OC Housing Report-May 24, 2015

For REALTORS®, buyers and sellers out in the real estate trenches, they may not feel it, but the inventory is steadily increasing.

Active Inventory: the active inventory increased by 5% in the past two weeks alone.

The Orange County housing market is on fire. For buyers looking for a home priced below $750,000, the market is simply nuts. They are greeted with unreal competition, multiple offers, and a virtual bidding war ensues. With competition so high, buyers are writing offers on home after home after home to no avail. The whole process right now is frustrating. The current supply of homes is too low to meet demand. It is as if everybody gets to go to Disneyland, but not everybody gets to ride because the lines are too long. However, there is change in the air. The active inventory has been steadily increasing, typical for this time of the year, and it will absolutely change the face of the Orange County housing market.

In the past two weeks, the active inventory increased by 279 homes, or 5%, and now sits at 6,104. The trend shows that the inventory will continue to increase from now through the end of the summer. For all of Orange County, the expected market time increased from 1.86 months to 2.0 months. With demand remaining the same, or dropping slightly, and the active inventory rising, the expected market time will continue to climb. Housing will move from a hot seller’s market to a slight seller’s market and by the start of school it could move towards a balanced market, not favoring sellers or buyers.

As housing transitions, appreciation will stop, yet sellers will still eagerly place their homes on the market at outlandishly, unrealistic prices. These homes will sit on the market, adding fuel to the increasing inventory. Price reductions will be the new normal. Sellers are already off their rockers in pricing today. In the past week alone, 8% of the market had to reduce their asking price even though it is an appreciating market. This phenomena occurs when homeowners price their homes out of thin air without any data to back it up, way outside the realm of reason and not considering the most recent comparable sales at all. This paradox takes place every day. Homes priced 10% above the last sale are not going to be successful. As a matter of fact, they won’t sell when they are priced 5% above the last sale either. If a home sold for $500,000 a month ago, the next home could sell for $510,000, a 2% increase. But, that is only if it is priced very close to that last sale.

Real estate chatter will move away from a hot market to a market plagued by overpriced homes. Pricing is the biggest issue today and it will intensify as the inventory expands. It was just reported that the median sales price increased to $600,000, a 4.2% increase year over year. That is 4.2% in a year. A year is 365 days and not a week. When sellers price their homes 4.2% above the last comparable sale, they are setting the stage to sit on the market overpriced without any offers. If they do obtain an offer, it will be by a buyer wanting to pay the Fair Market Value, so they will come in close to the last comparable sale. Many overpriced sellers are insulted by such an offer, even though, in reality, it is completely realistic and fair. Often overpriced sellers do not react appropriately and counter close to their unrealistic asking price. Most of these potential deals do not go together because these sellers must learn the hard way that often the first offer is the best offer. Instead, at a later date, they will reduce the asking price one, two, or even more times, until they are finally at a level where they are close to the Fair Market Value and able to entertain offers again.

More and more sellers will enter the fray thinking that summer is the best time to sell a home. But, that is not correct. The window of opportunity to sell during the best time of the year in terms of buyer demand is coming to a close, the Spring Market. In a couple more weeks housing will transition into the Summer Market. Spring is the best time because the homes that are placed into pending status now will close during the summer, the best time of the year to move. Homeowners thinking about selling do not factor the lag time from listing a home to closing the sale. If you are on the market for two months, the current expected market time, and have a 30 day pending period prior to closing, a seller new to the market is looking at 90 days from start to finish. In placing a home on the market in mid-June or July, a seller will be looking at a mid-September to October close, not the most desirable timeframe.

Summer is a season where distractions start to set in. During the spring there aren’t as many distractions. The 4th of July celebrations, long family vacations, the refreshing escape to the community pool, the inviting warm sand and crashing cool waves at the beach all distract buyers from looking and pulling the trigger to purchase. It is a good time to sell, just not as hot as the spring. During the summer, we will all read of a rising median sales price and plenty of sales, but these are closed sales that have already endured prospective buyers touring the home for the first couple of months and then a 30 to 60 day pending period prior to closing up shop; in other words, summer closed sales are a reflection mostly of homes placed on the market during the spring.

Getting down to the nitty-gritty, the Orange County housing market is evolving. As the active inventory grows so will the number of overpriced homes. Housing will transition from HOT to OVERPRICED and from a SELLER’S MARKET to a BALANCED MARKET. Stay tuned.

Last year at this time the inventory totaled 7,020 homes, 916 more than today.

Demand: Demand dropped by 3%, only the second drop this year and the largest since December 2014.

Demand, the number of new pending sales over the prior month, decreased by only 86 homes in the past two weeks and now totals 3,052 homes. In a time where everybody is lining up in droves to purchase homes, demand dropped in every price range except condominiums priced below $250,000. The only explanation is that too many homes are coming on the market overpriced. The lack of homes priced at their true Fair Market Value is beginning to hurt demand, limiting the number of homes that can be converted to sales until more homes drop their asking price to accurate levels.

Last year at this time there were 365 fewer pending sales, totaling 2,687, and the expected market time was at 78 days compared to 60 days today.

Distressed Breakdown: The distressed inventory increased by 4 homes in the past two weeks.

The distressed inventory, foreclosures and short sales combined, increased by 4 homes, or 2%, in the last two weeks and now totals 182. That was after posting its lowest mark since June of 2013 a couple of weeks ago. Year over year, there are 29% fewer distressed homes today. Only 3% of the active listing inventory and 5% of demand are distressed. The distressed inventory has been demoted to an asterisk in today’s market, almost not worth mentioning. Its impact on the overall marketplace is insignificant .The vast majority of real estate activity in Orange County involves regular homeowners with equity in their homes.

In the past two weeks, the foreclosure inventory remained the same, totaling 63. Only 1% of the inventory is a foreclosure. The expected market time for foreclosures is 33 days. The short sale inventory increased by 4 homes in the past two weeks and now totals 119. The expected market time is 29 days, one of the hottest segments of the housing market. Short sales represent just 1.9% of the total active inventory.