Orange County Housing Report: Time to Sharpen Your Pencil

To be successful during the Summer Market, it all boils down to price.

Achieving the Objective in Selling: Many sellers are pushing the envelope in terms of price and are risking not finding success and wasting valuable market time.

The transition from the Spring Market to the Summer Market is underway. Seemingly, everybody has become accustom to multiple offers within days of placing the FOR SALE sign in the yard. With so many offers to purchase a home, a bidding war often arises. Reports of record prices swirl around neighborhoods. Many homeowners are tempted to join the fray.

Yet, the market has already started to shift. There aren’t as many multiple offers. Sellers who have stretched their asking prices above the most recent comparable pending and closed sales are sitting on the market without success.  Can the shift between the Spring and Summer Markets really be that significant? The answer is a resounding YES.

It is not like the market suddenly transitioned into a buyer’s market. It’s more about supply and demand and carefully pricing a home. Housing is drifting away from a hot seller’s market and moving towards a slight seller’s market. The supply of homes on the market has been on the rise throughout the Spring Market. It has increased by nearly 1,300 homes since the end of February, a 29% rise.

The inventory will continue to grow until it peaks around mid-August. More and more homes will come on the market at a similar pace to the spring, yet many unsuccessful homeowners will accumulate on the active listing inventory. The inventory swells due to this accumulation of unsuccessful sellers. This occurs in every price range, not just the luxury end. In fact, during the Summer Market of 2016, homes between $500,000 and $750,000 had the largest increase compared to any other price range, growing by 18%. The second largest, a 13% increase occurred for homes priced between $750,000 and $1 million.

Demand, the number of homes placed into escrow within the prior month, rocketed upward since the beginning of the year and continued to rise until it reached a peak for 2017 at the beginning of May. During the Spring Market, it increased from 2,651 at the end of February until the May peak of 3,012 pending sales, a rise of 361, or 14%. Since reaching the peak, demand has actually dropped by 4% and sits at 2,904 homes today.

Due to all of the distractions of summer, demand slowly drops. It’s still the second hottest season of the year behind spring, but the shift can be felt within the real estate trenches.

The bottom line: as the supply of homes increases throughout the summer months, it is met with slowly dissipating demand. As the supply increases and demand decreases, price becomes a lot more important in order for sellers to find success. Push the envelope on pricing and homes will sit. Buyers know that home values have been on the rise for years now, but that does not mean they want to stretch much above the most recent comparable closed sale.

Right now is the time of the year when sellers really need to have a reality check, or they risk not achieving their objective in selling their homes. Are they pushing the envelope by stretching the asking price too far above comparable sales? Or, are they priced realistically, close to their home’s Fair Market Value? In order to zero in on the Fair Market Value, it is imperative that a home is compared to the most recent pending and closed sales. Comparing prices is extremely important, but so is the condition, upgrades, location, lot size, and all of the other nuances that go into making a home more or less desirable.

For sellers who are overpriced, the longer they wait to correct their price, valuable market time will have transpired. Since demand slowly drops through the summer months, the deeper a seller gets into the Summer Market, the harder it will be to find success. The reason for the drop, buyers with families typically want to move by the end of summer prior to the kids going back to school at the end of August. In order to close a sale by then, the window of opportunity to place a home into escrow is now through the first few weeks of July.

The moral to the story: it is time for sellers to sharpen their pencils and properly price their homes in order to achieve their objective in selling.

Active Inventory: The active inventory increased by 2% in the past couple of weeks.

The active listing inventory added an additional 134 homes in the past two-weeks, a 2% increase, and now sits at 5,757. We can expect the inventory to continue to rise throughout the Summer Market until it reaches a peak somewhere around mid-August. From there, the market will transition into the Autumn Market, from mid-August through Thanksgiving, with fewer homes coming on the market with both the spring and summer in the rearview mirror.

Demand:  Demand dropped by 10 pending sales in the past couple of weeks.

Demand, the number of homes placed into escrow within the prior month, dropped by 10 pending sales in the past two-weeks and now totals 2,904. Demand is off the most in the entry-level market, homes priced below $500,000. With 23% fewer homes that have been placed on the market so far this year below $500,000, demand is now off by 22%. This market has been underperforming all year due to a real lack of inventory.

We can expect demand to continue to drop slightly from now through the end of the Summer Market.

Luxury End:  Luxury demand dropped by 5% 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 369 to 351 pending sales, a 5% drop. Since the start of May, luxury demand has dropped by 15%. The luxury home inventory increased from 1,965 homes to 1,981, up 1%.  Similar to the rest of the market, demand is dropping for luxury homes while the luxury inventory continues to grow. There is already plenty of seller competition in the upper ranges.