Orange County Housing Report: It’s a Cool, Cool Summer

August 7, 2023

The summer of 2023 has been characterized by a low inventory,  homeowners unwilling to sell, low demand, and a low number of closed sales.

A Housing Cold Front

There is a scarcity of homes available, a lack of demand, and very few closed sales even though home values are rising and most homes are selling quickly.

California experienced a very unusual May and June this year. Southern California was subject to some of the coldest daytime temperatures in the last 40 years, far below their norm. There were days without sunshine. The marine layer was so thick that a cool drizzle welcomed morning commuters often. While the rest of the country roasted, Californians grabbed their sweatshirts and wondered if summer would ever arrive.

The housing market has experienced a similar cold front where it seems shrouded in a thick fog that will not clear. The higher mortgage rate environment has impacted many real estate statistics and resulted in a very cool summer. The active inventory, demand, and closed sales pale compared to when housing felt “normal” before COVID.  

Many would intuitively think that the most significant impact would be in demand, yet the supply of available homes to purchase has suffered the most substantial blow. The inventory started in January 46% below the 3-year average before COVID (2017 to 2019). The difference grew as the year progressed, and the supply failed to rise much at all. Today is 63% lower than that average, sitting at 2,475 homes compared to 6,753 when Orange County felt normal. Today’s level is the lowest inventory for a start to August since tracking began in 2004, even slightly lower than 2021. The low supply in 2021 led to a historic low start to 2022. Similarly, if trends do not change for the remainder of the year, 2024 may break that record low.

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The inventory has been at all-time lows not because of unbelievable, hot purchase demand but because of the lack of homeowners willing to relinquish their low, fixed-rate monthly mortgage payments. According to Freddie Mac’s Primary Mortgage Market Survey®, mortgage rates climbed to 6.9% as of August 3rd. Since 87% of Californians with a mortgage enjoy a fixed rate at or below 5%, homeowners are reluctant to sell. Through July, there were only 14,519 sellers to hit the market, compared to 21,444 last year, 47% more, or 25,847 before COVID, 78% additional homes. The lack of available homes has impacted everything from supply to demand to closed sales.

Demand, a snapshot of the number of new pending sales over the prior month, has been squeezed by sky-high mortgage rates and a lack of available homes. This one-two punch has resulted in demand readings at record low levels all year. From January through July, demand has remained at its lowest level since tracking began in 2004. Current demand is at 1,580 pending sales, down 13% compared to last year and 40% compared to the 3-year pre-COVID average of 2,630 pending sales. 

Low demand has led to the lowest monthly closed sales since tracking began in 2004. Through July, there have been only 11,577 closed sales, down 26% compared to last year and 34% compared to the 3-year pre-COVID average of 17,434 closed sales. In terms of closed units, housing is experiencing a recession. Nearly anyone that works within the real estate industry, from REALTORS® to mortgage lenders to inspectors, has felt the impact of completing fewer sales. Yet, in terms of values, the homeowner is doing quite well. According to Freddie Mac’s Home Price Index, the Los Angeles/Orange County metro dropped 7% from its all-time peak in May 2022 through December 2022. Since bottoming in December, home values have risen 7% through June and appear poised to continue to climb through 2023 due to a scarcity of homes for sale. 

Many wonder when this cold front will pass. When will more homeowners sell? When will the active listing inventory rise? When will the market experience higher demand and more closed sales? The answer is not higher mortgage rates. Some think the inventory will rise if mortgage rates rise to 8%. Yet, that would result in the “Hunkering Down” trend of fewer new listings to deepen. Instead, the answer is lower rates. More homeowners would opt to sell if rates were below 6%. Demand would rise, and so would the number of closed sales. But it is going to take a while to see the inventory increase. As rates drop and demand rises, newly listed homes would sell quickly, making it challenging for the supply to rise. The good news will be that the recession in units will fade as more buyers and sellers tap into the housing market. 

For now, it’s a cool, cool summer. 

Active Listings

The active inventory increased by 4% in the past couple of weeks.

The active listing inventory increased by 86 homes in the past two weeks, up 4%, and now sits at 2,475 homes, its highest level since January. Nonetheless, it has yet to reach the initial inventory level at the start of the year. It is the lowest level to start August since tracking began in 2004. The inventory typically peaks between mid-July to the end of August. Thus this year’s supply will most likely peak sometime in the next few weeks. Last year’s peak occurred at the start of August. If it is delayed to September, that will bode well for the overall housing market, meaning there will be more homes to start 2024. Next year’s start could reach a record low level if it is reached this month. As soon as a peak is reached, the inventory will slowly drop through mid-November. From Thanksgiving to the New Year, it will plunge. 

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Last year, the inventory was 4,069, 64% higher, or 1,594 more. The 3-year average before COVID (2017 through 2019) is 6,753, an additional 4,278 homes, or 173% extra, nearly triple where it stands today.  

Homeowners continue to “hunker down” in their homes, unwilling to move due to their current underlying, locked-in, low fixed-rate mortgage. For July, 2,257 new sellers entered the market in Orange County, 1,450 fewer than the 3-year average before COVID (2017 to 2019), 39% less. These missing signs counter any potential rise in the inventory.

Demand

Demand decreased by 18 pending sales within the past couple of weeks. 

Demand, a snapshot of the number of new pending sales over the prior month, decreased from 1,598 to 1,580 in the past couple of weeks, down 18 pending sales, or 1%. Demand continues to remain subdued but flat. The pending sales count will remain muted as long as rates remain elevated. Demand is lower because of the higher mortgage rate environment, currently just shy of 7%, and the lack of homeowners willing to sell. Many claim that experts are making too big of a deal about today’s rates and point to years where they were historically much higher. While that may be true, affordability is not just about rates. It also factors in incomes and home values. Given today’s home values, incomes, and mortgage rates, finding a time when affordability was worse is challenging. Until the prevailing rate falls, it will be more of the same. That will not happen until the U.S. economy slows. From here, expect demand to fall slowly through mid-November. Demand will plunge during the holidays, from Thanksgiving to New Year’s Day. 

Last year, demand was at 1,812, 15% more than today, or an extra 232. The 3-year average before COVID (2017 to 2019) was 2,630 pending sales, 66% more than today, or an additional 1,050.

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With supply rising and demand falling, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased from 45 to 47 days in the past couple of weeks. Last year the Expected Market Time was 67 days, much slower than today. The 3-year average before COVID was 78 days, significantly slower than today. 

Luxury End

The luxury market improved in the past couple of weeks. 

In the past couple of weeks, the luxury inventory of homes priced above $2 million decreased from 815 to 793 homes, 22 fewer, down 3. Luxury demand increased by 17 pending sales, up 9%, and now sits at 216, its highest level since June. With supply dropping and demand rising, the Expected Market Time for luxury homes priced above $2 million decreased substantially from 123 to 110 days, its strongest reading since June. Luxury is still much slower than the lower ranges, necessitating a careful approach to pricing to secure success.

Year over year, luxury demand is up by 15 pending sales or 7%, and the active luxury listing inventory is down by 44 homes or 5%. Last year’s Expected Market Time was 125 days, slower than today.

For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 83 to 76 days. For homes priced between $4 million and $6 million, the Expected Market Time decreased from 253 to 152 days. For homes priced above $6 million, the Expected Market Time decreased from 297 to 291 days. At 291 days, a seller would be looking at placing their home into escrow around May 2024.

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Orange County Housing Summary

  • The active listing inventory in the past couple of weeks increased by 86 homes, up 4%, and now sits at 2,475, its highest level since January. It is still the lowest level to start August since tracking began in 2004. In July, 39% fewer homes came on the market compared to the 3-year average before COVID (2017 to 2019), 1,450 less. Last year, there were 4,069 homes on the market, 1,594 more homes, or 64% higher. The 3-year average before COVID (2017 to 2019) was 6,753, or 173% more, nearly triple.
  • Demand, the number of pending sales over the prior month, decreased by 18 pending sales in the past two weeks, down 1%, and now totals 1,580, the lowest level for a start to August since tracking began in 2004. Last year, there were 1,812 pending sales, 15% more than today. The 3-year average before COVID (2017 to 2019) was 2,630, or 66% more. 
  • With supply rising and demand falling, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, increased from 45 to 47 days in the past couple of weeks. It was 67 days last year, much slower than today. 
  • For homes priced below $750,000, the Expected Market Time increased from 32 to 34 days. This range represents 18% of the active inventory and 26% of demand. 
  • For homes priced between $750,000 and $1 million, the Expected Market Time increased from 27 to 31 days. This range represents 15% of the active inventory and 23% of demand.
  • For homes priced between $1 million to $1.25 million, the Expected Market Time increased from 25 to 33 days. This range represents 10% of the active inventory and 15% of demand.
  • For homes priced between $1.25 million to $1.5 million, the Expected Market Time decreased from 46 to 44 days. This range represents 11% of the active inventory and 12% of demand.
  • For homes priced between $1.5 million to $2 million, the Expected Market Time remained unchanged at 53 days. This range represents 13% of the active inventory and 12% of demand.
  • For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 83 to 76 days. For homes priced between $4 million and $6 million, the Expected Market Time decreased from 253 to 152 days. For homes priced above $6 million, the Expected Market Time decreased from 297 to 291 days.
  • The luxury end, all homes above $2 million, account for 32% of the inventory and 13% of demand.
  • Distressed homes, both short sales and foreclosures combined, comprised only 0.3% of all listings and 0.6% of demand. Only one foreclosure and six short sales are available today in Orange County, with seven total distressed homes on the active market, down two from two weeks ago. Last year there were seven distressed homes on the market, identical to today.
  • There were 1,993 closed residential resales in June, 16% less than June 2022’s 2,362 closed sales. June marked a 2% drop compared to May 2023. The sales-to-list price ratio was 99.5% for all of Orange County. Foreclosures accounted for 0.1% of all closed sales, and short sales accounted for 0.1%. That means that 99.8% of all sales were good ol’ fashioned sellers with equity.