Orange County Housing Report: The Market Is Cooling Due to the Coronavirus
The Coronavirus has quickly evolved from bumping elbows and not holding hands at church to social distancing and a mandatory “stay at home” order from Governor Gavin Newsom for the entire state of California. Shopping malls have closed, schools have moved to electronic learning, restaurants now only allow take-out or delivery. Life as everybody knows it has been turned on its head.
Prior to the outbreak, Orange County housing was pumping on all cylinders. It was the hottest Spring Market since 2013. Multiple offers were the norm, home values were on the rise, and there simply were not enough homes on the market to satisfy the voracious appetite of buyers. The low mortgage rate environment with rates remaining in the 3’s was propelling housing upward.
Just as COVID-19 changed “business as usual” for everyone across the nation, trends have rapidly surfaced that highlight a cooling housing marketplace.
Demand did an about-face and dropped by 7% in the past two weeks. In the past five years, demand, the number of pending sales over the prior 30-days, averaged a 5% increase at this time of the year. The unconventional drop is due to pending sales falling out of escrow and fewer new pending sales. Demand is still 2% higher than last year, 48 additional pending sales, but the gap is closing. Two weeks ago, demand was 14% higher, 311 additional pending sales. Expect demand to continue to drop until the number of new Coronavirus cases starts to diminish and the “stay at home” order has an end date.
The Expected Market Time increased by 8% in the past two weeks, an unmistakable sign that housing is cooling. The Expected Market Time (the time between pounding in the FOR-SALE sign and opening escrow) increased from 48 to 52 days in just two-weeks. At 52-days, the market is technically a “hot” Seller’s Market, yet it is rapidly cooling. In the past five years, the Expected Market Time has dropped by an average of 4% in mid-March. It is officially spring, and the market normally gets hotter as more buyers start their home search. Expect the market to continue to cool the longer Californians are required to remain confined in their homes.
There are 528 homes that were placed on “Hold Do Not Show.” There are a number of sellers who are opting to wait for the crisis to end before placing their home back onto the open market. Some know that activity will diminish and are desirous of waiting until the conditions line back up in their favor. Others simply do not want strangers touring their homes while reports continue to detail the spread of the COVID-19 virus. With so many homes being placed on HOLD, the active inventory is not growing despite the drop in demand. This too is a trend that will continue to grow until an end to the spread is insight.
Despite the emerging cracks in the housing market, housing is not going to plummet into the abyss and bring a wave of foreclosures and short sales similar to the Great Recession. That is an unfounded rumor not based on all the facts. Yes, housing is downshifting and will slow in the coming weeks. Yes, these trends will continue to evolve and deepen. The extent and weight of the slowdown all depend upon the duration of the Coronavirus outbreak and how long everybody must remain in their homes.
It is important to understand that the housing market has a very long way to go before it even tilts slightly in favor of buyers. Currently, Orange County is still tilting heavily in favor of sellers. Housing must first evolve from a Seller’s Market, less than a 90-day Expected Market Time, to a Balanced Market, between 90 and 120-days. It is currently at 52 days. It is only a slight Buyer’s Market between 120 and 150-days. Home values start to drop in a “deep” Buyer’s Market, which is an Expected Market Time greater than 150-days. In 2018, with rising interest rates, housing took 8-months to go from a HOT Seller’s Market to a slight Buyer’s Market. It quickly reversed course at the start of 2019 as rates dropped.
The strength of the market depends on supply and demand. Demand will drop, but so will the supply of homes. The active listing inventory will drop as many homeowners will wait to place their homes on the market until after the number of new cases of the Coronavirus begins to diminish.
The government and lenders will initiate programs for borrowers who are unable to make their monthly mortgage payments. The foundation of housing is strong. Housing is not a house of cards about to collapse like it was prior to the Great Recession. Buyers have been purchasing with cash and large down payments. They have had to qualify for loans and prove that they could afford the monthly payment. There are no subprime or pick a payment plan loans. Homeowners have not been using their homes as ATM’s and pulling out massive amounts of equity like they did prior to the last recession. This is not a housing induced slowdown. This is an unexpected downturn and the government and banks are going to make sure that homeowners remain in their homes. The bottom line: there will not be a wave of distressed sales.
Active Inventory: The current active inventory decreased by 2 homes in the past two weeks.
The active listing inventory decreased by 2 homes in the past two weeks, nearly unchanged, and now sits at 4,159. The active listing inventory will drop from here and then remain at a low level until after the “stay at home” order has been lifted in California. Many sellers have opted to place their homes on “Hold Do Not Show” as well.
Last year at this time, there were 6,532 homes on the market, 2,373 more than today, a 57% difference. There were a lot more choices for buyers last year.
Demand: In the past two-weeks demand dropped by 7%.
Demand, the number of new pending sales over the prior month, decreased from 2,583 to 2,398, shedding 185 pending sales, down 7%. The “stay at home” order has made it extremely difficult for buyers to see homes. Virtual tours and professional photos will go a long way in allowing buyers to view homes that they are interested in digitally. Demand will continue to drop and remain at muted levels until the COVID-19 outbreak subsides.
Last year, there were 48 fewer pending sales compared to today, 2% less. The trend of stronger demand compared to the prior year is about to end.
In the past two-weeks, the Expected Market Time increased from 48 to 52 days, still a HOT Seller’s Market (less than 60 days), where home values are appreciating, and sellers get to call the shots. Expect the market to cool from here. Last year the Expected Market Time was at 83 days, much slower than today.
Luxury End: The luxury market cooled considerably in the past two weeks.
In the past two-weeks, demand for homes above $1.25 million decreased by 57 pending sales, down 14%, and now totals 359, its lowest level since the end of January. The luxury home inventory decreased by 38 homes, down 2%, and now totals 1,636. Many luxury homeowners will opt to wait to list their homes until after the outbreak. With a substantial drop in demand, the overall Expected Market Time for homes priced above $1.25 million increased from 121 to 137 days in the past couple of weeks.
Year over year, luxury demand is up by 7 pending sales or 2%, and the active luxury listing inventory is down by 454 homes or 22%. The Expected Market Time last year was at 178 days, noticeably slower than today.
For homes priced between $1.25 million and $1.5 million, in the past two weeks, the Expected Market Time increased from 71 to 80 days. For homes priced between $1.5 million and $2 million, the Expected Market Time remained unchanged at 80 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 175 to 248 days. For homes priced above $4 million, the Expected Market Time increased from 321 to 377 days. At 377 days, a seller would be looking at placing their home into escrow around March 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 2020.