Orange County Housing Report: A Mid-Year Checkup

July 16, 2017

Housing Checkup: Every once in a while, it is helpful to take a step back and evaluate the overall health of the current housing market and the latest trends.

The Orange County housing market has been hot for a very long time. It is working on its sixth year of continuous appreciation. Home values have surpassed record heights reached in June of 2007. There have not been enough homes on the market, buyers continue to trip over each other in pursuit of their piece of the American Dream, and multiple offers are the norm. That adequately describes the first half of 2017, so where do we go from here? Will it be more of the same or will the market evolve?

Let’s take a step back from the relentless real estate market for a moment. With a stethoscope, thermometer, and blood pressure cuff in hand, here are the latest trends and current heartbeat of the Orange County housing market:

• 2017 has been the year of the extremely lean active inventory. The year started with only 4,071 homes on the market, the lowest level since 2013. Since then, the active inventory has grown, but at a much slower pace than normal. It has been slim pickings. There have been 6% fewer homes placed on the market so far this year compared to 2016. In the past month alone, 11% fewer homes have entered the fray, resulting in an active inventory that only grew by 78 homes. It seems as if the housing market has already peaked, yet the inventory has not quite reached the 6,000 home mark. The inventory needs to be at 8,000 homes for it to move away from a seller’s market to one that is balanced, not favoring a buyer or seller; but that is not going to happen anytime soon. Today’s inventory is 18% lower than last year. It will remain at about 6,000 homes through the rest of the Summer Market and then will start to fall during the Autumn Market as unsuccessful homeowners throw in the towel, realizing that both the Spring and Summer Markets will be in the past.
• Demand has been hot this year, but has been muted a bit due to a lack of inventory. With fewer homes coming on the market this year, demand has not reached its full potential. In spite of that, it has reached levels similar to last year, surpassing 2016 for the first couple of months. From there, it has fallen slightly short of last year’s levels. The latest reading has demand surpassing 2016 slightly. From here, demand will slowly drop as summer progresses. It will continue its descent throughout the Autumn Market and will reach the lowest levels of the year during the Holiday Market, Thanksgiving through January 2018. With demand slowing a bit due to all of the summer distractions, carefully pricing is fundamental in order for sellers to find success. That will hold true for the remainder of the year.
• The expected market time is on the rise, but the overall market is a lot hotter than last few years. Supply (the inventory) and demand (recent pending sales) determines the expected market time. That is the amount of time it will take for a newly listed home to be placed into escrow. When it drops below 2 months, it is a HOT seller’s market. From February through the mid-June, the market was HOT, two months longer than last year. Since then, the market has exceeded 60 days, indicating a tepid seller’s market. In a tepid seller’s market, carefully pricing is essential and appreciation slows. Sellers were getting away with stretching the asking price and home values were appreciating swiftly. With the Summer Market rolling along, the pace has slowed a bit. For all of Orange County, it has risen from 51 days in the heart of the Spring Market to 63 days today. All price ranges are slowing, but it is still HOT below $750,000. It is important to note that the higher the price, the longer it takes to find success. The market will continue to slow throughout the summer. As the market downshifts, buyers move away from a willingness to pay any price to obtain a home, to a strong desire to pay the Fair Market Value for a home, a value determined by the most recent pending and closed sales. It will remain a tepid seller’s market for the remainder of 2017.
• Closed sales are slightly higher than last year and it looks as if that will not change for the remainder of the year. Through the first half of the year, there have been 15,658 closed sales compared to 15,219 last year, 3% more. With slightly higher demand for the remainder of the year, closed sales will remain a bit higher than last year.
• Luxury home sales have surpassed last year’s record pace, but there is still a lot of seller competition to overcome in order to find success. The luxury market is best defined as the top 10% of closed sales, or $1,250,000 and higher. For the first six months, there have been 1,864 closed luxury sales compared to 1,532 last year, 22% more. That is a record number of luxury sales in Orange County. However, as of today there are 2,089 active listings above $1,250,000, more than have sold in the first half of this year. Today, the expected market time for luxury homes is 190 days. For proper perspective, that would mean that escrow would open up at the end of January of next year. Keep in mind, the expected market time is even longer in the higher price ranges. For homes priced above $2 million, the expected market time is 269 days, opening escrow in April 2018.
• In spite of the Federal Reserve raising the short-term rate, interest rates have slowly inched their way back below 4%. The Federal Reserve has been talking a big game for a few years now about raising the short-term rate. After years of bluffing, they have backed up all of the talk and have raised rates three times, including the one last December. Yet, rates have not been behaving at all like expected by economic experts or prognosticators. After the presidential elections in November, interest rates climbed significantly at the prospect of inflation and reached 4.375% by the end of 2016. However, with the realization that the new presidential administration’s inflationary policies may take years to implement, long-term interest rates have floated back down to below 4%, reaching 3.91% in June. As international economic uncertainty continues, everybody is seemingly “parking their money” in US Treasuries as a “safe haven,” ultimately insuring that the low interest rate environment continues. Interest rates will not change much for the remainder of the year and they will continue to stoke the flames of demand.

Active Inventory: The active inventory increased by only 47 homes in the past couple of weeks.

The active listing inventory added an additional 47 homes in the past two-weeks, a 1% increase, and now sits at 5,983, poised to surpass the 6,000 home mark. The inventory is only slowly growing and it looks as if this year’s peak will be right around that 6,000 home mark. Quite simply, not enough homes are coming on the market as more and more homeowners are opting to stay put.

Demand:  Demand decreased by 2% in the past couple of weeks.

Demand, the number of homes placed into escrow within the prior month, decreased by 55 pending sales in the past two-weeks and now totals 2,830, a 2% decline. Demand is off the most in the entry-level market, homes priced below $500,000. With 38% fewer homes available below $500,000 compared to this time last year, it is no wonder that demand is off by 18% year over year.

Luxury End:  Luxury demand decreased by 4% in the past couple of weeks while the inventory grew by 1%.

In the past two weeks, demand for homes above $1.25 million decreased from 344 to 329 pending sales, a 4% decline. The luxury home inventory increased from 2,068 homes to 2,089, up 1%.  The luxury market downshift is due to summer distractions. The supply is up and demand is down.

The market is no longer a HOT seller’s market, but a tepid seller’s market with muted appreciation.

Luxury End:  Luxury demand decreased by 4% in the past couple of weeks while the inventory grew by 1%.

In the past two weeks, demand for homes above $1.25 million decreased from 344 to 329 pending sales, a 4% decline. The luxury home inventory increased from 2,068 homes to 2,089, up 1%.  The luxury market downshift is due to summer distractions. The supply is up and demand is down.