After starting the year with nearly nothing on the market, the active
inventory is on the rise.
Not 2013: The active listing inventory increased by 9% since New Year’s Day.
The housing market has been on a tear for six years now and is showing no signs of letting up. Two long-term trends emerged during the run that are also showing no signs of diminishing anytime soon: unrelenting, hot demand and a chronic lack of homes on the market.
Demand has been juiced by historically low interest rates for the entire six-year run. In spite of experts and prognosticators forecasting a rise in the long-term rate for years now, mortgage rates have remained steady, never exceeding 4.5% (reached in September 2013). In fact, today’s rates are still bouncing around 4% and are not expected to rise much in 2018. These persistent, historically low rates dramatically improve home affordability, and, ultimately, prop up demand.
The chronic lack of homeowners placing FOR SALE signs in their front yards has been the Achilles heel to this housing run. Years of juiced demand and a low supply of homes on the market has resulted in rapid appreciation, fewer total yearly home sales, and frustrated buyers, especially entry level, first-time buyers. Multiple offers and sales prices at or above their list prices is the norm for homes priced below $1 million (81% of all closed sales in 2017). It has been a deep seller’s market for years now with nothing indicating a change on the horizon. Buyers will have to continue to navigate the harsh reality of plenty of competition with very few choices.
Fewer choices is exactly how 2018 started. On New Year’s Day, the active listing inventory was at 3,397 homes, the second lowest start in the past 13 years. Only 2013 was lower, with 3,161 homes on the market. With such an anemic inventory, the biggest worry to start the year was that 2018 would shape up to be just like 2013. In 2013, the inventory did not increase much at all for the first three months and the market heavily favored sellers (typically, the inventory rises from January through mid-August). The expected market time dropped to 33 days for all of Orange County by March 2013. Sellers were able to stretch their asking prices quite a bit over the most recent sale and they often got their price. It felt impossible for buyers to secure a home, especially if they had a small down payment. They just would not be able to compete. The 2013 housing market proved to be extremely challenging.
Yet, 2018 is shaping up to be completely different than 2013. Since starting the year at 3,397 homes, the active inventory has increased by 9%, adding an additional 310 homes, and now totals 3,707. The expected market time is currently at 77 days, quite a bit slower than the 45 day expected market time at the beginning of 2013. It is not as deep of a seller’s market; so, homes will not appreciate as fast as they did in 2013. Remember, home prices are a lot higher today compared to 5 years ago. Buyers are not willing to dramatically overpay for a home compared to the most recent closed sale. If a home is placed on the market and is not priced according to its Fair Market Value, opting to significantly pad the price and take a stab at getting more, it will sit on the market and will not sell.
Carefully pricing is a fundamental ingredient in achieving the objective in selling a home. In December, 59% of all closed sales had to reduce the asking price at least once. It was not the time of the year; it was the inability for many sellers to price their homes accurately right out of the gate.
From here, we can expect the inventory to continuously rise from now through mid-Summer. It will fall short of the long-term average of 8,000 homes, which is where the inventory needs to be for an extended period of time for the market to transition into a balanced market, one that does not favor a buyer or seller.
Demand: Demand decreased by 10% in the past couple of weeks.
In the past two weeks, demand, the number of new escrows over the prior month, decreased by 158 pending sales, or 10%, and now totals 1,447. This is a true reflection of cyclically the slowest time of the year, the last 30-days. This period encompasses all of the holidays and all of its distractions. Also, with so few homes coming on the market, coupled with very limited choices of active listings, it’s no wonder demand has dropped to such a low level. As more homes enter the fray, expect demand to start to rocket upward by the end of this month.
Last year at this time, demand was at 1,562 pending sales, 115 more than today, or 8%.
The expected market time, the amount of time it would take for a home that comes onto the market today to be placed into escrow, increased from 67 to 77 days, a slight seller’s market with mild appreciation. Last year’s expected market time was at 84 days. The expected market time will significantly drop by the end of this month.
Luxury End: Luxury demand continued its holiday/winter plunge.
In the past two weeks, demand for homes above $1.25 million decreased from 187 to 170 pending sales, down 9%. The luxury home inventory decreased from 1,391 homes to 1,376, a 1% drop in the past two-weeks. Since the start of November 2017, luxury demand dropped by 52%, while the luxury inventory dropped by only 20%. Expect both demand and the inventory to rise from now through the Spring Market. The current expected market time for all homes priced above $1.25 million increased from 223 days to 243.
For homes priced between $1.25 million and $1.5 million, the expected market time increased from 123 to 157 days. For homes priced between $1.5 million and $2 million, the expected market time decreased from 196 to 188 days. For homes priced between $2 million and $4 million, the expected market time increased from 266 days to 285 days. In addition, for homes priced above $4 million, the expected market time increased from 667 to 695 days. At 695 days, a seller would be looking at placing their home into escrow around December 2019.
Orange County Housing Market Summary:
· The active listing inventory increased by 310 homes since the start of the New Year and now totals 3,707. Expect the inventory to increase from now through mid-Summer. Last year, there were 4,376 homes on the market, 669 more than today.
· There are 31% fewer homes on the market below $500,000 today compared to last year at this time and demand is down by 28%. Fewer and fewer homes and condominiums are now priced below $500,000. This price range is slowly disappearing.
· Demand, the number of pending sales over the prior month, plunged by 158 in the past couple of weeks, down 10%, and now totals 1,447, most likely its lowest point of the year. The average pending price is $839,613.
· The average list price for all of Orange County decreased to $1.8 million after reaching a record $1.9 million two weeks ago. This number is high due to the mix of homes in the luxury ranges that sit on the market and do not move as quickly as the lower end.
· For homes priced below $750,000, the market is HOT with an expected market time of just 46 days. This range represents 38% of the active inventory and 62% of demand.
· For homes priced between $750,000 and $1 million, the expected market time is 67 days, a slight seller’s market (between 60 and 90 days). This range represents 17% of the active inventory and 19% of demand.
· For homes priced between $1 million to $1.25 million, the expected market time is 101 days, a balanced market that does not favor a buyer or seller.
· For luxury homes priced between $1.25 million and $1.5 million, the expected market time increased from 123 days to 157. For homes priced between $1.5 million and $2 million, the expected market time decreased from 196 to 188 days. For luxury homes priced between $2 million and $4 million, the expected market time increased from 266 days to 285 days. For luxury homes priced above $4 million, the expected market time increased from 667 to 695 days.
· The luxury end, all homes above $1.25 million, accounts for 36% of the inventory and only 12% of demand.
· The expected market time for all homes in Orange County increased from 67 days to 77 in the past two weeks, a tepid seller’s market (60 to 90 days). From here, we can expect the market time drop dramatically by the end of this month.
· Distressed homes, both short sales and foreclosures combined, make up only 1.3% of all listings and 2.7% of demand. There are only 17 foreclosures and 33 short sales available to purchase today in all of Orange County, that’s 50 total distressed homes on the active market, dropping by 11 in the past two weeks and reaching its lowest level since the very beginning of the Great Recession. Last year there were 112 total distressed sales, 124% more than today.
· There were 2,269 closed residential resales in December, down by 9% from December 2016’s 2,484 closed sales. December marked a 6.5% drop from November 2017. The sales to list price ratio was 97.3% for all of Orange County. Foreclosures accounted for just 0.8% of all closed sales and short sales accounted for 0.9%. That means that 98.3% of all sales were good ol’ fashioned sellers with equity.
Have a great week.
Quantitative Economics and Decision Sciences