Orange County Housing Report: Values Rising

June 26, 2023

Despite the high mortgage rate environment eroding home affordability, home values in Orange County have been on the rise after bottoming in December.

Home Price Appreciation

The catastrophically low supply of available homes will continue to propel a rise in home values.

Plenty of housing naysayers have been calling for a severe market correction ever since home values skyrocketed higher after the initial COVID lockdowns from June 2020 through May 2022, two years of rapid appreciation. Then with mortgage rates climbing sharply from 3.25% in January of last year to 7.37% in October, the naysayers’ chorus grew much louder. Many anticipated a sharp decline in home values that rivaled the Great Recession. They can get quite emotional about their position. On the face of it, experiencing a swift rise in home values reminiscent of 2000 through 2005 and then the massive erosion in home affordability last year, it is understandable that some would conclude that prices would fall. And they did for seven months last year, but that all changed after they bottomed out in December.

It is time to push the emotions aside and consider the facts, basic economic principles, and irrefutable data. According to the Freddie Mac Home Price Index, home values in the Los Angeles/Orange County region dropped by only .01% in March and April of 2020 during the initial COVID lockdown. They then reversed course and rose consistently for the remainder of 2020. In 2021, home values rose by 2% or more monthly from March through June. This level had only been achieved since the turn of the century in April and May 2002, April and July 2003, from February through May 2004, March through May 2005, and March through May 2013. Only 15 months out of 243 months before the pandemic. It occurred again in March 2022, five times in total in just two years.

Values peaked in May 2022 and then dropped from June through December. With rapidly rising rates and affordability reaching record lows, they fell by 1% or more in July, August, and November. This level had only been reached since the turn of the century from July 2007 through February 2009, 20 months straight.

Year-over-year home values are down 4%, but the focus should be on the current monthly trend. Home values turned positive in January and have continued rising ever since. They are not increasing at the torrid pace of 2020 through the first several months of 2022, but the trend is up. Why are home prices not plunging with high mortgage rates and severe affordability issues? It all boils down to a catastrophically low supply of available homes.

Last year values dropped even though the inventory was at low levels. It rose from 1,100 homes in January until it peaked at the start of August at 4,069 homes, a 269% rise. Yet, the 3-year average peak before COVID (2017 to 2019) was 6,958, an extra 2,889 homes. There were not many homes last year; nonetheless, values dropped as affordability continued to erode with rising rates. It was not a supply and demand issue but strictly a home affordability issue. Demand was substantially impacted, reaching lows last seen during the Great Recession. But back then, there was a glut of homes available to purchase, over four times 2022 levels. Weak demand was matched up against an overabundant supply. As a result, values plunged for nearly two years.

In 2023, the year started with 2,530 homes; only 2022’s start was lower. The inventory bottomed in April at 2,053 and has added only 228 homes since, currently sitting at 2,281, its lowest end-of-June level since tracking began in 2004. Last year at this time, there were 3,491 homes, 53% more or an extra 1,210 available homes. The 3-year average before COVID was 6,633, an additional 4,352 homes or 191% higher than today. While demand remains at Great Recession levels, unlike last year, it is matched against a catastrophically low supply.

Today’s lack of supply and stabilized higher mortgage rate environment has resulted in an extremely hot real estate market that favors sellers in the negotiation process. For all homes priced below $1.5 million, the market is NUTS with an Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) of less than 40 days. Homes priced at or near their Fair Market Value are being inundated with buyer showings and receiving an avalanche of multiple offers within the first couple of weeks and often days. They are selling at or above their asking prices. Upon writing an offer, buyers quickly find that they are one of many, sometimes over ten offers on a home.

The inventory is about to hit its cyclical peak between July and August, not much time for the inventory to grow. After reaching a peak, the inventory will slowly and methodically decline through the end of the year. As a result, the pressure and trend for home values to rise on a monthly basis will continue at a slow pace. Orange County home values are on the rise.

Active Listings

The active inventory added 85 homes in the past couple of weeks.

The active listing inventory increased by 85 homes in the past two weeks, up 4%, and now sits at 2,281 homes, its lowest level for an end to June since tracking began in 2004. Housing is now knee-deep into the Summer Market, where the inventory will rise until peaking between July and August. That is not enough time to change much at all from today’s extremely anemic crisis level. The extremely low inventory is a trend that will continue for quite some time. Buyers

anxiously await anything new to hit the market. With an imminent peak just around the corner, the hot market will not change much for the rest of the year.

Last year, the inventory was 3,491, 53% higher, or 1,210 more. The 3-year average before COVID (2017 through 2019) is 6,633, an additional 4,352 homes, or 191% 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 did not change much in the past couple of weeks.

Demand, a snapshot of the number of new escrows over the prior month, increased from 1,595 to 1,602 in the past couple of weeks, up 7 pending sales, nearly unchanged. Last year demand plummeted by 159 pending sales or 8%, its largest drop of the year. Yet, mortgage rates were at 5.81% in June 2022 versus 6.67% today, according to Freddie Mac’s Primary Mortgage Market Survey®. Why has demand stabilized this year versus tumbling lower like it did last year? Although mortgage rates are stubbornly high, they have not changed much this year. Last year they rose from 3.25%, eclipsed 4% in March, then 5% in April, 6% in May, and 7% in October. They have been bouncing between 6% to 7% this year, much more stable than last year. Higher mortgage rates are frustrating, but buyers are getting more accustomed to them.

From here, expect demand to slowly drift downward until the overall U.S. economy slows along with inflation. When that occurs, rates will ease, and demand will rise.

Last year, demand was at 1,861, 16% more than today, or an extra 259. The year-over-year difference is diminishing fast as demand was plunging last year at this time. The 3-year average before COVID (2017 to 2019) was 2,679 pending sales, 67% more than today, or an additional 1,077.

With the inventory growing, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased from 41 to 43 days in the past couple of weeks. Last year the Expected Market Time was 56 days, slower than today. The 3-year average before COVID was 75 days, much slower than today.

Luxury End

The luxury market slowed in the past couple of weeks.

In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 715 to 769 homes, 62 additional homes, up 8%. It is the highest level since November. Luxury demand decreased by 11 pending sales, down 6%, and now sits at 189, its lowest level since April. With supply rising and demand falling, the Expected Market Time for luxury homes priced above $2 million increased from 107 to 122 days, its highest level since February. Luxury is not instantaneous like the lower ranges and is comparable to last year. The gap between the lower end and luxury is widening.

Year over year, luxury demand is down by 22 pending sales or 10%, and the active luxury listing inventory is down by seven homes or 1%. Last year’s Expected Market Time was 110 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 increased from 76 to 89 days. For homes priced between $4 million and $6 million, the Expected Market Time decreased from 163 to 131 days. For homes priced above $6 million, the Expected Market Time increased from 274 to 435 days. At 435 days, a seller would be looking at placing their home into escrow around September 2024.

Orange County Housing Summary

The active listing inventory in the past couple of weeks increased by 85 homes, up 4%, and now sits at 2,281. Regardless, it is the lowest level for an end 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 3,491 homes on the market, 1,210 more homes, or 53% higher. The 3-year average before COVID (2017 to 2019) was 6,633, or 191% more, nearly triple.
Demand, the number of pending sales over the prior month, increased by 7 pending sales in the past two weeks, nearly unchanged, and now totals 1,602, the lowest level for an end to June since tracking began in 2004. Last year, there were 1,861 pending sales, 16% more than today. The 3-year average before COVID (2017 to 2019) was 2,679, or 67% more.
With the supply rising, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, increased from 41 to 43 days in the past couple of weeks. It was 56 days last year, slower than today and rapidly cooling as rates were rising.
For homes priced below $750,000, the Expected Market Time increased from 28 to 29 days. This range represents 18% of the active inventory and 27% of demand.
For homes priced between $750,000 and $1 million, the Expected Market Time increased from 27 to 28 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 30 to 32 days. This range represents 11% 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 35 to 31 days. This range represents 10% of the active inventory and 13% of demand.
For homes priced between $1.5 million to $2 million, the Expected Market Time increased from 50 to 51 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 increased from 76 to 89 days. For homes priced between $4 million and $6 million, the Expected Market Time decreased from 163 to 131 days. For homes priced above $6 million, the Expected Market Time increased from 274 to 435 days.
The luxury end, all homes above $2 million, account for 34% of the inventory and 12% of demand.
Distressed homes, both short sales and foreclosures combined, comprised only 0.3% of all listings and 0.1% of demand. Only two foreclosures and five short sales are available today in Orange County, with seven total distressed homes on the active market, down one from two weeks ago. Last year there were five distressed homes on the market, similar to today.
There were 2,030 closed residential resales in May, 19% less than May 2022’s 2,520 closed sales. May marked a 20% rise compared to April 2023. The sales-to-list price ratio was 102.6% for all of Orange County. Foreclosures accounted for 0.25% of all closed sales, and short sales accounted for 0.05%. That means that 99.7% of all sales were good ol’ fashioned sellers with equity.

Have a great week.

Sincerely,
Steven Thomas
Quantitative Economics and Decision Sciences