Orange County Housing Report: Heating up
Cost of Waiting: Housing is poised to get hotter next year, setting the stage for appreciation.
Many buyers are trying to time the housing market. They too are trying to wait for the “perfect time.” They hear that the real estate market is doomed, that housing is on the verge of a bubble, or how the next downturn will be worse than the Great Recession. These buyers are sitting on the fence and are waiting for it to turn. Unfortunately, all the noise is just that… noise. The facts and data simply paint a completely different picture.
As a result of the current low interest rate environment, housing has transitioned from a slight Buyer’s Market at the beginning of the year to a Balanced Market in February, to a slight Seller’s Market ever since. In fact, the market has been picking up steam and the Expected Market Time (time from originally listing to opening escrow) just dropped to its lowest level of the year. Regardless of the time of year, housing is heating up with the active inventory dropping like a rock and demand remaining relatively flat.
Since the end of July, the active listing inventory has shed 2,067 homes, a 27% drop. That’s the largest decline since 2012. At the same time, demand (last 30-days of pending sales) has only dropped by 7%. It has not looked that good since 2011. Consequently, the Expected Market Time dropped from 91 days at the end of July to 71 days today, a slight Seller’s Market (from 60 to 90 days), which is when there is not a lot of appreciation and sellers get to call more of the shots during negotiations. Housing is knocking on the door of a HOT Seller’s Market (less than 60 days) where there are multiple offers and home values appreciate.
While it may be frustrating for buyers to hear that the supply problem is back and the market is getting hotter, these frustrations can be overcome by focusing on the payment and diving into the market now before it heats up further.
A $700,000 mortgage has a monthly payment of $3,242 today. For perspective, that same payment last year was $3,758 with a 5% rate, an eye-opening $516 extra every single month. But, let’s take it a step further. With a supply problem in 2020 coupled with low mortgage rates, home values are forecasted to appreciate between 2 to 4%. Even if rates remain the same, at 4% appreciation, that $700,000 mortgage would become $728,000 and the monthly payment would be $3,371, that’s an additional $129 per month or $1,548 annually.
What if rates grew to 4.25%? A mortgage rate of 4.25% would still be a great rate and would not rock the housing boat much at all. With 4% appreciation and a rate that is a half percent higher, the monthly mortgage payment would be $3,581 per month. That is an additional $339 per month or $4,068 annually.
For housing, there is often a cost to waiting. Looking back longingly at where values were in the past is an exercise in futility. There is no way to turn back the clock. Instead, looking at where housing is today and where it is headed next year, it makes sense for buyers that have been waiting on the sidelines to get off the fence and into a home. Payments look incredible when factoring in the current low mortgage rate environment.
Active Inventory: The current active inventory dropped by 7% in the past two weeks, its largest drop of the year.
In the past two weeks, the active listing inventory shed 387 homes, down 7%, and now totals 5,534, dropping to its lowest level of the year. The last time the inventory was this low was May 2018. The inventory has shed 878 homes in just four weeks, down 14%. The inventory will continue to drop for the remainder of the year and will pick up steam after Thanksgiving, the start of the Holiday Market.
Last year at this time, there were 7,218 homes on the market, 1,684 more than today, or a 30% difference. The inventory is MUCH different than last year when it continued to rise through Thanksgiving.
Demand: In the past two-weeks, demand increased by 2%.
Demand, the number of new pending sales over the prior month, increased by 53 pending sales in the past two weeks, a 2% rise, and now sits at 2,328. That’s four weeks in a row of increasing demand. The last time that occurred was in 2016, paving the way for a solid end of the year in terms of closed sales. Expect the same increase in closed sales in December to occur this year. After Thanksgiving, expect demand to drop significantly along with the inventory.
Last year, there were 552 fewer pending sales than today, 24% less.
In the past two-weeks, the Expected Market Time significantly dropped from 78 days to 71, a slight Seller’s Market (60 to 90 days), where home values are only appreciating slightly, and sellers get to call more of the shots during the negotiating process. 71 days is the lowest level of the year. The last time that the lowest level was achieved towards the end of the year was in 2012, the initial year of the housing run. Last year, the Expected Market Time was at 122 days and climbing, completely different than today.
Luxury End: The luxury market improved significantly in the past two weeks.
In the past two-weeks, demand for homes above $1.25 million increased by 21 pending sales, a 7% rise, and now totals 328. The luxury home inventory decreased by 111 homes and now totals 1,979, down 5%. With increasing demand and a dropping luxury inventory, the overall Expected Market Time for homes priced above $1.25 million decreased from 204 days to 181 over the past two weeks, a considerable improvement. It was at 230 days a month ago.
Year over year, luxury demand is up by 94 pending sales or 40%, and the active luxury listing inventory is down by 149 homes or 7%. The Expected Market Time last year was at 273 days and climbing, much slower than today.
For homes priced between $1.25 million and $1.5 million, in the past two weeks, the Expected Market Time decreased from 93 to 79 days.
For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 159 to 127 days.
For homes priced between $2 million and $4 million, the Expected Market Time decreased from 317 to 304 days.
For homes priced above $4 million, the Expected Market Time decreased from 825 to 609 days. At 825 days, a seller would be looking at placing their home into escrow around June 2021.
Not sure what this means for your situation? Contact me and we can go over it in as much detail as you’d like.
REALTOR® | Negotiation Expert (RENE)
Data and comments provided by Steven Thomas, Reports On Housing – All Rights Reserved. Copyright 2019.