June 12, 2023

Housing’s Summer Market has arrived, and with it comes an increase in inventory, a slight decrease in demand, and a rise in the market time.

The Summer Housing Market

Expect the Orange County housing market to slow slightly yet to remain exceptionally hot. 

Graduation caps have been tossed into the air since the end of May, marking the beginning of the Summer Market for housing. With the school year ending, it is time to usher in all the distractions of summer: the beach, the community pool, hiking, biking, camping, traveling, and all kinds of camps for the kids. As everyone turns their attention to fun in the sun, the housing market evolves and downshifts slightly.

Spring is cyclically the hottest time of the year for housing. Buyers and sellers are transacting all year long, yet families with kids like to hit the market in the spring, enabling them to close on a home during the summertime when the kids are out of school. Demand typically peaks during the Spring Market, between mid-March and the end of May. As soon as the last bell rings, marking the end of the school year, families may still have housing goals of selling and purchasing, but that often takes a back seat to enjoy all that summer has to offer. As a result, summer is the second busiest time of the year for housing.

The various seasons of the housing market do not necessarily align precisely with the official start and end dates of the four seasons. Summer officially begins on June 21^st, the summer solstice, the longest day of the year. Yet, in housing, it aligns with when the kids are out of school, around the end of May. It is hard to look for a home during the busy end-of-school-year activities and graduation festivities, while on vacation, enjoying the warmth of summer surf, or carpooling to and from camps, pools, water parks, and friends’ houses. The Summer Market comes to an end around the third week of August when schools are back in session. Housing then transitions to the Autumn Market.

During the summer market, demand, a reading of recent pending sales activity, decreases slightly with all the distractions. For many buyers, it still feels as busy as ever, but the numbers illustrate a drop in demand regardless. With a decrease in demand, the number of available homes rises as more homes continue to come on the market. Many sellers mistake summer as the best time of the year for housing. With a drop in demand and a rising inventory, the Expected Market Time, the amount of time between hammering in the FOR-SALE sign to opening escrow, grows longer. The overall speed of the market slows a touch. 

In looking at the 5-year average from 2015 through 2019 before COVID skewed the data, demand dropped by 7% from the end of May to mid-August, with 192 fewer pending sales in Orange County. On average, the supply of homes has increased by 9%, adding 557 homes. The average changes translate to a drop in demand from 1,665 pending sales at the end of May of this year to 1,553 by mid-August. The supply of available homes is projected to increase from 2,190 to 2,382 homes. With a rising supply and falling demand, the Expected Market Time would rise from 39 to 46 days, increasing by seven days, or 17%. At 46 days, it is still a very hot market, where sellers get to call most of the shots, just a bit more tolerable. 

In looking at these trends, buyers may conclude that the market will slow down enough to line up in their favor. That will not be the case. Negotiations will continue to favor sellers, yet the unbelievable housing pace will slow. As the Summer Market progresses, housing will not be as instantaneous. In the hottest price ranges, anything below $1.5 million, many homes that would have sold after the initial weekend will take an extra week to sell. Homes will still procure plenty of traffic, multiple offers, and sales prices above their asking prices. The market transformation will be characterized by fewer showings, slightly fewer offers generated, and not as many sales above their list prices.

In the coming weeks, buyers, sellers, and everyone connected to the real estate market will feel a slight slowdown in housing. They will scratch their collective heads and wonder what is going on. No, housing is not suddenly shifting completely in the buyer’s favor. Instead, it is shifting to a new cyclical season of the year: SUMMER. 

Active Listings

The active inventory did not change much in the past couple of weeks.

The active listing inventory increased by six homes in the past two weeks, nearly unchanged, and now sits at 2,196 homes, its lowest level for a start to June since tracking began in 2004. The inventory has not risen much since starting to rise in mid-April. The inventory this year closely resembles 2021 inventory levels. The inventory will not change much, only rising slightly until it peaks sometime this summer between July and mid-August. This is not because of crazy, out-of-control demand keeping the inventory from rising. Instead, it is due to a giant drop in the number of homeowners willing to sell their homes in the current higher mortgage rate environment. Through May, there have been 46% fewer sellers compared to the 3-year average before COVID (2017 to 2019). That is 8,339 missing FOR-SALE signs so far this year. This trend is not going to fade anytime soon. Expect the inventory to closely resemble 2021 for the remainder of the year.  

Last year, the inventory was 3,059, 39% higher, or 863 more. The 3-year average before COVID (2017 through 2019) is 6,501, an additional 4,305 homes, or 196% 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. 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 May, 2,286 new sellers entered the market in Orange County, 1,879 fewer than the 3-year average before COVID (2017 to 2019), 45% less. These missing signs counter any potential rise in the inventory.

Demand

Demand decreased by 4% in the past couple of weeks. 

Demand, a snapshot of the number of new escrows over the prior month, decreased from 1,665 to 1,595 in the past couple of weeks, down 70 pending sales, or 4%. The higher mortgage rate environment is not doing any favors for buyers and has been hovering around 7% since mid-May. This has had only a slight negative impact on demand. Yet, today’s demand readings are the lowest June level since tracking began in 2004, lower than the Great Recession. The lower readings are due to higher rates, but they are also a result of far fewer available homes. Demand is a reflection of recent pending sales activity. With 46% fewer sellers so far this year, it has translated to fewer pending sales and, ultimately, fewer closed sales. Demand will continue to be muted until rates drop. That will occur as soon as the economy cools and inflation drifts lower. 

Last year, demand was at 2,020, 27% more than today, or an extra 425. The 3-year average before COVID (2017 to 2019) was 2,766 pending sales, 73% more than today, or an additional 1,171.

With demand falling, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased from 39 to 41 days in the past couple of weeks. Last year the Expected Market Time was 45 days and cooling fast. This is the first time the Expected Market Time has been lower than the prior year since March last year. The 3-year average before COVID was 71 days, slower than today. 

Luxury End

The luxury market did not change much in the past couple of weeks. 

In the past couple of weeks, the luxury inventory of homes priced above $2 million decreased from 725 to 715 homes, down ten homes, or 1%. Luxury demand did not change in the past couple of weeks and remained at 200 pending sales. With supply falling slightly, the Expected Market Time for luxury homes priced above $2 million decreased from 109 to 107 days. Luxury is not selling as quickly as the lower ranges, and sellers should approach pricing carefully to find success. The higher the luxury price, the more intentional sellers need to be.

Year over year, luxury demand is down by 19 pending sales or 9%, and the active luxury listing inventory is down by four homes or 1%. Last year’s Expected Market Time was 98 days, similar to today. The year-over-year difference is diminishing rapidly and will soon reflect a better market than in 2022.  

For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 79 to 76 days. For homes priced between $4 million and $6 million, the Expected Market Time increased from 149 to 163 days. For homes priced above $6 million, the Expected Market Time increased from 267 to 274 days. At 274 days, a seller would be looking at placing their home into escrow around March 2024. 

Orange County Housing Summary

• The active listing inventory in the past couple of weeks increased by six homes, nearly unchanged, and now sits at 2,196. It is the lowest level for a start to June since tracking began in 2004. In May, 45% fewer homes came on the market compared to the 3-year average before COVID (2017 to 2019), 1,879 less. Last year, there were 3,059 homes on the market, 863 more homes, or 39% higher. The 3-year average before COVID (2017 to 2019) was 6,501, or 196% more, nearly triple.
• Demand, the number of pending sales over the prior month, decreased by 70 pending sales in the past two weeks, down 4%, and now totals 1,595, the lowest level for a start to June since tracking began in 2004. It was also the largest drop of the year. Last year, there were 2,020 pending sales, 27% more than today. The 3-year average before COVID (2017 to 2019) was 2,766, or 73% more. 
• With demand falling, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, increased from 39 to 41 days in the past couple of weeks. It was 45 days last year, similar to today, but was rapidly cooling with skyrocketing rates. It is the first time that the Expected Market Time has been lower than the prior year since March 2022.  
• For homes priced below $750,000, the Expected Market Time increased from 27 to 28 days. This range represents 19% of the active inventory and 27% of demand. 
• For homes priced between $750,000 and $1 million, the Expected Market Time increased from 25 to 27 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 28 to 30 days. This range represents 10% of the active inventory and 14% of demand.
• For homes priced between $1.25 million to $1.5 million, the Expected Market Time increased from 33 to 35 days. This range represents 10% of the active inventory and 12% of demand.
• For homes priced between $1.5 million to $2 million, the Expected Market Time increased from 46 to 50 days. This range represents 13% of the active inventory and 11% of demand.
• For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 79 to 76 days. For homes priced between $4 million and $6 million, the Expected Market Time increased from 149 to 163 days. For homes priced above $6 million, the Expected Market Time increased from 267 to 274 days.
• The luxury end, all homes above $2 million, account for 33% of the inventory and 13% of demand.
• Distressed homes, both short sales and foreclosures combined, comprised only 0.4% of all listings and 0.2% of demand. Only two foreclosures and six short sales are available today in Orange County, with eight total distressed homes on the active market, down six from two weeks ago. Last year there were six distressed homes on the market, identical to today.
• There were 1,696 closed residential resales in April, 34% less than April 2022’s 2,565 closed sales. April marked a 5% drop compared to March 2023. The sales-to-list price ratio was 100.2% 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.

Sincerely,
Steven Thomas
Quantitative Economics and Decision Sciences

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