Orange County Housing Report: It’s a Demand Problem

August 12, 2018

The focus has shifted from not enough homes on the market to extremely soft demand.

A Demand Problem: Demand was 20% higher last year and 23% higher two years ago at this time.

Everybody has been acutely aware that there have not been enough homes on the market for years now. The storyline has been the same year in and year out: with only a trickle of homes coming on the market, buyers have been tripping over themselves to purchase them. REALTORS® have become accustom to 50, or 100, or even more, potential buyers touring their Open Houses. Multiple offers have been the norm. In the lower ranges it was customary for homes that were priced well to lure 10 to 20 offers. It was no wonder that values have skyrocketed over the last 6½ years.

The type of market and home values are determined by supply and demand, and housing has been experiencing a supply problem for years. Quite simply, not enough homeowners have been entering the real estate arena since 2012. It has been a hot Seller’s Market ever since. Unfortunately, everybody has become used to the market lining up heavily in the seller’s favor. It has everyone’s expectations out of whack. The expectation is for the Seller’s Market to continue forever. That is just now how economics and housing works.

Suddenly, in 2018, the market evolved. The year started like every other year of the housing run, there were not enough homes on the market. But, this year the inventory climbed at a very fast pace during the Spring and Summer markets, the fastest since 2008. The active inventory has more than doubled this year and sits at 6,893 homes today, but it is still shy of the long-term average of 8,000 homes. Nonetheless, the market was redefining itself. The supply problem morphed into a demand problem.

As the inventory was increasing rapidly in the spring, the number of pending sales was subdued. Demand, the number of pending sales over the prior month, was slightly off from the very beginning of the year. It slowed further in February, but did not really become apparent until April when the year over year difference widened. At that point, REALTORS® in the trenches and sellers began to feel a noticeable shift in the market. The “normal” market that everybody had been used to with a steady stream of buyers, instantaneous, multiple offers, and sellers wondering if they had underpriced their homes even though they had achieved a record sales price for the neighborhood, was quickly vanishing.

Even though everybody has become accustom to a hot seller’s market, it is NOT a normal market. Today, we are experiencing a “NORMAL” market, also referred to as a Balanced Market, one that does not really favor sellers or buyers. That is where housing has evolved to today. It is a market where properly pricing is fundamental in order to find success. Both buyers and sellers need to carefully approach the market. Sellers cannot stretch their asking prices, like so many do today, or they will just sit. Buyers cannot bring in low, unrealistic offers either, or they will never buy. It is not a buyer’s market. Homes will sell at their Fair Market Values. Buyers are willing to pay very close to the last comparable sale, so sellers need to meet them there by pricing their homes appropriately.

It is time for everybody’s expectations to adjust. A normal housing market is here, and it looks like it’s not going to evolve further anytime soon. That means that one of four homes on the market will not find success. Sellers will have to recalibrate and often reduce their asking prices to be more inline with reality. In fact, 13% of the entire active listing inventory reduced their asking price just last week. Slowly but surely, everybody will get used to the normal, balanced market. Those that realign their expectations today will find success.