Orange County Housing Report: A 2019 Forecast

December 30, 2018

HAPPY NEW YEAR!!!  Now, what does that mean for Orange County real estate?

 First, let’s take a look back at what happened in 2018 in terms of the inventory, demand, luxury properties, and Expected Market Time.

Active Inventory – The active inventory climbed all year and peaked much later than normal. The year started with an active inventory of 3,397 homes. It was the second lowest start to a year behind 2013’s incredibly low 3,161 homes.

After a six-and-a-half-year run in housing, 2018 was the year of a shifting market where many cracks emerged. The active listing inventory continued to climb from the very start of the year and did not peak until the middle of October. Typically, the active inventory peaks somewhere between July and August, right before the kids go back to school and the market transitions to the Autumn Market. Normally, the active inventory drops for the remainder of the year right after peaking, but not in 2018. This year’s peak was more of a plateau, lingering around the 7,200 mark for an additional month. It was not until Thanksgiving week, the beginning of the Holiday Market, when the inventory really started to drop. That only left about six-weeks for it to descend, paving the way for a higher start to 2019.

Another crack in the market emerged in May, when the active inventory was higher than the previous year for the first time in 20-months. For nearly two years, the active inventory was less than the prior year. That changed in 2018 and is a trend that will continue for quite some time.

For the first few months of the year, sellers were able to stretch their asking prices and achieve success. However, as more homes entered the fray, they began to sit. With rising interest rates, buyers were not willing to pay much more than the Fair Market Value for a home. It was all about the price of a home. Sellers who were a bit too overzealous and pumped up their prices ultimately sat on the market until they adjusted more in line with their true Fair Market Value.

The inventory more than doubled from January to mid-October, rising by 114%. With a late peak, the inventory dropped by only 20% by the end of 2018.

Demand: With rising interest rates, demand was muted all year.

Demand for Orange County homes (the number of pending sales over the prior month) followed a normal strong housing pattern; yet, was muted all year long. In terms of demand, the Spring Market was the hottest, followed by the Summer Market, then the Autumn Market, and, finally, the Holiday Market.

Rising interest rates coupled with higher home values created a home affordability issue. According to the California Association of REALTORS®, only 20% of the Orange County population could afford the median sales price for a home.

The bottom line: values had risen dramatically since 2012, substantially outstripping the rise in incomes. As a result, payments had risen too much, too fast. Fewer potential buyers were willing to pull the trigger as payments rose to unsustainable levels.

Luxury End:  Luxury homes dramatically slowed in the second half of 2018.

2017 was a record-setting year for the most sales ever above $1.25 million. Yet, a major crack emerged as the luxury market slowed considerably in the second half of the year.

The Orange County luxury home market started off robust. In the first half of 2018, there were 10% more luxury sales year over year. But, demand started to drop during the Spring Market. That translated into a slower third quarter with 1% fewer closings year over year. The brakes were pumped a bit more over the summer with even less demand, which resulted in 12% fewer year over year sales in the fourth quarter.

The luxury market was stronger than ever at the beginning of the year; yet, it too succumbed to the same shifts in the housing market as in the lower price ranges. The luxury inventory continued to grow as demand dropped. The inventory peaked for high-end homes in mid-October.  With more supply and muted demand, the market felt a lot more sluggish in the second half of the year.

Expected Market Time: As the market shifted from a supply problem to a demand problem, the market shifted from a Seller’s Market to a Balanced market, and finally to a slight Buyer’s Market.

The Expected Market Time, the amount of time it would take to place a home listed today into escrow down the road (based upon current supply and demand) dipped to below 60-days, a HOT seller’s market, from February through April. It seemed as if 2018 was shaping up to be the seventh consecutive year for the vigorous housing run. However, the active inventory grew at a rate not seen since 2006. At the same time, demand dropped considerably from April through the end of the year. By July, demand dropped to levels not seen since 2007, where they remained through December.

A Balanced Market is one that does not favor buyers or sellers. Multiple offers are no longer the norm, buyers are not tripping over each other to purchase, and home values are no longer appreciating at all.

The 2019 Forecast: A sluggish year.

The U.S. economy was strong throughout 2018. Unemployment was at record lows. The GDP was up considerably. The new corporate tax cut juiced an already hot economic landscape. But, as the year unfolded, tailwinds emerged. The Federal Reserve increased short-term rates four times. Long-term interest rates grew from 4 to 5% before receding slightly at the end of the year. Wall Street had a tumultuous ride, ending up down for the year. The trade war took center stage and became a drag on the overall economy. Finally, new home sales have been on a steep slide for the past year. 2018 was about a shifting economy. While the economy may still be strong, its strength is fading. With interest rates remaining elevated and more headwinds to come, the local housing market is not going to improve much in the coming year.

The bottom line, 2019 will continue shifting away from sellers and line up more in favor of buyers. It will finally be the buyer’s turn during the second half of the year. Sellers will not get away with overpricing just as buyers will not get away with lowball offers. Sellers will have to pack their patience in 2019. Gone are the days of multiple offers and instant gratification. Instead, price will be king.