home accurately is the difference between a seller raising their arms in celebration within the first few weeks versus taking months to sell and likely for much less. In today’s market, values are slowly declining. The longer a seller takes to properly price their home and secure a successful outcome, the more money they will ultimately lose.

One of the most crucial steps in being able to sell quickly, open escrow, and obtain the highest possible net proceeds from the sale of a home is to carefully arrive at its Fair Market Value. In every price range, homes sit without success, leaving these sellers wondering what in the world they are doing wrong. 37% of all homes in Orange County have been on the market for over two months, and 44% have reduced their asking price at least once. Throwing a price out there just to test the market is not a wise strategy. Instead, carefully, and methodically pricing a home is vital to cashing in on the Golden Opportunity, the first few weeks after coming on the market. It would be better to spend several hours coming up with an extremely accurate price than to waste weeks, or even months of precious market time.

Due to the high interest rate environment, the market is lining up in favor of buyers during the negotiation process. Buyers do not want to overpay; they are unwilling to stretch. Accurate pricing is fundamental regardless of the temperature of housing, especially in a declining market. Throwing a price out there just to test the market is not a wise strategy. Ultimately, when asking prices of homes must be reduced in order to secure offers to purchase, it not only takes longer to sell, but sellers also sell for less. On average, the net proceeds check at the close of escrow is less if a price reduction is required.

It is very telling to look at the sales price to last list price ratio. This refers to the final list price prior to opening escrow. These are averages, meaning there are exceptions, but the overall trend is stunning. In Orange County, 57% of all closed sales in October did not reduce the asking price at all. The sales price to last list price ratio for these homes was 99.0%, meaning, on average, a home sold within 1% of the asking price. A home listed at $1 million sold for $990,000, just $10,000 below the asking price. 15% of all closed sales reduced their asking prices between 1% and 4%. The sales to last list price ratio for these homes was 97.5%, and, on average, it took 43 days to open escrow. A home that reduced their list price to $1 million sold for $975,000, a considerable $15,000 less than homeowners with no reduction. For homes that reduced their asking prices by 5% or more, an astonishing 26% of closed sales in October, the sales to last list price ratio was 96.4%, after being on the market for a couple of months. A home that finally reduced their price to $1 million sold for $964,000. Everybody would agree that closing at $990,000 is a whole lot better than $964,000, a mind-blowing $26,000 better.

The data is staggering in looking at the sales price to original list price. This is the price when a home initially comes on the market prior to any price reductions. For homes that reduced the asking price between 1% to 4%, the sales to original list price ratio was 94.7%. For example, a home that was listed originally for $1,056,000 had to reduce the asking price to $1 million to find success. Homes that reduced the asking price by at least 5% had a sales to original list price ratio of 86.7%. A home that was originally listed at $1,153,500 had to reduce the asking price, often more than once, to $1 million to find success.

Carefully and methodically pricing a home is vital to cashing in on today’s much slower housing market. The first few weeks after coming on the market is absolutely the most crucial time period with the greatest exposure and heightened buyer activity. This occurs because there are many buyers who have not yet secured a home and are eagerly waiting on the sidelines for something to come on the market that meets their criteria. Every time a home enters the fray, there is a rush of initial activity as potential buyers clamor to be one of the first to see it. There is more activity in the initial two weeks than any other time during the marketing process.

When sellers overprice their homes and do not properly take advantage of the first few weeks after coming on the market, eventually they must improve the price through a reduction. Reducing the price to be more in line with a home’s Fair Market Value is not met with nearly the same fanfare as a home new to the market. The excitement is no longer there. A home becomes a bit “shop worn” and loses some of its marketing allure the longer it sells without success.

A WARNING to Sellers: Overpricing a home risks wasting valuable market time, obtaining a smaller net proceeds check at the close of escrow, and could result in chasing a declining market. Pull the emotion out of the process in arriving at the asking price. Instead, carefully, and methodically isolate the Fair Market Value and achieve the best outcome with the most amount of money.

Active Listings

The current active inventory dropped by 3% in the past couple of weeks.

The active listing inventory decreased by 96 homes, down 3%, and now sits at 3,581, its lowest level since June. It was the largest two-week drop since the very start of September. With the Holiday Market fast approaching, next week through the first couple of weeks of the New Year, the inventory is finally starting to behave normally and is starting its seasonal drop. It normally drops during the Autumn months, but, until the past couple of weeks, this year has been far from normal due to the high interest rate environment’s extreme impact on demand. There are fewer homeowners coming on the market due to being locked in with exceptionally low fixed rate monthly payments. Further limiting the number of available homes through the end of the year is the fact that cyclically the fewest number of homes are placed on the market during the month of December, and the second fewest is November. Expect the active inventory to sharply drop over the remaining seven weeks of the year.

Last year, the inventory was at 1,793, 50% lower, or 1,788 fewer. The 3-year average prior to COVID (2017 to 2019) is 5,822, an extra 2,241 homes, or 63% more. There were a lot more choices back then.

The new trend that developed this year is a sharp decrease in the number of homes coming on the market, homeowners “hunkering down” and not willing to move due to sky-high mortgage rates and being locked in at a low fixed rate. For the month of October, there were 1,961 new FOR-SALE signs in Orange County, 1,042 fewer than the 3-year average prior to COVID (2017 to 2019), 35% less. So far in 2022, there have been 7,271 missing signs, down 21%. These missing signs counter any potential rise in the inventory.

Demand

Demand dropped by 5% in the past couple of weeks.

Demand, a snapshot of the number of new escrows over the prior month, declined from 1,270 to 1,202 in the past couple of weeks, shedding 68 pending sales, or down 5%. It was the smallest two-week drop since September 1^st, indicating that demand has finally caught up to the swiftly rising mortgage rate environment. Yet, these are the lowest demand readings for this time of year since tracking began in 2004, slightly lower than start of the Great Recession in 2007. Demand has only been lower during the initial pandemic lockdown in April 2020, and January 1^st in both 2008 and 2019. According to Mortgage News Daily, mortgage rates have dropped from 7.22% on November 9^th to 6.65% today due to the Consumer Price Index (CPI) falling more than expected. That is down by more than one-half of a percent. If inflation continues to fall, rates will fall along with it, and, ultimately, demand will improve as more buyers qualify to purchase. The next CPI reading is in mid-December. For the remainder of the year, expect demand to continue to fall along with the inventory.

Last year, demand was at 2,322, 93% more than today, or an extra 1,120. The 3-year average prior to COVID (2017 to 2019) was at 2,139 pending sales, 78% more than today, or an extra 937.

With demand falling faster than the drop in the inventory, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased slightly from 87 to 89 days in the past couple of weeks, its highest level since mid-May 2020. It was the smallest two-week rise since mid-September. Last year the Expected Market Time was at 23 days, substantially faster than today and home values were screaming higher. The 3-year average prior to COVID was 85 days, slightly better than today.

Luxury End

The luxury housing market has not changed much in the past couple of weeks.

In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 727 to 775 homes, up 48 homes, or 7%. Luxury demand increased by 9 pending sales, up 7%, and now sits at 135. With both supply and demand climbing, the overall Expected Market Time for luxury homes priced above $2 million decreased slightly from 173 to 172 days. For perspective, it was 45 days in February, nearly instantaneous. Yet in 2019, it was at 370 days in November, a normal reading prior to COVID to wrap up a year.

Year over year, luxury demand is down by 104 pending sales or 44%, and the active luxury listing inventory is up by 318 homes or 70%. The Expected Market Time last year was 57 days, much stronger than today.

For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks increased from 121 to 137 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 360 to 364 days. For homes priced above $8 million, the Expected Market Time decreased from 484 to 220 days. At 220 days, a seller would be looking at placing their home into escrow around June 2023.

Orange County Housing Summary

The active listing inventory in the past couple of weeks decreased by 96 homes, down 3%, and now sits at 3,581, its lowest level since June. In October, there were 35% fewer homes that came on the market compared to the 3-year average prior to COVID (2017 to 2019), 1,042 less. Last year, there were 1,793 homes on the market, 1,788 fewer homes, or 50% less. The 3-year average prior to COVID (2017 to 2019) was 5,822, or 63% more.
Demand, the number of pending sales over the prior month, decreased by 68 pending sales in the past two weeks, down 5%, and now totals 1,202, its lowest reading since April 2020, the initial lockdown of the pandemic. It is the lowest level for November since tracking began in 2004. Last year, there were 2,322 pending sales, 93% more than today. The 3-year average prior to COVID (2017 to 2019) was 2,139, or 78% more.
With demand dropping a bit faster than the inventory, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, increased slightly from 87 to 89 days in the past couple of weeks, its highest level since mid-May 2020. It was 23 days last year, much stronger than today.
For homes priced below $750,000, the Expected Market Time increased from 64 to 71 days. This range represents 23% of the active inventory and 29% of demand.
For homes priced between $750,000 and $1 million, the Expected Market Time increased from 65 to 72 days. This range represents 22% of the active inventory and 27% of demand.
For homes priced between $1 million to $1.25 million, the Expected Market Time decreased from 82 to 77 days. This range represents 12% of the active inventory and 14% of demand.
For homes priced between $1.25 million to $1.5 million, the Expected Market Time decreased from 97 to 95 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 decreased from 131 to 110 days. This range represents 11% of the active inventory and 9% of demand.
For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks increased from 121 to 137 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 360 to 364 days. For homes priced above $8 million, the Expected Market Time decreased from 484 to 220 days.
The luxury end, all homes above $2 million, accounts for 23% of the inventory and 12% 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 4 foreclosures and 3 short sales available to purchase today in all of Orange County, 7 total distressed homes on the active market, up 1 from two weeks ago. Last year there were 10 total distressed homes on the market, similar to today.
There were 1,726 closed residential resales in October, 38% less than October 2021’s 2,778 closed sales. September marked a 14% decrease compared to September 2022. The sales to list price ratio was 98.7% for all of Orange County. Foreclosures accounted for 0.2% of all closed sales, and there were no short sales. That means that 99.8% of all sales were good ol’ fashioned sellers with equity.

Have a great week.

Sincerely,
Steven Thomas
Quantitative Economics and Decision Sciences