February 12, 2017
The eight-year seller drought is a relentless trend that has significantly contributed to Orange County’s hot market.
Lack of Sellers: Fewer homeowners have opted to sell for years now in spite of massive appreciation and excellent conditions to sell.
The storyline has remained the same for years now, there simply are not enough homeowners electing to sell their homes and make a move. It’s not just a local phenomenon, nor a Southern California phenomenon; it’s a national issue that has been juicing the 5-year seller’s market. Lack of supply, that’s the story.
It makes perfect sense that homeowners were not in a rush to sell from 2008 through 2011. Those were the years where home values took a pounding and homeowners watched their equity vanish seemingly overnight. However, since 2012, those same homeowners watched their equity return nearly as fast as it disappeared. The relentless appreciation has continued and resulted in a record high median sales price. Orange County is back to where it was prior to the Great Recession, yet sellers have still not returned in the same numbers.
From 2000 to 2007, there were an average of 1,500 additional homeowners opting to sell every single month compared to the past five years. That’s an additional 18,000 homes per year. More homes on the market would be a welcome relief to today’s frustrated buyers.
Based upon 2016 closed sales, the turnover rate for the Orange County housing stock is once every 21 years. That’s an improvement over 2015’s once every 23 years and 2014’s once every 24 years, but not by much. The markets with the best rates can be found in areas with relatively newer homes (Laguna Woods being the only exception): Talega, Newport Coast, Coto de Caza, Foothill Ranch, and Rancho Santa Margarita. And, the top turnover rate can be found in Ladera Ranch and Rancho Mission Viejo, once every 10 years.
The lowest turnover rates can be found in more established cities: Fountain Valley, Los Alamitos, Seal Beach, Villa Park, and Westminster. The lowest rate in Orange County can be found in La Palma where homeowners are moving once every 41 years.
SO, what gives? Why aren’t homeowners moving like they did before? Some think it is because too many millennials are delaying the purchase of their first home and are shacking up with their parents. Others think it is because financing is too tight and that Dodd-Frank regulations are hurting housing. Both issues would have a negative effect on demand; however, housing does not have a problem with demand.
One of the key issues that has impacted the Orange County housing market has been the lack of affordable new housing. Today’s builders have been focusing on catering towards the higher end. The Orange County new home market used to create a lot more local real estate activity as many local homeowners bought new and had to sell their existing homes first. With the county running out of vacant land, this will be an ongoing issue.
Many homeowners are not moving because owning a home long term is now in vogue. The Great Recession rattled our collective psyche and people came out of it changed, looking at homeownership differently. Many are looking to hang onto their homes and dig in their roots, similar to the Midwest philosophy.
Still, the biggest factor preventing many would be sellers from placing their homes on the market is the fear that there will be nothing to buy after successfully selling their homes. This is one of the most prevalent, undermining market forces. Essentially, the low inventory is preventing homeowners from entering the fray. Collectively, they would significantly increase the inventory if they all gave it a shot and marketed their homes subject to finding a replacement property. A seller can accept an offer to purchase their home with the condition that they would be able to find a replacement property within a specific time period, 30-days being most common. If they are unable to find a replacement home within the given time period, then the contract is cancelled or additional time may be negotiated.
Another way around this dilemma is the dreaded “double move” where a homeowner sells their home, moves into a monthly rental, and then takes their time to isolate the most ideal home for their family. There are plenty of moving companies that actually cater to this scenario and can crate and store whatever will not be used at the short term rental.
A lack of inventory coupled with a low housing turnover is a persistent trend that is not going to change in the near future.
Active Inventory: Within the past couple of weeks, the active inventory only increased by 3%.
Since January 1st, the active inventory has only grown by 377 homes. Within the past couple of weeks it added 128, or 3%, and now sits at 4,448. Part of the issue is that almost everything that has come on the market priced close to its Fair Market Value has flown off the market almost as quickly as the FOR SALE sign goes in the ground, especially homes priced below $1 million. Another issue is that, so far this year, 6% fewer homes have come on the market compared to last year at this time.
More and more homeowners will come onto the market from now through the end of summer. The first wave starts now, around mid-February. Many of these sellers will move swiftly into escrow. The next wave is the official beginning of the Spring Market, mid-March. This wave will stretch all the way through mid-August.
Demand: Demand is HOT, increasing 25% in the past two weeks.
This is typically when demand starts to take off. As the housing market moves closer to the best time of the year in terms of real estate activity, the Spring Market, demand continues to climb. Even though there are few choices right now, buyers are pouncing on any fresh inventory that is reasonably priced.
Demand, the number of homes placed into escrow within the prior month, increased by 473 pending sales in the past couple of weeks, or 25%, and now totals 2,403. As a result of the giant rise in demand and only a slight rise in the inventory, the expected market time dropped from 67 days to 56 days, a seller’s market. This is the first time it has dipped below the 60-day mark at this point of the year since 2013 (34 days).
Luxury End: Both the luxury inventory and luxury demand are on the rise.
Demand is up for Orange County’s luxury home market with 55 additional pending sales compared to last year at this time, 15% higher. The luxury inventory is up by 81 homes, 5% more. Most of the spike in demand is isolated to the $1 million to $1.5 million price range.
For homes priced between $1 million to $1.5 million, the inventory is down by 12 homes compared to last year, and demand is up by 42 pending sales. Yet, above $1.5 million, the inventory is up by 81 homes, and demand is up by only 13.
For homes priced between $1 million to $1.5 million, the expected market time in the past couple of weeks decreased from 98 days to 80 days. For homes priced between $1.5 million to $2 million, the expected market time decreased from 195 to 153 days. For homes priced above $2 million, the expected market time dropped from 277 days to 252 days.