OC Housing Report – March 1, 2015

Orange County Housing Report: Current Market is HOT… Now What?

Good Afternoon!

The sudden, unexpected jump in demand has buyers and sellers wondering where will housing go from here.

Hot Market: Current demand exceeds last year’s height that was reached in April.

Initially, 2015 started with muted demand and looked like the year would be a repeat of 2014, not too exciting. Then February rolled along and the housing market picked up steam. It wasn’t an anomaly either because the trend continued and demand jumped another 10% in the past two weeks. Demand has nearly doubled from the start of the year.

The current expected market time for all of Orange County is 56 days, a sellers’ market. That is significantly different than the 101 day expected market time posted right after ringing in a New Year. Back then it was a balanced market that did not favor buyers or sellers. Since then, buyers have been cashing in on an interest rate environment that provides “easy money.” Everybody has been listening to reports that the Federal Reserve is going to start raising the short term rate; thus, buyers are jumping at the opportunity to cash in while borrowing money is cheap.

The Orange County housing market is back to a Seller’s market. How should a seller approach the current market? Right now homes are able to push the envelope a little bit in terms of pricing. Multiple offers are back and homes are selling for a bit more than the most recent comparable sale. Open house activity is up and buyers are competing to purchase.

But, let’s not get ahead of ourselves. Yes, the market is tipping towards sellers again and prices are beginning to rise, but there are major differences from the heydays of the 2013 market, the last time we witnessed a big push that favored sellers. For proper perspective, two years ago demand was nearly identical, but today’s active listing inventory is 68% higher, 5,433 homes compared to 3,237. The expected market time back then was a little over a month versus about two months today.

Today’s market is NOT 2013. The approach has to be different. Back then sellers were getting away with drastically overpricing their homes and values were skyrocketing from month to month. The biggest risk for sellers today is to push the envelope too far, pricing their homes out of bounds, which will result in nothing more than sitting on the market with no success. The closer a home is priced to their Fair Market Value, which takes into consideration comparable sales, location, amenities, AND condition, the quicker a seller will be able to achieve their goal in selling. Remember, values have already risen substantially from the lows of just a few years ago, so buyers still do not want to grossly overpay for a home.

What about buyers, how should they approach the current market? The economic recovery, especially locally, has improved significantly. Employment is getting much better and wages are trending upward. Interest rates are at historical lows and everybody is clamoring to purchase.

These are great signs, but, again, let’s not get ahead of ourselves. Values are no longer 30% off of the pre-recession peak reached in 2006; instead, they are within 8% of that peak. Remember, those heights were reached on the backs of subprime and no documentation loans. Lending standards have since been tightened dramatically.

The biggest warning to buyers is to not get caught up in the current surge, to not go crazy and trip over themselves to get a home. It is wise to take advantage of the current interest rate environment, but be strategic and mindful in pursuing a home. Planning on being in a home for years, then lock in those low payments and don’t look back regardless of where the real estate market goes from here. For buyers looking to stay in a home for just a couple of years, be prepared that there is always a risk that the real estate market could turn the other direction and move from a seller’s to a buyer’s market.

As a buyer, do not be afraid to walk away from a home that is undergoing a bidding frenzy. Often the mindset changes from purchasing close to a home’s Fair Market Value to winning by paying whatever price. Instead, remove the emotional connection to a home and the need to win.

On the flip side, REALTORS® in the trenches have described stories of buyers who have walked away from a potential deal over just a few thousand dollars. With interest rates so low, a $3,000 difference is about $14 per month more. It may not be worth walking away over the equivalent of three trips to Starbucks.

Demand: Demand increased by 10% in the past two weeks.

Demand, the number of new pending sales over the prior month, increased by 272 homes in the past two weeks and now totals 2,891 homes. The current level surpassed the 2014 height of 2,818 pending sales reached in mid-April. And, we haven’t really sunk our teeth into the prime Spring Market, which cyclically peaks between April and May.

Last year at this time there were 433 fewer pending sales and the expected market time was at 66 days compared to 56 today.

Active Inventory: The inventory remained flat in the last couple of weeks.

The active inventory dropped by only 16 homes in the past two weeks and now totals 5,443. Last year at this time, the inventory was rising fast, but not today. Since current demand is so much stronger, it is chipping away at the active inventory and it is no longer rising. This recent trend will continue to keep a lid on any real growth.

Last year at this time there were 5,403 homes on the active inventory, just 30 fewer than today. The gap has narrowed substantially after starting off the year at 267 additional homes.

Distressed Breakdown: The distressed inventory dropped to its lowest level since August 2013.

The distressed inventory, foreclosures and short sales combined, decreased by 13 homes in two weeks and now totals 243. Year over year, there are 12 fewer homes today. Only 4% of the active listing inventory and 6% of demand is distressed. Distressed properties are playing an extremely insignificant role in the overall market.

In the past two weeks, the foreclosure inventory increased by one home and now totals 62. Only 1% of the inventory is a foreclosure. The expected market time for foreclosures is 39 days, one of the hottest segments of the Orange County housing market. The short sale inventory decreased by 14 homes in the past two weeks and now totals 181. The expected market time is 37 days, also a hot segment of the housing market. Short sales represent just 3.5% of the total active inventory.